Some States Limit Noncompetes, Others Work to Ban Them

Several states have recently enacted modifications to their respective noncompete laws or have legislation in the pipeline. Most continue the trend of limiting enforceability of noncompetes, which are agreements between an employee and employer where the employee agrees not to enter into competition with the employer following the employee’s termination of employment.

A couple of years ago, Utah enacted a law imposing a one-year time limit on post-employment noncompetes, except in limited circumstances including the sale of a business. Recently, Utah modified its law to limit the enforcement of noncompetes against employees in the broadcasting industry. Should an employer seek to enforce a noncompete against an employee in the broadcasting industry, the employer must ensure that the employee is paid a salary of at least $913 per week, the noncompete must be part of a written employment agreement with a term of no more than four years, and the employee must be terminated “for cause” or must have breached the employment agreement in a manner that results in his or her separation.

Recently, Idaho repealed an employer-friendly amendment to its noncompete law. Pursuant to Idaho law, employers can enter into noncompetes with “key employees” and “key independent contractors” provided the noncompetes protect a legitimate business interest and are reasonable in duration, geographic scope, and type of employment. An amendment to the law entitled employers to a rebuttable presumption of irreparable harm if an employer sought injunctive relief against a “key employee” or “key independent contractor” and the court found a violation of the noncompete. The rebuttable presumption of irreparable harm was repealed, and thus the burden of establishing the likelihood of irreparable harm is back on the employer.

Several other states have sought to impose restrictions on noncompetes. Illinois prohibits noncompetes with “low-wage” employees, and legislation in New Jersey and New York City seeks to do the same. Bills in the Vermont and Pennsylvania legislatures would generally ban noncompetes (with limited exceptions). The Vermont bill would only permit noncompetes in the context of sale of a business or dissolution of a partnership or interest in a limited liability company. The Pennsylvania bill would have similar exceptions, but would also require Pennsylvania to be the governing law and venue in any noncompete agreement. That is, choice of law and venue provisions in noncompetes would not be recognized in Pennsylvania. Several Senate and House bills in the Massachusetts legislature would ban noncompetes for nonexempt employees and those employees terminated without cause or otherwise laid off. In other instances, the Massachusetts legislation would limit noncompetes to 12 months and require employers to continue paying earnings post-termination to employees who are subject to a noncompete (i.e., garden leave).

With the introduction and passage of more and more employee-friendly noncompete legislation, it is important that employers understand the noncompete laws of the respective states in which they operate and that they do not create a “one-size-fits-all” noncompete agreement for all employees. It also remains critical that employers draft appropriate restrictive covenant agreements that are narrowly-tailored in duration, geographic scope and prohibited activities and that any restrictions serve to protect a legitimate business interest.