In recent years, there has been growing concern about the potential negative impact of noncompete agreements. To address these concerns, both federal and state governments have taken steps to regulate and restrict the use of noncompete agreements in employment relationships.
Defining "noncompete"
Noncompete agreements are contractual agreements between employers and employees. They typically restrict employees from working for a competitor or starting a similar business within a specified geographic area and time frame. The primary purpose of noncompete agreements is to safeguard a practice’s confidential information, patient relationships, and trade secrets from being misused or exploited by former employees.
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Federal regulation
At the federal level, there is no comprehensive law specifically regulating noncompete agreements. Earlier this year, however, the Workforce Mobility Act of 2023 was reintroduced in the senate. This bill would prohibit the use of noncompete agreements in nearly all circumstances. While the bill has not moved forward yet, we could see it happen in the future.
Other federal laws have an indirect impact on the enforceability and scope of these agreements. In fact, the Federal Trade Commission (FTC) issued a proposal on January 5, 2023 to prohibit noncompetes. They stated noncompetes constitute an unfair method of competition and therefore violate Section 5 of the Federal Trade Commission Act. They also concluded that noncompetes suppress wages, stifle innovation, and make it harder for entrepreneurs to start new businesses. They received 27,000 comments on their draft rule and are expected to vote on it in the spring of 2024.
Additionally, the National Labor Relations Board General Counsel Jennifer Abruzzo announced that noncompete agreements violate the National Labor Relations Act, which applies to both union and nonunion employers. As a result, employers who use noncompete agreements may find themselves on the receiving end of a charge for unfair labor practices.
State regulation
Rather than wait for the federal government, many states are already restricting or banning the use of noncompetes. State laws vary in scope and requirements, and several states (California, Minnesota, North Dakota, and Oklahoma, plus the District of Columbia) have banned noncompetes in all but very limited circumstances, such as selling a business.
Where there isn’t an outright ban, states have applied a more nuanced approach to their restrictions in an effort to ensure fairness. Some common provisions include:
- Time and geographic limitations require that noncompete agreements have reasonable time and geographic limitations to be enforceable. The restrictions must be narrowly tailored to protect legitimate business interests without unduly restricting employee mobility.
- Protectable interests require that noncompete agreements protect specific interests, such as trade secrets, confidential information, or customer relationships. Agreements that seek to restrict ordinary competition or general skills may be deemed unenforceable.
- Notice and consideration require employers to provide employees with advance notice of the noncompete agreement before employment or a reasonable period after. Additionally, consideration, such as job offers, promotions, or specialized training, must be provided in exchange for the employee's agreement to the restrictions.
Many state laws primarily target noncompete agreements that apply to low-wage workers. For example, allowing noncompetes for workers whose salary is above a certain threshold and not for others. This variation in state laws can create difficulty for large employers working across state lines. Generally, a one-size-fits-all approach is not advisable.
If you are currently using a noncompete agreement and it hasn’t been reviewed by legal counsel for compliance within the last few months, you should have it reviewed immediately. It may need to be tailored to fit new restrictions or eliminated altogether, and it’s best to find out now.
You may also consider taking steps toward protecting your practice in an alternative method on the off chance that future laws prevent you from using noncompetes. For example, you may be able to use a nondisclosure and nonsolicitation agreement to protect your trade secrets, which may be more flexible and legally enforceable going forward.
The laws are not going in a direction that favors the employer. Avoid costly liability by getting noncompete agreements in compliance now, and be sure to keep your eyes on the changes going forward.
Editor's note: This article appeared in the November 2023 print edition of Dental Economics magazine. Dentists in North America are eligible for a complimentary print subscription. Sign up here.
