Don't Expect Noncompete Relief Until Next Year Says FTC

 Although we've been hoping that the FTC would come through on its proposed rule banning or limiting noncompete agreements, it looks like we'll have to wait. They've announced they won't be voting on the final rule until April 2024. 

That's bad news for workers. Noncompetes have been abused to suppress wages, prevent employees from looking for better jobs, create fear among employees that they will be terminated and unable to work, and force employees to work in terrible conditions. They've been used against sandwich makers and receptionists. 

That doesn't mean you have no remedies. Depending on your state law, there are defenses to noncompete agreements.

While Florida is one of the most anti-employee states in the nation, both federal and Florida antitrust law require that employers have a legitimate interest other than preventing competition in order to enforce a noncompete agreement. Absent a legitimate interest, the agreement violates antitrust laws. Some other states have additional defenses to enforcement.

When in doubt about your noncompete agreement, get some advice from an employee-side employment lawyer in your state.

Treasury Department Report Blasts Noncompete Agreements

 I wrote awhile back about President Biden's executive order on noncompete agreements. In it, he asked the FTC and other agencies to look into curtailing the use of noncompete and other anti-competitive agreements and practices. The Treasury Department just issued a report, presumably in an effort to comply, and it's damning in the extreme on the topic of noncompete agreements. 

Some juicy excerpts:

Firms can engage in tacit collusion by sharing wage information for different occupations, conspiring to fix wages, adopting no-poach agreements where firms agree not to hire other firms’ workers, or forcing workers to sign non-compete agreements that limit their ability to switch jobs.

Wage-setting power is also evident in the large number of workers who are subject to rules and agreements that limit their ability to switch jobs and occupations and, hence, their bargaining power. For example, a recent paper estimates that one-in-five workers is currently subject to non-compete agreements and double that number report having been bound by a non-compete agreement in the past.

Employers can also act to decrease the value of a worker’s outside options. For example, restrictive employment agreements that require workers to repay training costs if they leave the firm or non-compete agreements (both discussed in greater detail below) reduce worker power by increasing the costs of leaving the firm. Those costs are explicit in the case of training repayment programs but implicit in non-compete agreements. By preventing a worker from accepting positions well-suited to their skills, firms decrease the expected gains from a worker’s job search. 

By design, non-compete agreements limit employees’ outside options, which, in turn, weakens workers’ bargaining power and raises hiring costs for other firms. The limits are typically within a geographic area for a specific period and within a set of relatively similar occupations or industries but may be much broader. Balasubramanian (2017) models the effects of non-competes to show how this narrowing of outside options reduces employee bargaining power relative to their employer. All else equal, this leads to what they call a “lock-in” effect: lower worker mobility and longer tenure, as well as a flat or declining wage profile. Both the mitigation of the “hold-up” effect and “lock-in” effect mentioned above can reduce worker mobility. Lower worker mobility increases recruitment costs for all firms as fewer workers are seeking to switch jobs than otherwise would, absent the post-employment restrictive employment agreement. The increases in recruitment costs can lead to worse matches between employers and employees, lowering wages and aggregate productivity (Javanovic 2015).

However, the share of people who negotiate over a non-compete agreement appears to be quite small. Starr, Prescott, and Bishara (2021) find only about 10 percent of employees negotiate over their non-compete agreements. Therefore, it is unlikely that most employees demand (or receive) a compensating differential from signing a non-compete agreement. Furthermore, a worker with little bargaining power (e.g., low-income workers) or who is unaware they are bound by a non-compete (which may be more likely for less-educated workers) is unlikely to be able to secure a compensating differential in exchange for signing a non-compete agreement. To the extent that a compensating differential requires an explicit negotiation, certain workers may be less willing or able to do so—for example, Babcock and Laschever (2009) argue women are much less likely to negotiate during the hiring process. Accordingly, the share of workers whose wages increase as a result of non-compete agreements is small. While one of the main justifications for noncompete agreements (as well as other types of restrictive employment agreements) is mitigation of the “hold up” effect, there are far less restrictive means of addressing this problem. For workers with access to genuine trade secrets, there may be overlapping authority with trade secrecy laws, irrespective of the existence of a noncompete agreement.

Restrictive employment agreements, including non-compete, non-solicitation, and non-recruitment agreements, may reduce firm entry. In aggregate, this tends to lead to reduced demand and wage competition, leading to fewer appealing outside options for similarly situated workers. Samila and Sorenson (2011) find that increases in supply of venture capital funds has a stronger impact on firm start-ups, patent creation, and employment growth in states that have weaker enforcement of non-compete agreements, suggesting non-compete agreements may reduce certain types of entrepreneurial activity.

