Article prepared by and republished courtesy of our colleagues Stephen Taeusch, Daniel Turinsky, and Carsten Reichel; originally published here: https://www.dlapiper.com/en/insights/publications/2024/01/what-to-know-about-noncompete-agreements-in-2024

As we head into 2024, employers can expect more risk related to the use of restrictive covenants at both the federal and state level. From the Federal Trade Commission’s (FTC) anticipated final rule and National Labor Relations Board (NLRB) unfair labor practice charges to new state laws and court decisions, employers are monitoring the landscape, preparing to meet compliance deadlines, and reassessing their approach to noncompete agreements. Below we discuss the latest developments and what to watch for in the new year.

Federal agencies are expected to remain active

In January 2023, the FTC proposed a rule that would ban virtually all non-competes in employment agreements, with limited exceptions for noncompete clauses between franchisees and franchisors and certain noncompete clauses relating to the sale of a business. A vote on the final rule is expected by April 2024, with legal challenges likely to follow – the Chamber of Commerce has stated that it will sue the FTC if the rule goes forward.

Even if a final rule is immediately challenged and/or enjoined, employers should consider the FTC’s (and the Department of Justice Antitrust Division’s) hostile posture toward agreements that can restrict labor market competition. Recent enforcement has shown that both agencies will closely scrutinize restraints on workers, consistent with the Biden Administration’s commitment to enforcement of antitrust laws in labor markets. While the DOJ’s efforts to obtain a criminal conviction for alleged “no-poach” agreements and wage-fixing between competitors have been largely unsuccessful – most recently, it voluntarily dismissed its only pending criminal no-poach case in November – protecting employees from anticompetitive agreements remains an enforcement priority. In a December 2023 speech, the Division’s principal deputy committed that the agency’s courtroom setbacks would not dissuade it from future prosecutions of no-poach and wage-fixing agreements and teased forthcoming matters that might rely on evidence obtained via wiretap or other covert means. DOJ also has shown a willingness to bring civil enforcement actions involving labor practices, and both the FTC and Antitrust Division committed to consider the impacts of mergers on workers in their revised Merger Guidelines, which were published in December 2023.

At the federal level, the Biden Administration’s “whole of government” approach to antitrust enforcement also promised to involve agencies beyond the FTC and Antitrust Division.

The NLRB is one such agency, and it is likely to follow the lead of its General Counsel (GC) and move to restrict the use of noncompete agreements. On May 30, 2023, NLRB GC Jennifer Abruzzo issued a memorandum asserting that certain noncompete provisions in employment-related agreements violate the National Labor Relations Act (NLRA). While GC memoranda are not binding and do not represent the views of the Board or federal appellate courts, several complaints have adopted the GC’s theory.

Last year the Regional Director of NLRB Region 9 filed a consolidated complaint accusing an operator of spas and medical clinics of violating the National Labor Relations Act (NLRA) by allegedly seeking to enforce its noncompete, non-solicitation and confidentiality agreement. The complaint alleged that the noncompete provision prevented former employees from practicing “aesthetic medicine” within 20 miles of any company location for 24 months following their termination and further obligated them to repay training costs in the event of a violation of the noncompete period. The respondent moved to partially dismiss portions of the consolidated complaint related to noncompete provisions on the grounds that noncompete agreements do not implicate the NLRA and are enforceable under state law. In December, a three-member panel of the Board denied the motion.

An earlier enforcement action in June reported by Bloomberg Law resulted in a private settlement.

Employers can expect more litigation related to noncompetes, as well as challenges to regulatory authority, moving forward.

California enacts two new laws that further restrict employers’ use and enforcement of noncompetes

On January 1, 2024, two new laws took effect in California which could significantly increase the risk of lawsuits related to noncompetes.

Assembly Bill (AB) 1076 makes it unlawful for an employer to include a “noncompete clause” in an employment contract, or to require an employee to enter into a noncompetition agreement, with very limited exceptions.

Of particular note, the new law requires employers to send individualized written notices to all current and former employees (employed after January 1, 2022) whose agreements include an unlawful noncompete clause or who were required to enter into a noncompete agreement that the noncompete clause or agreement is void. Notice is to be provided both by email and regular mail.  A violation of these provisions constitutes an act of unfair competition that could result in civil penalties for unfair competition of up to $2,500 per violation under California’s Unfair Competition Law.

AB 1076 further codifies existing case law to specify that the statutory provision voiding noncompete contracts is to be broadly construed to void the application of any noncompete agreement in an employment context, or any noncompete clause in an employment contract, no matter how narrowly tailored, that does not satisfy specified exceptions. It also provides that the existing state law restricting noncompetition agreements is not limited to contracts where the person being restrained is a party to the contracts, which raises the question of whether employee nonsolicitation clauses or agreements are also void and subject to the individualized written notice requirement.

