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Now That the White House Weighs in on the Non-Compete Debate, Where Do We Go from Here?

Proponents of non-compete agreements have long argued that they encourage economic growth. After all, why would you invest in developing new technologies and training new employees if they could learn the tricks of your trade, meet your customers, and then leave for a competitor? Opponents of non-compete agreements take the opposite approach. After all, isn’t innovation stifled if people can’t pursue new opportunities in a business space that they have come to know? Now, the White House is weighing in on the issue.

In a May 2016 report titled “Non-Compete Agreements: Analysis of the Usage, Potential Issues, and State Responses,” the White House labels non-compete agreements an “institutional factor that has the potential to hold back wages.” Citing statistics in which fewer than half of the workers who have non-competes report possessing trade secrets and 14% of workers earning less than $40,000 are subject to non-competes, the report argues that non-compete restrictions are being used excessively and often when there is little business justification for them. Call it the “Jimmy John’s effect” – the White House, like many others, is now reacting to an economy in which sandwich makers are being asked to agree to restraints comparable to those of some executives.

As multi-state employers know, non-compete law has long been the province of the states. There are fifty different sets of applicable law, with states like California and North Dakota prohibiting non-competes in the employment context altogether and others like Delaware and New York generally permitting them, so long as certain standards are met. So what will the White House’s entry into the debate mean? Does this signal a new era of federalization of non-compete law just like we did for trade secrets law with the May 2016 entry of the Defend Trade Secrets Act (“DTSA”)? Like the DTSA, could a federal non-compete statute allow for federal court jurisdiction for non-compete claims if certain drafting requirements are met?

Perhaps this increased federal scrutiny will encourage the now-accelerating process in which several states have enacted or introduced legislation that makes it tougher (or more expensive) to enforce restrictive covenants. Indeed, the White House report looks favorably upon recent state initiatives that: propose restrictions against enforcing non-competes against those eligible for unemployment compensation (unsuccessful bills introduced in New Jersey and Maryland); require disclosure of non-compete agreements before job offers are accepted or job advancement can occur (laws in Oregon and New Hampshire); or mandate consideration besides short-term, continued employment in order to enforce a non-compete (judicial decisions in Illinois and Wyoming).

While the White House report is non-binding, it represents growing federal interest in the non-compete debate. Per the report, “the White House, Treasury, and the Department of Labor will convene a group of experts in labor law, economics, government and business to facilitate discussion on non-compete agreements and their consequences.” What will become of that discussion remains to be seen. But the process will, no doubt, be an interesting one.

This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.