So long as the perceived probability of an employer attempting to enforce the contract is non-zero, restrictive employment agreements can create frictions. Consistent with this, Starr, Prescott, and Bishara (2020) present survey evidence that workers with non-compete clauses frequently decline job offers because of their preexisting non-compete agreement, even in states that do not enforce such agreements. Likewise, survey evidence also suggests that the incidence of non-compete clause inclusion in employment contracts is not strongly correlated with enforceability of non-compete agreements, which could suggest employers include such clauses even when they do not expect them to be enforceable. This partially occurs because people tend to be risk averse. Therefore, even in places where non-compete contracts are outlawed, the presence of unenforceable non-compete clauses can have a chilling effect on job-switching. The effects may be particularly severe for lower-wage workers, who may have limited access to legal counsel.  

Twenty-one percent of workers in the top income quintile are covered by a non-compete agreement compared to eight percent of workers in the bottom quintile of hourly wages. However, this still leaves millions of workers with minimal employer-specific training subject to non-compete agreements.

Unlike higher income workers, lower wage workers likely lack sufficient bargaining power to refuse a non-compete agreement. As a result, whereas non-compete agreements may increase top-earner wages at the expense of mobility, non-compete agreements appear to reduce both wages and mobility for lower-income earners. For example, Lipsitz and Starr (2021) find that the ban on non-compete agreements for hourly workers (who tend to be lower income) in Oregon increased overall hourly wages by 2–3 percent, with a stronger efect for female workers.

Starr, Prescott, and Bishara (2021) find that the huge number of low-skill workers subject to non-competes suggests that employers routinely apply them to workers who do not possess trade secrets or customer lists and are not given specialized training. They cite as an example a large sandwich chain, which subjected its workers to extremely broad non-competes. Though these non-competes are not likely enforceable under state law, they point out that they may have an in terrorem efect that deters employees from obtaining jobs at competing employers.

A decline in the competitiveness of labor markets lowers worker wages, may decouple wages from productivity, and likely diminishes the relative share of income that goes to workers. Moreover, actions of the firm such as requiring workers to sign non-compete agreements and limiting workers’ access to information diminishes worker mobility, implicitly reducing workers’ bargaining power relative to employers. 

These direct effects on workers’ wages, employment, and mobility have important broader negative impacts on the economy. Higher inequality likely makes it more difficult to sustain sufficient aggregate demand. Lower wages disproportionately impact women and workers of color. A large pool of low-priced labor likely weakens firm incentives to invest and improve productivity, while lower mobility diminishes productivity growth by hindering the reallocation of labor to more productive firms and industries. Non-compete agreements may prevent workers from starting their own businesses and discourage innovation. In short, a growing body of evidence suggests that declining labor market competition may stymie the drivers of U.S. economic growth. 

The use of non-compete clauses, especially among internet-based commerce firms, could be discouraging firm entry (Congressional Budget Office 2020). For instance, Marx, Strumsky, and Fleming (2009) finds that an unintended change in Michigan law boosting the enforceability of non-compete agreements led to sharp declines in the mobility of patent holders. Restricting the use of non-compete agreements and other restrictive employment agreements could allow for new firm creation, as workers at incumbent firms could leave the firm to pursue new ideas, thereby forcing incumbent firms to innovate to stay dominant. 

These are just some highlights. There's lots to unpack in this 68-page report, and I suggest you read it if you are interested. Summary: noncompetes are bad for society, bad for competition, particularly bad for low wage workers, and have the effect of suppressing wages, worker mobility, and innovation. 

And haven't I been saying this all along?

Biden Moves To Curtail Noncompete Agreements, But They Aren't Illegal (Yet)

 I've had some clients get very excited about the news that President Biden's new executive order seeks to curtail noncompete agreements. And it is exciting. It just isn't a magic wand that made noncompete agreements suddenly disappear. Here's what it says about noncompetes:

Section 1. Policy.

A fair, open, and competitive marketplace has long been a cornerstone of the American economy, while excessive market concentration threatens basic economic liberties, democratic accountability, and the welfare of workers, farmers, small businesses, startups, and consumers.

The American promise of a broad and sustained prosperity depends on an open and competitive economy. For workers, a competitive marketplace creates more high-quality jobs and the economic freedom to switch jobs or negotiate a higher wage. For small businesses and farmers, it creates more choices among suppliers and major buyers, leading to more take-home income, which they can reinvest in their enterprises. For entrepreneurs, it provides space to experiment, innovate, and pursue the new ideas that have for centuries powered the American economy and improved our quality of life. And for consumers, it means more choices, better service, and lower prices.

