The Legal Zone (S1:E5): Non-Compete Agreements Under Biden Administration

Transcript

The executive order on non-competes

Hi, I'm Regina Campbell, this is The Legal Zone, and we're proud to bring you Season 1, Episode 4. Today we're going to talk about non-compete agreements in the Biden age. This particular topic has a lot of people a little bit nervous, particularly employment and corporate lawyers and business owners. But rest assured, the executive order does not mean that any non-compete, non-solicitation or similar type of provision is invalid. It's basically an instruction to the federal agencies to look into the unfair use of these types of agreements or covenants, and particularly the effect they may have on workers' mobility.

So even if something were to come down the pipe, it's more likely to affect companies that are larger in scale, that have a national workforce, so to speak, and that use non-compete agreements unnecessarily to keep employees from having options to leave the company. Although it's definitely not off the table, it doesn't sound like it's likely to affect buy-sell agreements or purchase agreements between parties, and the restrictions contained in them.

Drafting and blue penciling

But once again, even on a state level, these types of provisions can be scrutinized as well if they're not properly written to protect the company's interest. That's something very specific that we need to look into, and I'll be doing other podcasts on it, because it is a very fact-intensive analysis. And it's a very important one, because a lot of the time these covenants, non-compete and non-solicitation, are written rather broadly. They can be struck down, or modified if blue penciling is allowed. In the state of Florida it is, although I always recommend that you add a provision in your contract that permits it, in the event that the geographic location or the restrictions are found to be unenforceable or invalid.

So what does this all mean? It all sounds kind of funny and very nuanced, but this is something you should keep in mind when talking to your lawyers about drafting these types of provisions: explain to them your actual business interest, and where you might be going in the future, if you know, while being a little bit flexible toward the employee as well. Ultimately, if you have these types of agreements in place and they're overly restrictive, it might also keep you from attracting good employees.

Legitimate business interests

So you want to strike a balance, and that's actually what the federal government is trying to do, and what the states are trying to do as well: strike a balance between protecting employers' rights and legitimate business interests, which may include confidential information they acquired through their own blood, sweat and tears, so to speak, going door to door and building relationships with customers. It could be a specific network of vendors, or pricing that might be very distinct, especially in a highly competitive industry where pricing can be very competitive. It could be margins of percentages. So it can make a very big difference if someone knows this sensitive information about your company. It can easily be used against you.

Every state defines confidential information and what is potentially a protected business interest, and the state of Florida is very similar to most other states. They're looking at protecting something that cannot be recreated from the public. In other words, you can't just Google it, find the information there and properly compete with somebody else. It's something sensitive that's obtained through marketing efforts, sales efforts, goodwill, building your reputation for a product or service.

So the more you put into this, the more you can define something that's special and unique to your company, the more likely any one of these provisions is to be upheld by a court. Now, the more these provisions can be seen as overly restrictive on commerce or competition, that's the counterbalancing factor that has to be taken into account: protection of legitimate business interests versus competition and creating whatever you're marketing out there.

Protecting what you've built from departing employees

In between, this is where employees come in as well. There's a separate issue with buy-sell agreements and selling your business, of course. But particularly with reference to employees, the difficulty a lot of companies have is that you train these employees, you put marketing money behind things, you try different sales tactics, and you have different processes and methodologies that might be very unique and maybe the key to your success. The company's concern is that your employees are going to take all that learning, which took you years and potentially thousands or millions of dollars to build, and just turn around, open up their own company and use it against you.

So going back to the different factors and the balancing act that the statutes and the federal government are trying to achieve, so to speak: most states, with the exception of California, North Dakota and Oklahoma, have some variation of non-compete and non-solicitation provisions or statutes that protect a company that has goodwill, that has name recognition, that has put in this effort and built something, a database that's very unique, through their work and efforts, their sweat equity, so to speak. That might be protected.

But if you have something you can Google, or easily obtain from a public source, so to speak, like a public database that's for sale, it's less likely to be protected. And the employee may have a right to compete. They have a right to leave your company and compete against you. What wouldn't be fair is if they can take information that's sensitive and confidential, that you built and spent a lot of time and money on, and just take it over, apply it over here. But remember, it has to be specific methodologies and something that's unique. If it's just learned experience and knowledge, it's less likely to be protected.