Senate Bill (SB) 699, which also took effect on January 1, 2024, prohibits employers from entering into or attempting to enforce post-employment noncompete agreements, regardless of where and when the contracts were signed. The bill specifically provides that California’s noncompete restrictions trump other states’ laws when an employee seeks employment in California, even if the employee had signed the noncompete while living outside of California and working for a non-California employer.

Significantly, SB 699 also creates a private right of action, authorizing employees, former employees, and prospective employees to seek injunctive relief and / or actual damages, and entitles a prevailing employee to recover reasonable attorneys’ fees and costs.  

Given new legal remedies and penalties, California employers are encouraged to take steps now to ensure compliance.

More states are moving to restrict noncompetes

In addition to California, several other states enacted new laws in 2023 that broadly limited the use of noncompetes (eg, Minnesota), raised the salary threshold for noncompetes (eg, Maryland) and restricted the use of noncompete agreements for certain employees such as physicians, mental health professionals and other health care practitioners. This trend is expected to continue in 2024.

New York employers are watching for new legislation following the defeat of Senate Bill S3100A, a bill that would have banned all noncompetes in the employer-employee context and created a private right of action. On December 22, 2023, New York Governor Kathy Hochul vetoed the bill after she and legislative leaders were unable to reach a compromise. Governor Hochul had expressed support for the bill subject to “chapter amendments” exempting highly compensated employees (those earning $250,000 or more annually).

New York employers may still see new limits. The Governor has stated that she remains committed to enacting noncompete legislation protecting “middle-class and low-wage earners,” and Senator Sean Ryan, who sponsored SB S3100A, has indicated that noncompete legislation will be reintroduced this year.

Bills restricting the use of noncompete provisions are also pending in other states, including Iowa, Maine, Michigan, New Jersey, and Oklahoma.

Further, employers are encouraged to monitor changes to salary thresholds, which can increase annually, including based on changes to the state’s minimum wage or federal poverty level. For example, Maryland’s amended law prohibits noncompete clauses for employees who earn less than or equal to 150 percent of the state minimum wage ($15.00/hour effective January 1, 2024). Colorado’s threshold increased to $123,750 effective January 1, 2024. In Washington, starting on January 1, 2024, only workers who earn more than $120,559.99 per year for employees or $301,399.98 per year for independent contractors can be held to non-competition agreements.

Judicial scrutiny of noncompetes is expected to continue

Courts may be increasingly unwilling to correct facially overbroad noncompete provisions. For example, in several decisions last year, the Delaware Chancery Court declined to blue-pencil or otherwise modify an overbroad covenant (even when the agreement expressly authorized the court to do so), noting that the practice can create a “no-lose” incentive.

In one case, the court ruled that a 30-month noncompete in a sale of a business agreement was unenforceable where the definition of “business” encompassed all of the purchaser’s business lines and geographic areas rather than just the one in which the seller worked. According to the court, the purchaser’s legitimate economic interest could support restraining the seller’s employment only in the goodwill and competitive space of the purchased asset and the market it serves, and not that of the purchaser’s subsidiaries.

In November, in Sunder Energy, LLC v. Jackson, the Delaware Chancery Court again declined to modify various restrictive covenants in a limited liability company agreement, finding them facially unreasonable (interlocutory appeal to the Delaware Supreme Court pending). According to the court, “when a restrictive covenant is unreasonable, the court should strike the provision in its entirety.”

With respect to the noncompete provision, the court held that it was “astonishingly broad” insofar as it: covered the entire door-to-door sales industry, without regard to whether the company marketed or sold similar products; applied not only to Jackson but also to his “Affiliates,” broadly defined to include his spouse, parents, siblings, and descendants (natural and adopted); covered any state in which the company reasonably anticipated conducting business (46 states); and lasted indefinitely because it applied for the period during which Jackson owned incentive units and for a two-year period thereafter and transfer restrictions prohibited Jackson from divesting himself of the units to “start the clock.”

Next steps

The direction of travel is clear – noncompetes are being scrutinized more closely than ever before. Employers are encouraged to review their current noncompete agreements and ensure they are fit for purpose and narrowly tailored to protect their legitimate business interests.

If you have questions about developments related to restrictive covenants and the best approach for your business, please contact any of the authors or your DLA Piper relationship attorney. For more information about key considerations for global employers see our handbook, Noncompetes around the world: Top issues and strategies for global employers.