Robust competition is critical to preserving America’s role as the world’s leading economy.Consolidation has increased the power of corporate employers, making it harder for workers to bargain for higher wages and better work conditions. Powerful companies require workers to sign non-compete agreements that restrict their ability to change jobs. And, while many occupational licenses are critical to increasing wages for workers and especially workers of color, some overly restrictive occupational licensing requirements can impede workers’ ability to find jobs and to move between States.

. . . 

Sec. 5. Further Agency Responsibilities.


(a) The heads of all agencies shall consider using their authorities to further the policies set forth in section 1 of this order, with particular attention to:

(i) the influence of any of their respective regulations, particularly any licensing regulations, on concentration and competition in the industries under their jurisdiction; and(f) To better protect workers from wage collusion, the Attorney General and the Chair of the FTC are encouraged to consider whether to revise the Antitrust Guidance for Human Resource Professionals of October 2016.

. . .

(g) To address agreements that may unduly limit workers’ ability to change jobs, the Chair of the FTC is encouraged to consider working with the rest of the Commission to exercise the FTC’s statutory rulemaking authority under the Federal Trade Commission Act to curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.

As you can see, the President is asking the FTC and other agencies to look into curtailing the use of noncompete and other anti-competitive agreements and practices. But he didn't make them disappear with the stroke of a pen. First, there will be new agency regulations. Then there will be litigation, because noncompetes are generally governed by state law, which doesn't just go away. So, for now, assume that your noncompete agreement will be vigorously enforced by your employer and govern yourself accordingly. 

Yes, there are defenses to noncompete agreements. The one thing they are not allowed to be used for is preventing competition (yes, I know that's what they're called and what they're actually being used for, but this would violate antitrust laws). Employers have to have legitimate reasons other than preventing competition, like protecting trade secrets, customer goodwill, specialized training not generally available, etc. if they want to enforce noncompetes. The laws vary by state, so talk to a lawyer in your state if you have questions about a noncompete agreement.

Some Florida Physician Noncompetes Are Invalid

For the first time in many years, the Florida legislature actually did something pro-employee. Well, at least, pro-doctor. Here's the new law:

542.336 Invalid restrictive covenants.—A restrictive covenant entered into with a physician who is licensed under chapter 458 or chapter 459 and who practices a medical specialty in a county wherein one entity employs or contracts with, either directly or through related or affiliated entities, all physicians who practice such specialty in that county is not supported by a legitimate business interest. The Legislature finds that such covenants restrict patient access to physicians, increase costs, and are void and unenforceable under current law. Such restrictive covenants shall remain void and unenforceable for 3 years after the date on which a second entity that employs or contracts with, either directly or through related or affiliated entities, one or more physicians who practice such specialty begins offering such specialty services in that county.

For doctors whose employer has a monopoly on an entire specialty practice area in a county, they will see some relief from noncompetes with this new law. It probably only helps those in rural counties, but it's a baby step in the right direction.

Of course there's a lawsuit. 21st Century Oncology has filed a lawsuit to stop the law. They lost their bid for an emergency injunction, but the suit is still pending.

I'll keep you posted if anything changes, but for the moment this is the law in Florida.

Employer Agreeing Not To Poach Competitor's Employees? That's A Jailing

The Department of Justice's Antitrust Division is serious about going after employers who agree not to poach a competitor's employees. So serious, that they announced in 2016 they would start criminally prosecuting violators, and they recently announced some prosecutions are imminent. In a joint publication with the Federal Trade Commission titled Antitrust Guidance for Human Resource Professionals, the DOJ said this about no-poach agreements (these are my favorite excerpts):

From an antitrust perspective, firms that compete to hire or retain employees are competitors in the employment marketplace, regardless of whether the firms make the same products or compete to provide the same services. It is unlawful for competitors to expressly or implicitly agree not to compete with one another, even if they are motivated by a desire to reduce costs.  

Violations of the antitrust laws can have severe consequences. Depending on the facts of the case, the DOJ could bring a criminal prosecution against individuals, the company, or both. And both federal antitrust agencies could bring civil enforcement actions. In addition, if an employee or another private party were injured by an illegal agreement among potential employers, that party could bring a civil lawsuit for treble damages (i.e., three times the damages the party actually suffered).  

An individual likely is breaking the antitrust laws if he or she:  

• agrees with individual(s) at another company about employee salary or other terms of compensation, either at a specific level or within a range (so-called wage-fixing agreements), or 
• agrees with individual(s) at another company to refuse to solicit or hire that other company’s employees (so-called “no poaching” agreements). 