The other thing is that states, particularly the state of Florida, want to protect legitimate business interests that can be identified. This is where it's very important for you to talk to your attorney about tailoring the restrictions you need to your business and industry, segmenting them if you even need to go that far. Also take into consideration the different employees: their risk, their level of information, how dangerous they are to your company if they leave. You may want to provide them different types of packages depending on the level of sensitive and confidential information, or the damage they may be able to do if they go into the market. There's additional consideration there that helps with the analysis when a court looks at whether that person is able to continue to make a livelihood or not.

Fair and unfair competition

But the courts must also balance the right to free commerce, free from restriction, and promote competition. What they don't want is unfair competition. That's considered un-American, just as much as competition and free commerce are considered American.

Because it's not fair for someone, for instance, as an employee, to take your confidential information: learning that this customer has a dog named Jack, and Jack likes bones, and that's how you developed the relationship. And he likes to chat a lot, likes to talk about his family, about fishing. That's the kind of thing an employee probably learned under your umbrella, under your compensation, under your marketing dollars and all of that. So it's something that may be very specific, and it might be unfair for an employee to bring this over and automatically compete with you, particularly if they bring the price list over: "Well, ABC Company gives you 10% off. I'm going to give you 12%." That's information normal competitors would not know.

So keep in mind that there's also a distinction. Sometimes people confuse this with misappropriation of trade secrets or confidential information, which is a separate protected issue, defined not only by federal law but also by state law. That's a separate issue. That's like flat-out theft, versus an employee taking not just information, but the relationship they built. John Smith is the one who knows Jack. John Smith is the one who talks to Jack three times a week and chats about his family and everything he loves to talk about. So John Smith is a little bit more dangerous if he opens up another company.

So these are things we want to keep in mind when you're writing these provisions, and also in understanding the reasons behind some of these changes, movements and dynamics going on behind the scenes between employers and employees. Overall, it's about promoting competition: there can't be an unfair restriction on competition or commerce, but there also have to be some countervailing interests or factors as well. So these are things you want to consider.

What the executive order actually asks

So the bottom line is that currently there is no restriction on these types of agreements. That does not mean one is not coming down the pipe, so to speak. The executive order tells the Federal Trade Commission to look into the unfair use of non-compete agreements and non-solicitation agreements, and those types of covenants as well, because sometimes they're not just agreements. They may be separate covenants contained within an agreement, for instance an employment agreement.

So they have been charged with looking into whether there are unfair restrictive covenants that are affecting employees' mobility unreasonably. Non-solicitation was not specifically the highlight of this order, and people are not really talking much about it, but it does talk about all types of restrictive covenants and their effect on industries. It's basically asking the Federal Trade Commission to look into its rulemaking abilities, and what else it may be able to do to stop this at a federal level. But depending on what happens, that doesn't mean it will necessarily withstand constitutional challenges, or disputes between the federal government and states' rights to protect their citizens and their companies within their own borders. So it's going to be a tight balance for the Biden administration to walk. But it gives you an idea of what they're looking to protect, and of the factors that go into these different dynamics.

Non-solicitation agreements

So, to understand the difference: non-solicitation agreements are really about not soliciting a particular group of people that you might have defined. It might be existing customers. It might be prospective customers you've started developing a relationship with. It might be referral sources, which are also protected in the state of Florida.

Past clients get a little tricky, because it depends on the information the employee has. And we're particularly talking about employees right now, not business owners, buy-sell agreements or sales of a business between parties. It gets trickier because, for instance, the longer a client has had no relationship with the company, the more stale it becomes, and the less likely it is to be a protected interest, unless it's a recurring business source. If there's an ongoing relationship, most of the time they're not past clients; they're existing clients. But that would also be very business-specific. Do your customers place orders every six months? Then you might define a person as an existing customer unless they haven't placed an order for two years. And if they haven't placed an order for two years, and typically the product or service is required every six months, it's less likely that particular customer is going to be a protected interest.

