Is It Time to Rethink Non-Competition Agreements?

Despite guidance to the contrary, some employers insist that employees sign arduous noncompetition agreements as a condition of employment, without regard to their role at the company. Some of these employers may reason that even if such agreements are not enforceable, they may help deter a former employee from joining a competitor. New York Attorney General Eric Schneiderman (the “AG”) has suddenly established his office as an advocate for eliminating the overuse of such agreements.

Utilizing the investigatory authority the AG has to protect the state’s workers pursuant to New York Executive Law § 63(12), the AG’s Labor Bureau recently disclosed the conclusion of three inquiries into the improper use of noncompetition agreements. The employers were Law360, Jimmy John’s and Examination Management Services Inc. (“EMSI”), and each investigation concerned distinct employee populations and income levels. Each employer agreed to cease its broad use of noncompete agreements as a condition of concluding the investigations.

The announcement of Law360’s agreement with the AG, the first of its kind, on June 15, 2016, came within a month of the White House’s release of an analysis of the proliferation of noncompetes, Treasury Department findings regarding the impact such agreements have on the economy and various states’ actions to limit such agreements. The investigation into Law360, a legal news website which is owned by Portfolio Media Inc., began in December 2015 when the company received a subpoena from the AG’s office relating to its use of noncompete agreements and its efforts to enforce such agreements. At the time, Law360 required all senior staff and editorial staff to sign agreements not to work for a direct competitor, defined broadly, within one year of leaving Law360. The AG’s office reviewed the relevant documents, interviewed employees and found that the inclusion of the entire editorial staff was too broad because these non-senior staff members did not have knowledge of trade secrets, and requiring them to sign noncompete agreements thus did not protect the employer’s “legitimate interests.”

The AG similarly objected to Jimmy John’s distribution to franchisees of sample noncompetition agreements that prohibited employees from working for any other sandwich shop for a period of two years (including another Jimmy John’s franchise), because the sandwich makers were unlikely to have access to trade secrets. Indeed, the AG’s office, in its letter agreement with Jimmy John’s, explained that “[t]he scope of what constitutes an employer’s legitimate interest is generally limited to protection against misappropriation of trade secrets and confidential customer lists and protection from competition by a former employee whose services are unique or extraordinary.” Citing Read, Roberts Assocs. Inc. v. Strauman, 40 N.Y.2d 303, 308 (N.Y. 1976).

The EMSI investigation was prompted by an employee complaint. The EMSI employee, a traveling phlebotomist, complained to the AG’s office after her new job offer was rescinded when her new employer learned of EMSI’s noncompete, and the AG again objected to the use of such agreements for “rank and file” employees. EMSI ultimately agreed to severely curtail its use of noncompete agreements in New York.

Local 153, the Office and Professional Employees International Union of the AFL-CIO, recently wrote a letter to the Illinois and New York attorney general’s offices to complain about the noncompetes used by WeWork, a shared workspace company, but no action with respect to these complaints has become public.

To limit the possibility of such investigations, employers should (a) limit their use of noncompetition agreements to those employees who have access to trade secrets, develop special relationships with customers, or otherwise are uniquely skilled or senior-level employees, (b) review all such agreements to ensure that they are properly limited in duration and geography, and (c) consider other methods of protecting competitive information that will not prevent an employee from earning an income in the field in which they work. Employers seeking to retain the protection offered by noncompetes may take some comfort in the fact that the AG’s involvement in the matters discussed above involved a probable overuse of restrictive covenants and their application to more junior-level and unskilled employees.