Naked wage-fixing or no-poaching agreements among employers, whether entered into directly or through a third-party intermediary, are per se illegal under the antitrust laws. That means that if the agreement is separate from or not reasonably necessary to a larger legitimate collaboration between the employers, the agreement is deemed illegal without any inquiry into its competitive effects.  

Going forward, the DOJ intends to proceed criminally against naked wagefixing or no-poaching agreements. These types of agreements eliminate competition in the same irredeemable way as agreements to fix product prices or allocate customers, which have traditionally been criminally investigated and prosecuted as hardcore cartel conduct. Accordingly, the DOJ will criminally investigate allegations that employers have agreed among themselves on employee compensation or not to solicit or hire each others’ employees. And if that investigation uncovers a naked wage-fixing or nopoaching agreement, the DOJ may, in the exercise of its prosecutorial discretion, bring criminal, felony charges against the culpable participants in the agreement, including both individuals and companies. 

Sharing information with competitors about terms and conditions of employment can also run afoul of the antitrust laws. Even if an individual does not agree explicitly to fix compensation or other terms of employment, exchanging competitively sensitive information could serve as evidence of an implicit illegal agreement. While agreements to share information are not per se illegal and therefore not prosecuted criminally, they may be subject to civil antitrust liability when they have, or are likely to have, an anticompetitive effect. 

Additionally, merely inviting a competitor to enter into an illegal agreement may be an antitrust violation – even if the invitation does not result in an agreement to fix wages or otherwise limit competition.  

Reports can be made to the Division through the Citizen Complaint Center by e-mail (antitrust.complaints@usdoj.gov), phone (1-888-647-3258, toll free in the U.S. and Canada, or 202-307-2040), or mail (Citizen Complaint Center, 950 Pennsylvania Avenue, NW, Room 3322, Washington, DC 20530).  

Reports can be made to the FTC through the Bureau of Competition’s Office of Policy and Coordination by email (antitrust@ftc.gov), phone (202-326- 3300), or mail (Office of Policy and Coordination, Room CC-5422, Bureau of Competition, Federal Trade Commission, 600 Pennsylvania Avenue, NW, Washington, DC 20580). 

In my opinion, this not only means that your employer cannot have a gentleman's agreement with a competitor not to hire each other's employees, but that such an agreement is prohibited even when it is done to settle a noncompete lawsuit involving a noncompete agreement of an employee.

If your employer is breaking the law, don't participate in those antitrust violations. You could land in jail. Instead, report them to the Department of Justice or the FTC. If you are the victim of a no-poach arrangement, contact an employee-side employment lawyer in your state.

My 2018 Predictions

Okay, okay. So I've been promising these for awhile. It has taken me a bit to wrap my head around things that have happened so far since the presidential election. The good news is that the GOP remains the party that couldn't shoot straight (no pun intended). So far, little has been done against employees on the legislative front. It's mostly been done by executive order.

So what can we expect for the rest of 2018? Here are my predictions:

Sexual harassment: Despite all the brouhaha on #MeToo and sexual harassment, no new legislation will pass and we'll see some judicial and jury decisions penalizing sexual harassment victims. There will be backlash, and lots of it.

Agcncy paralysis: With cuts to EEOC, DOJ and NLRB, these agencies will develop backlogs and go into paralysis. Employees can expect little help from the feds this year. The one hopeful thing I see is that EEOC mediations are still going strong. The EEOC mediators, at least down here, are some of the best I've ever seen, government or private. We will still see cases resolved in EEOC mediations unless the mediation program is cut too.

Guns at work: Thanks to high school students down here, we may start to see states revisiting those idiotic guns at work laws that have been all the rage. On the other hand, the orange one is pressing to arm teachers in classrooms. What could possibly go wrong? I think we will actually see some baby steps on common sense gun control for the first time in this country in a long time. It will take awhile, probably years, but there will probably ultimately be a drop in workplace shootings if these laws pass.

Immigration raids: We've already started to see employers being raided to round up illegal immigrants and arrest the bosses for hiring them. We're also seeing traffic stops to round up immigrants. That will continue. Employers  and employees beware.

Antitrust: The Department of Justice has announced it will start cracking down on no-poach agreements between employers. That's a ray of sunshine in what will be an awful year for employees. I would caution employers who threaten to sue competitors for hiring former employees, then quietly settle with a no-poach agreement. The government will come after you as well as my colleagues and me for these illegal arrangements.

