Corporate non-compete agreements are agreements “between an employer and employee where the employee agrees not to use information learned during employment in subsequent business efforts for a set period of time.” Generally, these agreements become applicable once the “employer-employee” relationship terminates. Once this relationship terminates, the employee must adhere to the terms of the non-compete agreement, which essentially prohibits an employee from working for another competitor within a specified geographical limit for a specified time.
Recently, President Joe Biden has announced that he “will work with Congress to eliminate all non-compete agreements, except the very few that are absolutely necessary to protect a narrowly defined category of trade secrets.” And, on Feb. 25, four U.S. senators and four members of the U.S. House of Representatives reintroduced the Workforce Mobility Act, a bill to ban all employee non-competes — but permitting non-competes in the sale of business or dissolution of a partnership. The bill would ban non-competes in the employment context, not their use in the context of a sale of business or dissolution of a partnership.
While Biden has not offered details about the scope of his planned constraints and the text of the Workforce Mobility Act has not yet been released, we can expect that — if federal regulatory efforts are successful — non-competes will be either completely banned or severely limited. In the best of circumstances — for companies and the employees that work there — a federal law would likely allow the use of non-competes to protect trade secrets, but prohibit their use to protect customer goodwill and other legitimate business interests.
The rationale for non-competes seems obvious–it’s a tactic to keep talent from taking industry knowledge to the competition after a company has invested in them. They have been common among executive-level employees for years, but have been trending down to entry-level employees recently. These contracts, however, may actually do more harm than good–both for the person signing away their future employment opportunities as well as the industry in which they work.
Indeed, at Burnham Douglass we have argued that non-compete agreements undermine the national economy, social welfare and free competitive business opportunity. For instance, there are other ways to prevent the disclosure of trade secrets that are less costly to individual employees and to the economy; many states have laws that prohibit trade secrets disclosures and provide legal redress for such disclosures. Also, many employees who sign non-competes are often entry level employees with little access to highly classified information, which casts doubt on the notion that non-compete agreements are effective in preventing the disclosure of trade secrets.
Also, we believe that non-compete agreements may actually hurt the public because of their binding and restrictive nature. Their restrictive nature has negative economic impact by stunting job growth and reducing employment flexibility. This reduced employment flexibility may foster stagnation within a company and reduce productivity rates. Moreover, if the employer-employee relationship terminates, it will likely take a longer time for the employee to find a job in an area of their expertise that is not prohibited by the non-compete agreement, likely increasing the national unemployment rate. Finally, limiting competition in the marketplace undermines the core value of free enterprise, which could lower economic growth in the long term.
In New Jersey, there is a presumption against non-competes, especially in the context of certain professional businesses such as the medical and legal professions. In Comprehensive Psychology System v. Prince, 375 N.J. Super. 273 (App. Div. 2005), the court held that a post-employment non-compete ancillary to an employment contract for a licensed psychologist, Dr. Brett Prince, was not enforceable. This ruling was based on a specific regulation, N.J.A.C. §13:42–10.16, adopted by the State Board of Psychological Examiners, which prohibits licensed psychologists from entering into non-competes. Interestingly, if the State Board had not adopted this regulation, a New Jersey court might have enforced some or all (New Jersey is a “bluepencil” state) of Dr. Prince’s restrictions if they were otherwise found reasonable to protect a legitimate business interest of his employer, were not injurious to the public, and did not impose an undue hardship on him.
In general, post-employment non-compete agreements that directly restrict an attorney’s ability to practice law are not enforceable in private law firms in New Jersey. American Bar Association (ABA) Model Rule of Professional Conduct (RPC) 5.6 (Restrictions on Right to Practice) prohibits a lawyer from making “a partnership, shareholders, operating, employment, or other similar type of agreement that restricts the right of a lawyer to practice after termination of the relationship, except an agreement concerning benefits upon retirement.” The comments to this rule reflect the ABA’s view that the prohibition on lawyer non-competes is intended to protect attorneys’ “professional autonomy” and to ensure “the freedom of clients” to select counsel of their choice.
The enforceability of restrictive covenants in New Jersey might vary from industry to industry, or even within particular industries. Some industries ban them altogether and some welcome them with open arms. Some industries have specific rules and practices that dictate the parties’ course of dealing and determine the “reasonableness” of the restrictions. There might be some quirky or arcane rules or regulations tailored to specific occupations or industries. Therefore, we welcome the elimination of all non-competes and look forward to tracking the progress of the Workforce Mobility Act.