The State of No-Poach and Non-Compete Agreements

There are two sides to every coin. This saying is particularly true of no-poach and non-compete agreements, which have been an increasing source of contention in courtrooms across America in recent years, and specifically in the antitrust arena.

• The Labor Reform Perspective: Labor reformers and the Department of Justice have taken interest in labor practices. Over the past four decades, the rate of startups has halved, job mobility decreased 22 percent, and wages for the bottom 90 percent of earners has grown only 0.4 percent overall; in fact, the lowest 10 percent of earners have seen their wages decline by 5 percent. Reform groups and lawmakers point to no-poach and non-competes (which affect approximately 1 in 5 workers) as an obstacle for workers looking to pursue better job opportunities.
• The Business Perspective: At the same time, when one’s best employees leave the company; they not only take skills and training with them but also their competitive knowledge and contacts. Onboarding employees is an expensive ordeal. For example, no-poach agreements are standard among franchisees and in big technology companies. In these cases, employers do not want to invest in training an employee only to have him or her to go work for another company across town. Most employers are not keen on letting trade secrets walk out the door, which is why they implement non-compete clauses as a condition of employment.

Are No-Poach and Non-Compete Agreements Allowed in the U.S.?

Federal law does not expressly prohibit no-poach and non-compete agreements. However, each state has its own laws and patterns of enforcement. For instance, in California, North Dakota, and Oklahoma, these agreements are “banned” on paper. In other states like New York, Montana, Michigan, Virginia, and North Carolina, these practices are allowed. The agreements are allowed in Nevada, Maine, Texas, Washington, and Florida, but with exceptions.

Often, legality and enforceability fall to the courts. The court ruling is critical whether you are a class action litigator hoping to secure a win for the employees you represent or are tasked with defending a business leader who doesn’t want to fall afoul of a multi-million-dollar labor settlement.

Why Is Interest Increasing in No-Poach and Non-Compete Agreements?

There are several reasons why we see a spike in labor cases related to no-poach and non-compete clauses:

• Highly publicized cases have increased public awareness.
• Policymakers are looking for solutions regarding wage stagnation and declining economic dynamism in the wake of the Great Recession.
• State variance in non-compete law creates reform momentum.
• Behind the scenes collaboration in competing companies to maintain their workforce and keep them from moving and driving labor costs up.

The Workforce Mobility Act (WMA) was first proposed in 2018 but has failed to pass two years in a row due to partisan gridlock. The WMA would be the first direct piece of legislation to ban employee non-compete agreements under most circumstances.

Recent No-Poach and Non-Compete News

Over the last decade, non-compete and no-poach agreements have appeared on the agendas of federal and state legislatures, state Attorneys General, and antitrust agencies alike. Two federal agency reports recently hit on the topic. The Department of Justice has issued repeated warnings regarding no-poach violations but has yet to file any criminal prosecution.

The DOJ’s implied support for enforcement has sparked several states to undertake investigations of their own. State legislators have proposed more than 20 laws targeting these agreements. Antitrust agencies are basing reforms on the 2016 Department of Justice Human Resource Guidelines, which state that it is illegal for competing firms to “limit or fix the terms of employment.” State Attorneys General are opening abuse investigations.

Perhaps most significantly, Washington State Attorney General Bob Ferguson has led the effort to deter no-poach and non-competes, entering into agreements with over 50 national chains operating in his state. Under the new “assurance of discontinuance” agreements, the franchise chains agreed to remove no-poach clauses within 120 days, stop enforcing, and remove them nationwide as they come up for renewal.

Will the Courts Decide?

The number of private lawsuits is likely to keep no-poach agreements in the spotlight. The central debates appearing in courtrooms right now focus on whether:

• The rule of reason applies to franchisor-franchisee no-poach agreements? If so, we may see dismissals or early settlements, depending on whether a plaintiff can meet the burden of proof in demonstrating that anti-competitive benefits outweigh pro-competitive benefits.

OR

• The per se rule applies to franchisor-franchisee agreements. If so, state enforcement efforts may increase and lead to antitrust claims, putting the onus on the defendant to prove that no-poach agreements serve a valid pro-competitive purpose.

Until a formal position is established, liability for retaining the agreements remains unclear. Our class action team is closely following all non-compete agreement news on employment and labor claims as it develops. Contact us to discuss how we can help your law firm with current or future antitrust class action matters.