LGBT rights: The courts will continue to battle over whether or not Title VII'a sex discrimination prohibition covers sexual orientation. I don't think the Supremes will get to the issue this year, so we'll have a split among circuits on this. So far, the 2nd and 7th Circuits say it's covered. The 11th, which covers my home state of Florida, says no.

Marijuana crackdowns: I've been predicting for awhile that the feds will start cracking down on legal marijuana use. It's still illegal on the federal level, no matter what your state says. That handy-dandy card allowing you to buy will be a nice tool for the feds to use to claim probable cause to search your house. They'll probably go after growers and dispensaries first, but if people don't rise up and resist, they'll come after individuals next. I'm guessing the crackdown this year will be on the businesses, not on individuals.

Overall, this won't be a good year for employee rights. But then, you knew that already. Resistance is not futile.

Massachusetts Legislators Fail To Protect Citizens Against Abusive Noncompetes. Again

For a second year in a row, Massachusetts legislators introduced legislation to ban or severely limit the use of noncompete agreements in their state. And for the second year in a row, those efforts failed. Things looked hopeful for awhile, as both houses passed legislation, but then legislators couldn't agree on a compromise. So for the time being the citizens of Massachusetts will have to put up with being limited in their ability to leave their jobs.

This is not a small inconvenience. The White House estimates that 18% of American workers are now covered by noncompete agreements, many of them low wage workers. Jimmy John's has faced two antitrust investigations of its sandwich maker noncompetes. Dog groomers, fast food workers, data entry clerks and other low-level workers are prohibited from working for competitors of their employer for a year or two after they leave, whether they leave voluntarily or are fired because their boss didn't like their shirt or was in a bad mood.

Noncompete agreements are bad for business, bad for innovation, and are certainly bad for workers. Employers can use noncompetes to suppress wages, force employees to stay in abusive jobs, and blackmail employees into feeling trapped in their jobs. So it's a shame the Massachusetts legislature adjourned without a fix.

At least Massachusetts is trying to help their citizens, unlike my home state of Florida, one of the worst states in the nation for employees who want to escape noncompete restrictions. Other states have passed restrictions on noncompetes. Delaware and Colorado ban noncompetes for physicians. Some employees are fighting them through unions. Hawaii banned noncompetes for technology workers and New Mexico banned them for health care workers. Some states ban "sign or be fired" agreements presented after employees start working. Others require pre-hire notice to potential employees that a noncompete will be required. Some allow employees to claim that enforcing a noncompete agreement will cause them undue hardship.

An attempt by Democratic members of Congress to ban them for low wage workers has failed. Now the White House is investigating noncompete agreements and is seeking input from people who have been subjected to unreasonable restrictions.

Bottom line is that it takes real citizens raising holy hell with state and federal legislators and regulators to get the law changed. While there have been efforts to change or limit abusive noncompete agreements, nothing will change unless you speak out. Had the citizens of Massachusetts bombarded legislators with emails and phone calls asking for reform, this year's efforts wouldn't have stalled. So if you think employers shouldn't be able to prevent employees from working for competitors, then call your state legislators and members of Congress and tell them so.

The Criminalization Of Employment Law

A new indictment in a trade secret case, where a former employee opened his own business, made me think about something that's been bothering me for awhile, namely, the criminalization of employment law. I did a piece about this a couple years ago called Your Ex-Boss Wants You In Jail. It's gotten worse. Not only are we sending employees to jail for what used to be civil offenses, but the criminalization is completely one-sided. Employees blink wrong, go to jail. Employers can't get tossed in the hoosegow no matter how bad they misbehave.

Here's what The Dallas Morning News says about the case:

The indictment states that Tezock was an employee of Voltaix for about 16 months until September 30, 2005, when he was scheduled to be let go from the company.

During the last month of his employment he was allowed to complete a project from home, working with proprietary company files on his personal computer. It was during this time that the district attorney’s office alleges Tezock made copies of a secret recipe for germane, a valuable chemical used in semiconductors and solar technology.

Speaking through an attorney, Tezock denied the charge that he had stolen plans to produce germane.

A letter released by Tezock’s legal counsel said that he had applied and was granted a patent for his method of germane production in 2009. According to Tezock, Voltaix’s response at that time was to try and re-hire him.

Daniel Therings, a former attorney for Metaloids, said that thereafter Voltaix brought a civil action against the company and Tezock in 2010. Court documents filed in Texas’ fifth district court of appeals show the company asked the court to stop Metoloids from producing germane.

While Therings said the case is still caught up in appeals, he said the court sided with Metaloids. A news brief on the company’s website said Voltaix was ordered to pay the cost of further litigation.

