Employers Should Revisit Their Non-Compete Agreements For 2023

• Jurisdiction: United States,Federal,New York,Delaware,California
• Law Firm: Foley Hoag LLP
• Subject Matter: Antitrust/Competition Law, Employment and HR, Intellectual Property, Antitrust, EU Competition , Contract of Employment, Employee Rights/ Labour Relations, Trade Secrets
• Author: Mr Robert Haney Jr, Paul F. Downs and Garrick Josephs
• Published date: 07 February 2023

Key Takeaways:

• Given recent legal and legislative trends, employers should narrowly tailor non-compete provisions to protect essential business needs. Employers cannot rely on the courts to repair or reform overly broad restrictive covenants.
• A more serious challenge: the FTC's proposed rule could ban non-compete agreements nationwide for all workers and require employers to rescind all existing non-compete agreements. Employers should strengthen Confidentiality and Inventions Assignment Agreements and non-solicitation clauses to maximize this alternate protection should the proposed rule become law.

In recent years, there has been a shift across the U.S. to restrict the use of non-compete agreements. In fact, on January 5, 2023, the Federal Trade Commission ("FTC") proposed a new rule that would effectively ban the use of non-compete agreements. The FTC's notice of proposed rulemaking details the suggested five-part regulation that would eliminate the use of non-competes nationwide for all workers. The proposed rule defines the use of non-compete clauses as an unfair method of competition,¹ prohibiting employers from entering non-competes with their workers.

The FTC's proposed rule is a dramatic crescendo in the growing chorus to restrict or eliminate non-competes. Many states make up this chorus, and we have provided a few examples from key jurisdictions.

New York

In New York, while non-competes are enforceable, they are generally disfavored by the courts.² New York courts will only enforce a non-compete when the employer can establish: (1) the restriction is reasonable in time and geographic scope; (2) the restriction is necessary to protect a legitimate interest of the employer; (3) the restriction is not unreasonably burdensome to the employee; and (4) the restriction is not harmful to the general public.³ New York courts may blue-pencil a non-compete (i.e., sever and grant partial enforcement of an overbroad employee restrictive covenant) when the unenforceable portion of the agreement is not essential.⁴

A recent decision by the U.S. District Court for the Southern District of New York, however, saw the court decline to blue-pencil a former employee's allegedly overly broad restrictive covenant. In Flatiron Health, Inc. v. Carson, 2020 U.S. Dist. LEXIS 48699 (S.D.N.Y. March 20, 2020), the employer sued its former employee to enforce its non-compete that prohibited competitive activity and solicitation of Flatiron clients and employees for one year following the employee's separation from employment. While the Flatiron court acknowledged the "judicial power to...