A Potential Overhaul of Noncompete Law is on the Horizon

August 9, 2023Articles
Goering Center

Many businesses rely upon restrictive covenants with their employees. These include noncompete agreements, nonsolicitation agreements and confidentiality agreements. These agreements are intended to ensure that the investment a business makes in its employees, its customer relationships and confidential information are adequately protected.

Recently, multiple new rules have been proposed that could see many of these agreements ruled unlawful and unenforceable in the United States. These proposed rules specifically target noncompete agreements — agreements which prohibit an employee from working for a competitor in any capacity for a period of time after leaving employment. The proposed rules would not prohibit the use of nonsolicitation agreements or agreements to protect an employer’s confidential information. However, given that one in five American workers are subject to a noncompete agreement, the proposed rules outlined below could require a significant change in how employers in the United States protect their business interests.

In January 2023, the Federal Trade Commission (FTC) announced a proposed rule that would prohibit employers from having employees sign noncompete agreements. This rule, as written, would apply to almost all employees, with the only noted exceptions being for individuals that enter into a noncompete agreement as part of the sale of a business or for noncompete agreements between franchisors and franchisees. Tens of thousands of public comments were submitted regarding the proposed rule, and there is no concrete timeline for implementation of the final rule, if it is implemented at all. Employers should watch for any announcements from the FTC regarding noncompete agreements in the next year, although any rule proposed by the FTC is sure to be subject to legal challenges that could take years to resolve.

Additionally, a bill has been introduced in the United States Senate that would also prohibit the use of noncompete agreements. The Workforce Mobility Act of 2023 has co-sponsors from both major parties, and President Joe Biden has indicated that he will sign the bill, if passed. This bill, if passed, would not be likely to be subject to the sort of legal challenges that could invalidate the FTC’s similar rule prohibiting noncompete agreements. The bill has not yet been introduced in committee, and there is no timeline for its passage. As with the proposed FTC rule, employers with noncompete agreements should monitor this legislation moving forward.

Although the legal headwinds appear to be blowing against the use of noncompete agreements in the long term, Ohio employers are still currently permitted to use noncompete agreements that are reasonably crafted to protect an employer’s interests, without being so broad as to overly harm employees. If your business requires some or all of your employees to sign noncompete agreements, you should consider some of the key factors that Ohio courts examine when determining whether a noncompete is enforceable:

  • Whether a noncompete has limits as to time and space;
    • Any noncompete agreement should be limited in time (two years or less is likely reasonable), and should have a geographic limitation that corresponds to the reasonable reach of the employer’s business.
  • Whether the employee represents the business’s sole contact with customers;
    • Employees that serve as the sole contact with some or all of an employer’s customers are recognized to have a particularly negative effect on an employer’s legitimate interests, if the employee leaves for a competitor.
  • Whether the employee possesses confidential information or trade secrets;
    • Employees that have access to genuine confidential information or trade secrets are more likely subject to a reasonable noncompete agreement.
  • Whether the employee’s skills were developed working for the employer or elsewhere;
    • Ohio courts recognize that employers sometimes put significant resources into the training of employees, and that a noncompete is a valid tool to protect that investment.

Considering the recent developments in noncompete law noted above, employers should ensure that any noncompete agreements used are appropriately narrow in scope. They should be used only with those employees that could genuinely harm the employer by leaving for a competitor.  Employers should also consider nonsolicitation agreements and agreements to protect confidential information as alternative restrictive covenants (in place of or in addition to noncompete agreements). These can also protect employer interests, while being more likely to be enforceable for years to come.