He got a patent for it, but it's their trade secret? Let's assume that this isn't as ridiculous as it sounds. So an employee who uses alleged trade secrets to open his own business is a criminal, despite antitrust laws saying competition is one of the biggest tenets of capitalism. Indeed you can look at all the arguments againstnoncompetes in Massachusetts to see why letting employees compete with former employers is a good thing. Okay, taking trade secrets is bad, if it really happened. So sue the employee for any damages. But a crime?

One employee was sentenced to four years in prison for trade secret violations. Another employee is sentenced to 97 months. There are trade secret convictions and more trade secret convictions.

Then there employees getting convicted for exceeding their authority to access information on computers at work. One guy was sentenced to 41 months under the Computer Fraud and Abuse Act and his sentence was finally reversed on appeal. CFAA prosecutions have been all the rage among employers seeking to toss employees in jail. Yet if you look at the civil cases on CFAA, you can see just how broad this law is and how much employees are at risk if they click the wrong link at work.

 Employers Skate

Then look at the employer side. No criminalization there. Despite attempts to criminalize wage theft, all we get are local ordinances and attempts by Republicans to make even the wage theft ordinances illegal. Wage theft is rampant, and it costs us all money. Several Florida counties have passed ordinances to beef up efforts to go after employers who steal employee wages. They should be throwing them in jail, but no, can’t do that. Heck, Broward County couldn't even use the term "wage theft" in its ordinance because employer groups threw a hissy fit.

Look at employers who violate antitrust laws, which have criminal penalties, by the way, by forcing low level employees who can’t affordto fight to sign noncompete agreements for the sole purpose of preventing competition. Are they being prosecuted for making employees virtual indentured servants? No way. What about eBay, Apple, Google and othersconspiring to violate antitrust laws with no-poach hiring agreements? Criminal prosecutions? Nope. Slap on the wrist.

Egypt just made sexual harassment a crime. We can’t even get federal laws passed making sexual harassment of unpaid interns illegal. That’s right. Our kids have no legal protection against sexual harassment anywhere but Oregon and NY.

Groping teenagers and young women? Not even a civil offense. Stealing employee wages? Not a crime. But starting a competing business against your former employer? That’s a jailing offense.

Seizing Employee Property?

Now employers want to pass a law allowing courts to seize the property of former employees who dare to compete. The Fourth Amendment be damned. How can you fight a case if you don't have the proof? You can't, and that's exactly what employers want. They can shut down employees who dare to compete without lifting a finger. Where's the outrage? Why isn't hell being raised at the prospect of this ridiculous new law?

This makes me mad as hell. Does it make you mad too? Then start raising hell with your legislators. Tell them to stop the one-sided criminalization of employment law. And tell them to say no to seizure of employee property for alleged trade secret violations.

Let's not give up employee rights so easily.

Noncompete Answers - Company Lost The Customer Contract; Employer Owes Me Wages

On the ever-popular topic of non-competition agreements, I continue to get tons of questions. I'm answering some more today.

Is My Noncompete Agreement Enforceable If My Employer Owes Me Wages?

Q: My former employer wrote such an ambiguous non-compete that it virtually eliminates any chance of me finding any employment in my field. Plus they owe me $9500 and say they won't pay unless I provide them with proof I'm not competing.

They made exceptions to the non-compete during my employment and now say that I'm violating the agreement by continuing to do the exceptions that they allowed.

They are in Illinois - I am in Florida. 

Mr. High School

Hi Mr. High School. You raise several interesting issues, so I'll touch on all of them quickly. The one that I hear most often is whether a noncompete agreement is enforceable if your employer owes you wages. The answer is a whopping, clear-as-mud, maybe. If your noncompete agreement is part of an employment agreement that sets out your wage rate and other terms and conditions of employment, then the failure to pay those wages is a breach of the agreement. If they breached before you started working for a competitor, then the breach should eliminate your obligations. However, this may vary from state to state (and judge to judge) so I can't predict how a judge in the state where it ends up in court would see it.

If the noncompete agreement is separate and doesn't include any promises about wages, then the issue is less clear. I'd still argue that the failure to pay the wages owed negates your obligations, but the question would really depend on the specific facts and contract language. I'd suggest talking to an employment lawyer in your state about this to be sure.

If they've made exceptions to the noncompete and allowed you (or coworkers) to compete in specific circumstances or with specific companies, it will be really tough for them to argue that they have a legitimate interest to protect in enforcing the restrictions against you alone (or you now, when you've previously been allowed).

You also mention that they're in a different state than you. If the agreement says which state's law applies, then that's probably which state law you'll be dealing with. If the agreement is silent on which state's law applies, it's probably the state where you executed the agreement. Frankly, Florida law is so horrid on noncompetes that you're probably better off if you can apply Illinois law (but I'll defer to any Illinois lawyers out there who disagree.)

