An encouraging new trend we have seen lately is more states enacting laws or enhancing existing laws that limit the enforceability of non-compete clauses. The specific laws that apply to non-compete clauses in employment contracts vary greatly from one state to another. While some of the basic law around this area is outlined in court opinions — or “case law” — there are also legislatively enacted laws that affect what is and isn’t allowed in different states. This year, Utah, Idaho, and Colorado joined recent moves by California and Illinois to strengthen laws covering an employee’s right to switch employers. Meanwhile, case law around non-compete clauses also continues to develop.
Non-compete clauses can take many forms. Generally speaking, a non-compete clause is a provision that restricts an employee from directly competing with the employer while in the employment relationship, from accepting later employment with a competitor of the employer or from going into business against the employer after the employment relationship has ended. A non-compete provision may cover only a short period after employment, or it may last many years. Non-compete agreements may or may not include provisions against “poaching” one’s colleagues (known as “non-solicitation” clauses). Geographically, they may be limited in scope to a particular neighborhood, town or city, or they may reach across an entire state or region. They may only encompass the employer’s existing clientele, or they may broadly restrict employment by the employee within an entire industry. Indeed, where these lines are drawn in a particular non-compete clause can determine whether or not the clause is considered legal and enforceable or null and void.
Employers are, of course, fond of non-compete clauses because they perceive them as protecting competitive advantages and trade secrets while supporting workforce stability.
For employees, though, non-compete clauses can have drastic and lasting effects on their ability to earn a living. And, for society in general, the impacts of non-competition agreements can be significant. Since they restrict people’s ability to switch jobs easily, taking their accumulated expertise and knowledge with them, they impact social and geographical mobility as well as wage and salary growth. It is conceivable that left entirely unfettered, they could hurt innovation across whole industries.
Thus, like other restraints on free-trade and competition, there are limits to what various jurisdictions — and the courts — consider acceptable in a non-compete clause. Here are some recent developments:
- This spring, Utah enacted a new law to limit the reach of non-compete agreements in the broadcasting industry. This law adds more strength to a bill they enacted two years ago. The two-year-old law in Utah imposed, in general, a one-year post-employment time limit on non-compete agreements. With this new law, employers in the broadcasting industry may not impose non-compete agreements on employees making a salary of less than $47,476 annually. Nor may they enforce a non-compete provision against an employee who was not terminated for cause unless the employee breached their employment contract.
- Also this spring, Idaho moved to repeal a burdensome requirement it had enacted two years ago which required employees to prove that their change of employers did not irreparably harm their former employer. With Idaho’s repeal of Idaho Code Section 44-2704(6), the burden is once again on the former employer to show a likelihood of irreparable harm before a court may issue an injunction against the employee’s new employment.
- In Colorado, the legislature passed a law that allows physicians to continue treating patients with “rare disorders” even when that would otherwise constitute a violation of the physician’s non-compete agreement. This serves to clarify Colorado’s existing law which generally prohibited non-compete agreements except in certain specific cases, such as for protection of trade secrets.
In addition to these statutory changes, we’ve also seen recent case law affecting non-compete agreements:
- In Wisconsin, non-compete clauses are governed by Wisconsin Statute 103.465. In Wisconsin, to be enforceable, the statute requires that a non-compete covenant must be “reasonably necessary for the protection of the employer,” only cover a reasonable period, only cover a reasonable territory and not be an unreasonable restraint on employees. In January this year, the Wisconsin Supreme Court held, in Manitowoc v. Lanning, that this statute, which generally refers to “covenants not to compete,” also applies to non-solicitation agreements that would prevent employees from soliciting, inducing or encouraging other employees to terminate employment with one employer to accept employment with a competitor. The court found that the statute applies to all such covenants that are restraints of trade, regardless of whether they specifically include the term “compete” in their label.
- Last but not least, the South Dakota Supreme court decided a case in March of 2018 entitled Farm Bureau Life Insurance v. Dolly. In that case, the court declined to enforce a non-compete clause. The clause would have prevented a former insurance salesman from selling insurance to any of Farm Bureau’s former customers, even though the former customers had approached him and he had not actually reached out to the customers or otherwise solicited them for their business. The court held that “an agreement not to solicit — rather than not to sell to — an insurer’s existing customers [was] the only reasonable interpretation of [South Dakota Codified Laws 53-9-12].” The court concluded by stating, “The general rule against contracts in restraint of a lawful profession, trade, or business is a legislative expression of public policy….”