As many employers are aware, non-compete agreements have been subject to increased scrutiny in recent years. Many states have recently passed laws that dramatically limit the enforceability of non-compete agreements, and the Federal Trade Commission (FTC) has recently proposed a rule banning most types of non-compete agreements. Due to increased limitations on non-compete agreements, many employers may look to protect their interests through other types of restrictive employment agreements, such as non-disclosure agreements (NDAs) and non-solicitation agreements. Employers should be aware that recent developments in the legal environment may also have implications for the enforceability of these types of agreements.
In the FTC’s notice of proposed rule regarding non-compete agreements, the FTC wrote that NDAs that are unusually broad in scope may function as de facto non-compete clauses and thus be subject to the FTC’s proposed ban on non-compete agreements. The FTC’s proposed rule includes an NDA in the definition of a non-compete agreement if the NDA “is written so broadly that it effectively precludes the worker from working in the same field after the conclusion of the worker’s employment with the employer.” As an example, the FTC cited Brown v. TGS Mgmt. Co., a California state court case involving an NDA which broadly defined confidential information as including any information that is “usable in” or “relates to” the securities industry. The NDA in this case appears to be an extreme example due to its unusually broad scope, which effectively prohibited employees from working for any other company in the securities industry other than the employer.
On the other hand, the FTC’s notice of proposed rule indicates that an NDA would not fall under the proposed ban on non-compete agreements if the employees subject to the NDA “remain free to work for whomever they wish, wherever they wish, and at whatever they wish,” subject only to the terms of the NDA restricting the disclosure of certain information. However, it is possible that in certain circumstances an NDA that is not otherwise overly broad might still restrict an employee from working for any employer of his or her choice. For example, an employer might decline to hire a prospective employee who is bound by an NDA with a major competing firm if the employer is concerned that hiring the employee may result in litigation. As is often the case, employers will have to wait for further guidance to be issued by courts on a case-by-case basis.
Non-solicitation agreements have also come under increased scrutiny in recent years, and employers with remote workers residing in other states should monitor these developments. Illinois recently amended its Freedom to Work Act to prohibit employers from entering into non-solicitation agreements with employees earning less than $45,000 per year, and Colorado has also enacted similar income-based restrictions on non-solicitation agreements. Further, Jennifer Abruzzo, General Counsel of the National Labor Relations Board, recently issued a memo indicating that in certain cases involving lower wage, non-managerial employees, non-solicitation agreements could be unenforceable to the extent that these limit employees’ rights under the National Labor Relations Act to bargain collectively and engage in concerted activity for improved working conditions.
Navigating through all the twists and turns associated with employment-related agreements is no easy task, as new laws are enacted and existing laws are continually reinterpreted by federal agencies and courts. While NDAs and non-solicitation agreements remain enforceable in many situations, employers should consult with experienced legal counsel when drafting employment-related agreements. If you have questions on drafting or interpreting employment law documents, please contact a Davenport Evans lawyer at [email protected], 605-336-2880, or find a specific lawyer here.
Disclaimer: The information contained in this article is provided for informational purposes only and may not reflect the current law in your jurisdiction. No information from this article should be taken as legal advice from Davenport Evans or the author of the article. Nobody should act or refrain from acting based on the information contained within this article without first seeking appropriate legal counsel.
Davenport Evans stands ready to help our employment law clients with questions regarding these new laws and compliance. Contact a lawyer at [email protected], 605-336-2880, or find a specific lawyer here.
Davenport, Evans, Hurwitz & Smith, LLP, located in Sioux Falls, South Dakota, is one of the State’s largest law firms. The firm’s attorneys provide business and litigation counsel to individuals and corporate clients in a variety of practice areas. For more information about Davenport Evans, visit www.dehs.com.