My Company Lost It's Contract - Can I Stay?

I got two questions on this topic. Here they are:

Hi I signed a contract with a company that states I cannot work for myself, or any other company in my line of profession for 1 yr.. My contract is up in may and my boss has moved to South America. Since being over there he has messed my wages up and hardly replies to my emails. The customers are not contracted with this company and I would like to take them on myself. If my company has gone elsewhere and I took over the duties for the customers they left behind, where do I stand?

Lee B.

Hi Lee. I answered the issue about the unpaid wages above. I'll answer your question about your company moving after the question below.

Sounds like this is more of a hot topic than I knew. I am a victim also--I started working for company x in March 2004. A while after I started, the manager's position came open and they offered it to me. I am pretty sure it was at this time they made me sign a non-compete. (I am contract labor). The company that owned the building I was working in then was purchased by another company. In 2008 this building closed down and I transferred to another building. About 6 months later I was again asked to sign a non-compete. Now the company "x" that I work has lost their contract in the building so I am being told because of the non-compete I cannot stay and do the same type of work for the new company.

I applied and was going to be hired by the company that owns the building for a totally different type of job, but they are now saying they have a "policy" that states I cannot work for them for 12 mos. then have to reapply, when I was originally told by my supervisor that I could do any other job in the building other than the services they provide. Now that has changed. So, now am waiting for an answer from the new company as to whether or not they can get me out of the non compete--which is slim to nothing chance. If not I will be looking for a new job and am restricted can't do the three jobs listed above, OR work in any of the buildings owned by current building I'm in.

I live in a rural area where there are virtually NO JOBS so I may be in the unemployment line because of this stupid non compete! I will never sign one again. 

Tired of This

Hi Tired of This. I'm tired of ridiculous noncompete restrictions too, which is why I enjoy fighting them when I can. To answer Lee and you, if your company has either abandoned a geographic area of business or lost the customer through someone's fault other than yours, such as through competitive bidding, then I think it will be really tough for them to prove there is any legitimate interest to protect in enforcing a noncompete agreement against you.

Remember, agreements that are for the sole purpose of preventing competition are illegal. They violate antitrust laws. Noncompete laws are an exception to antitrust laws. Your employer must show a legitimate interest to protect. Legitimate interests might be things like trade secrets, confidential information that's truly confidential and not available from public sources, and customer goodwill. If they can't show a legitimate interest other than preventing competition (or spite) then they should lose in court.

The problem is, most employees don't have the resources to fight if they're sued, and most new employers will just fire you if they get a nastygram from your former employer because they don't want to be in the middle of a lawsuit. I'm hoping that the Department of Justice and some state Attorney's General will start stepping up for the common man and enforcing antitrust laws against bullying employers.

In the meantime, you should contact an employment lawyer in your state about your rights.


If you have a question on noncompete agreements, discrimination, whistleblowing, employment contracts or any other employment law issue, and don't mind having me answer it publicly, feel free to ask it in the comments section. If you ask me here, you're asking for general information and not for legal advice. The question and answer will be public and will not be covered by attorney-client privilege, nor will it establish an attorney-client relationship. If you need legal advice or have an urgent legal issue that needs to be dealt with, contact an employment lawyer in your state.

Why Should Employers Have All the Injunction Fun? How To Stop Your Ex-Employer From Harassing You

By: Associate Attorney who now chooses to be anonymous, Donna M. Ballman, P.A., Employee Advocacy Attorneys

When you leave a job and start working somewhere else, you may be greeted with a letter from your former employer threatening legal action against you unless you quit your new job. The ex-employer may claim you are bound by a non-compete agreement, non-solicitation agreement, or a confidentiality agreement. Your ex-employer may allege that you were privy to trade secrets or other confidential information and claim you are forbidden from working for the new employer, because it is a competitor of your ex-employer. (Ms. Ballman has tackled the ins and outs of these agreements in length in prior posts, so I will not waste your time explaining these dreadful contracts).

Most employees who get letters like this are forced to quit the new job, usually because they cannot afford to defend against a lawsuit if the employer makes good on his wicked promise. However, you may be able to get an injunction against the employer’s anti-competitive and restrictive actions.

An injunction is a court order that would require your former employer to perform an act or restrain the employer from acting in a particular way. In order get a court to issue an injunction, the you’ll have to prove (1) the likelihood of irreparable harm, (2) the unavailability of an adequate remedy at law, (3) a substantial likelihood of success on the merits, and (4) that a temporary injunction will serve the public interest.

