Non-Competes Face Scrutiny on Multiple Fronts

June 23, 2023

Only six months in, it seems that 2023 will be a seminal year for non-compete enforceability in the United States.  And it appears that the trend will continue in years to come.  State courts have declined to expand the enforcement of non-competes, while state legislatures have passed legislation severely curtailing their use and enforcement.  While federal legislation remains stalled, agencies have taken steps to limit the abuse of non-competes.

Federal Agencies Take Aim at Non-Competes.

In January, the Federal Trade Commission (FTC) made waves when it announced its proposed rule banning non-competes nationwide.  The rule would apply retroactively to non-competes entered into with employees at all levels.  It would require employers to take an affirmative step of issuing a notice of rescission to each employee bound by a non-compete or a de facto non-compete.  Public response to the rule was sweeping – resulting in nearly 27,000 submitted comments.  The FTC has indicated that it will vote on its proposal in April 2024.

Following shortly on the footsteps of the FTC, the General Counsel of the National Labor Relations Board (NLRB) issued a formal memo determining that non-competes interfere with workers’ Section 7 rights under the National Labor Relations Act and that employer enforcement of non-compete agreements would violate the Act.  Unlike the FTC’s proposed rule, this determination would not apply to non-competes with all employees, since the NLRA only protects those workers who hold non-managerial and non-supervisory roles.  However, unlike the FTC’s efforts, the NLRB’s memo is immediately in effect.

Because both actions are at the behest of federal agencies, the process to enforce these decisions may be a tedious one, and employee should continue to consult with counsel as to how these determinations impact their existing obligations.

Recent Rulings from Delaware Signal a Sea Change on Judicial Enforcement of Non-Competes.

The Delaware Chancery Court has, generally speaking, been a friendly forum for employers seeking to enforce their contractual rights.  The jurisdiction is known for holding parties to their bargain, even if those bargains include harsh non-compete provisions.  For that reason, employers incorporated in the state would often default to Delaware choice-of-law provisions in their employment and incentive agreements.  But recently, rulings have indicated that relying upon Delaware law is no longer an end-run to enforceability. 

  • In Ainslie v. Cantor Fitzgerald, L.P., Consol. C.A. No. 9436-VCZ (Del. Ch. Jan. 4, 2023), the Delaware Chancery Court refused to adopt the employee choice doctrine under Delaware law, which permits employers to adopt unreasonably broad and long non-competes so long as the sole remedy for enforcement is forfeiture of monetary benefits.  In the same ruling, it held that the restrictive covenants in partnership agreements under which individuals held equity and long-term incentive interests were overly broad and therefore not enforceable.
  • In Hightower Holding, LLC v. John Gibson, C.A. No. 2022-0086-LWW  (Del. Ch. Feb. 8, 2023), the Delaware Chancery Court held that an individual residing and working in Alabama could not be held to the Delaware choice-of-law provision in his restrictive covenant and LLC agreements.  Applying a stricter Alabama law, the Court refused to redraft the overly-broad restrictions. 
  • In Intertek Testing Servs. NA, Inc. v. Eastman, C.A. No. 2023-0853-LWW (Del. Ch. Mar. 16, 2023), the Delaware Chancery Court refused to enforce an overly-broad restrictive covenant in a purchase agreement, and it likewise refused to exercise its judicial discretion to revise the restriction to reasonably match the geographic scope of the plaintiff’s legitimate business interests.  Historically, Delaware courts have taken steps to revise (commonly referred to as “blue pencil”) overly broad restrictions in a manner to uphold the parties’ agreements within the bound of the law.

Individuals who are granted equity or deferred compensation often have restrictive covenants tied to such compensation, and those agreements are often governed by Delaware law.  In light of these rulings, employees who are subject to such restrictions should consult with counsel to determine how their rights under these compensation arrangements have changed, if at all, to their deferred or equity compensation.

Minnesota Bans Non-Competes, and New York May Follow.

Effective July 1, 2023, Minnesota will become the fourth state to summarily ban the use of non-compete agreements in the employment context.  Unlike other jurisdictions that, in recent years, have limited the use of non-competes for low-wage employees, Minnesota’s ban applies to across the board to all employees that primarily reside in the state.  The law also requires employer to use a Minnesota choice-of-law provision so that the stated public policy of the state cannot be superseded by contractual agreements otherwise.  Unlike California, which bans non-compete and non-solicitation clauses other than in limited circumstances involving a sale of a business, however, the law specifically permits non-solicitation provisions.

Following closely in Minnesota’s footsteps, on June 20, 2023, the New York State legislature passed a bill that would ban all post-employment non-compete restrictions.  As of this writing, Governor Hochul has not yet signed the bill into law, but the governor has been a proponent of regulating the use of non-competes, so it seems likely that the bill will become law, in some form.

Outten & Golden’s Executives and Professionals Practice Group has attorneys barred in both Minnesota and New York who regularly advise on the enforceability and negotiation of non-compete and other restrictive covenants. Individuals in those states who are being asked to sign such agreements should consult with counsel to determine what their rights are under applicable state law.

(*Prior results do not guarantee a similar outcome.)