So a non-solicitation agreement basically says you can't try to solicit an employee, take them away from us and use them for your company. You potentially can't solicit certain vendors; there may be a unique relationship with them that's protectable. And of course clients, and how you define them. It's all very important to define these things in the agreement. If they're overly broad, they're more likely to be struck down. You don't want contracts that are susceptible to being considered invalid, or heavily litigated, because they're so ambiguous or broad. So in general, you want to take the time to tailor these types of provisions and covenants whenever you have them, or the agreements, if they are standalone agreements.

Non-compete agreements and reasonableness

Non-compete agreements have the same issue, and of course they get more attention, particularly under the executive order Biden issued. But non-competes go a little bit further. They might restrain an employee from going to a company that competes with your company, for a particular time period. Sometimes non-compete provisions are narrowly tailored to just keep you from competing for customers you had contact with in your prior employment. Sometimes it's a year.

Everything is subject to reasonableness. So if you're asking for a five-year restrictive covenant, and the person was, for instance, a nail tech, that might be considered unreasonable, especially if it's a large geographic area. Let's say you have someone who's a nail tech, and you're restricting her for 50 miles for five years. That's most likely going to be an unreasonable restraint on the person's ability to make a livelihood as a nail tech. So there has to be some definition. Every business is so different and unique, so you really have to understand it and draft these provisions that way.

With non-compete provisions specifically, and restrictive covenants, there's concern because, again, they can keep you out of the industry. Let's say you're in the shoe industry, so to speak. You sell shoes. It depends on what level and type of employee you are. At a retail level, there's less likely to be a need for protection. But if you're, let's say, at an executive level or mid-management level, you may have information that is very sensitive. If you went from, let's say, Nike to Adidas, that could pose a problem, because you're aware of information, on a potential national or global level depending on what segment you're in or what your job functions are, that could cause harm when you change companies: harm to the other company, to its goodwill, its reputation, its sales plans, what it's going to do in the future, where it's going to expand, where it's going to retract. That's information that's obviously not readily available to the public.

So the type of employee you have, the level of access they have, and the harm they could potentially cause the company should dictate the level of restriction, if any at all. In some cases, maybe you just do a non-solicitation provision, or not. Let me go back for a moment. The non-compete would depend on the level of the employee, and you should tailor the restriction accordingly.

But for instance, you may have circumstances where a competitor wants to hire your sales or customer service person, and you think, "Well, okay, I have 200 of them. What damage can that cause?" Unfortunately, sometimes the competitor is doing that not just because the person is very personable, because that really goes with the employee: their ability to be personable and a good salesperson. It's because they may have access to certain client information, and unfortunately the new employer wants the employee to bring the information over. In that case, it's an unfair competition situation, and theft, if it's literally a list being taken over with client-specific information.

Balancing both sides

So there are all different circumstances we're trying to protect, and the more examples I give you, the more you can probably see that there are factors on both sides. There's a legitimate interest in protecting businesses, and there's also a legitimate interest in not overly restricting employees. And even aside from the Biden order, these are things you just don't want to be litigating. If they're overly broad or extensive, it just leads to more litigation or difficulty. You're also potentially keeping away good employees who might be great for your business or your company. They're more frightened by it. It's scarier for them to work with you, and they may consider working with a competitor that's a little bit friendlier to the employee, more flexible, more understanding of the bigger picture.

So it really depends on the circumstances. I've seen them all, for different types of employees and executives, and of course the non-compete and non-solicitation provisions change. Often with executives, though, they're given a year or two years' worth of salary to stay out of competition. In other words, they're being given a livelihood even during the period of the non-compete. That makes sense for a lot of companies. It might just be a matter of freezing them out until the market changes: a long enough time period for the market to change, so that the person can no longer pose a threat given their position or knowledge of the company.

Closing

So these are complicated topics, but I just wanted to talk a little bit about it and reassure everybody that non-compete agreements are not dead in the Biden age. And once again, we'll have more podcasts that go into detail about non-competes and give you examples of industries, and maybe what non-compete agreements would be reasonable in a particular industry. I'll take this topic apart a little further in other segments, but hopefully this has been helpful.

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