Almost every state has an antitrust statute, or similar law, prohibiting anti-competitive behavior in the market place. Federal law also provides injunctive relief in limited circumstances. Sometimes these antitrust statutes specifically permit injunctive relief against the types of behavior discussed above. For instance, when a person violates Florida’s Anti-Trust Law, the aggrieved party is entitled to injunctive relief against threatened loss or damage and even authorizes attorney's fees and costs to a plaintiff who substantially prevails on such a claim.

Make sure you check your local state statute to see if similar relief is available. Some states do not have antitrust laws, others only have criminal penalties for antitrust violations, and some only permit a civil action to be brought by the state attorney general.

It is common for employers to move for injunctions against ex-employees it believes are violating non-compete agreements and the like. This is usually because antitrust laws, such as Florida’s, have specific provisions providing that the violation of an enforceable restrictive covenant creates a presumption of irreparable injury to the person seeking enforcement of that covenant. This makes it much easier for the employer to obtain an injunction. However, non-compete laws are an exception to anti-trust laws. They are only enforceable if they are supported by a legitimate business interest, not expired, not over-broad, and that satisfy other requirements that vary from state to state.

Normally, proving “irreparable injury” is an uphill battle. In most cases, the irreparable injury must be immediate. This is probably why many employees have not been successful in getting courts to issue injunctions against former employers. However, it is a positive sign for employees that state law makers have drafted these statutes providing injunctive relief. It demonstrates that legislators recognize the importance of preventing monopolies. This means you may be able to persuade a court to enjoin your employer if it tries to restrict you from freely working and competing in the marketplace.

If you believe your ex-employer’s actions may be considered an illegal restraint on trade or commerce, you should contact an employee-side employment attorney in your state. Proving the elements for injunctive relief and antitrust violations can be difficult and you should have an attorney assist you.

If you are successful in getting the injunction, the Court will attempt to maintain the status quo. This means, for the time being, no more pesky letters from your ex-employer. You may now freely enjoy your new job without your ex trying to ruin it all for you.

Non-Compete Agreements Can't Be Used to Prevent Competition

Whether you work in the copy room or in a corner office, you may have been presented with something called a Non-Competition Agreement. Or maybe it was called something sneakier, like a Confidentiality Agreement or Intellectual Property Agreement. Whatever it was called, it said you can't work for a competitor of the company for a year or two after you leave.

If you haven't been forced to sign one yet, beware. They're all the rage with management these days. Physicians, managers, executives, professionals and employees are often given the choice: sign or be fired.

While companies claim all kinds of reasons why they want a non-compete agreement from their employees, there's only one reason they really want it: to prevent a competitor from luring you over to work for them. They want to do everything they can to inhibit and prevent competition. But they will almost never admit that's the real reason.

Why not? Because preventing competition is the one reason that will never, ever justify a non-compete agreement.

While every state has different laws regarding enforceability of noncompetes, most allow them in some form or other. I'll use Florida's as an example, since I'm most familiar with it.

Florida law says:

542.18 Restraint of trade or commerce.—Every contract, combination, or conspiracy in restraint of trade or commerce in this state is unlawful.

 This law is similar to the Federal equivalent, the Sherman Antitrust Act, which makes all contracts, combinations, and conspiracies that unreasonably restrain interstate and foreign trade illegal. There are both civil and criminal penalties for violations of the Sherman Act and the Florida antitrust law.

The Florida noncompete statute is a very specific exception to the antitrust laws. It says, in part:

542.335 Valid restraints of trade or commerce.—

(1) Notwithstanding s. 542.18 and subsection (2), enforcement of contracts that restrict or prohibit competition during or after the term of restrictive covenants, so long as such contracts are reasonable in time, area, and line of business, is not prohibited. In any action concerning enforcement of a restrictive covenant:

 

(a) A court shall not enforce a restrictive covenant unless it is set forth in a writing signed by the person against whom enforcement is sought.

 

(b) The person seeking enforcement of a restrictive covenant shall plead and prove the existence of one or more legitimate business interests justifying the restrictive covenant.

 
The statute sets out some things the legislature considers legitimate interests, such as trade secrets, substantial relationships with customers and client goodwill. But preventing competition is not a legitimate interest to protect.

If your employer doesn't have a truly legitimate interest to protect, then they are violating antitrust laws by enforcing or trying to enforce a non-competition agreement. Unless you're the holder of the company's secret recipe, you might want to talk to an employment lawyer in your state about defenses you have to your noncompete obligations before you decide you have no choice but to step out of your industry for a year or two.