An intimidating letter from your former company threatening to enforce a long-standing non-compete clause is the last thing you need when thinking about applying for a new job.
To clarify, is this a potential legal concern? While the standard employment documents you signed at your previous position may seem inconsequential, you’re concerned they might impact your eligibility for the next stage in your career.
The short answer is: Maybe. But you’re not alone…
Approximately 30 million individuals in the US are bound by non-compete agreements, which aim to limit their post-employment options by prohibiting them from working for competitors or even an entire industry. The U.S. government estimates that these contracts may reduce workers’ incomes by about $300 billion annually, even in cases where the limits are unenforceable in court, as is frequently the case.
The Federal Trade Commission recently issued a rule banning non-competes nationwide in an attempt to protect a worker’s ability to switch jobs without penalty. However, the U.S. Chamber of Commerce says it will sue the FTC as they come from a position that the FTC doesn’t actually have the authority to issue such a rule.
Non-compete agreements have been in the crosshairs of several states and the federal government for some time. For example, the District of Columbia officially banned, with some exceptions, the majority of non-compete agreements issued after October 1, 2022. Oklahoma and North Dakota likewise prohibit such agreements, with very few exceptions, as does California. Recent laws prohibiting non-compete agreements for “low-wage” employees—a definition that varies depending on the state—have been passed in Maryland and Virginia. Furthermore, courts have tight guidelines for upholding these “restrictive covenants” in employment, even in cases when some non-compete agreements are lawful.
However, many employers still threaten to enforce non-compete agreements against their former employees while we wait for the battle between the FTC and other business entities to conclude. This often occurs when the employees are starting (or are in the process of negotiating) a new job, which makes them vulnerable and conflict-averse.
Although it’s never fun to get a letter noting you’ve violated a non-compete, you can respond wisely. Here is a five-step strategy to responding to a non-compete request from your former employer. If the circumstances warrant it and you feel comfortable doing so, you might even be allowed to retaliate by filing legal claims against your former employer.
Hopefully, the new ruling from the FTC and associated court battles will render all of this unnecessary, but in the short-term, it’s good to play it safe.
First, ascertain the legal circumstances
You’ll need some guidance before you find yourself torn between two bosses who don’t really care about you.
The laws pertaining to non-competes are intricate and differ greatly between states. A competent labor attorney can assist you in understanding:
- How probable it is that your non-compete agreement will be upheld;
- If it’s likely to be applicable to your particular circumstance;
- a few options that your former company could accept; and
- Several potential actions to take next.
A lawyer should advise you of your options and point out the advantages and disadvantages of your case. It can be as easy as replying to your former employer in California stating that it is unable to enforce a non-competition agreement. Other states could find it much more difficult.
Step 2: Integrate With Your New Company
Your former employer could approach your new employer and allege that your employment there is illegal if it is an aggressive or just stupid employer. If you’re still in negotiations, it can even demand that you be fired or that you not be employed.
A demand like this may be unlawful, as we’ll cover later. In any case, you don’t want your new employer to be surprised by it. Therefore, you might think about making a proactive disclosure as damage control, on the counsel of a lawyer.
You may choose to disclose the following to a potential employer or new hire:
- You previously signed a non-compete agreement, along with, if relevant, the reasons you chose not to disclose it before
- If applicable, you’ve heard from your former employer
- Which particular conduct that is purportedly prohibited by the non-compete agreement (and maybe the agreement’s wording)
- An assessment of your lawyer on the agreement’s applicability and enforceability
- The terms of any other pertinent agreements, including non-solicitation and confidentiality clauses
- Your proposed strategy for moving forward
Your new employer may offer to indemnify you if you haven’t been employed yet and your talents are highly valued. This means that they will pay for any money that your former employer could win in court, but they generally won’t. It might even consent to represent you in court in any disagreement, but you would need to talk to your attorney about that.
We’ve discovered that a more typical result is that your new employer will accept the warning and step aside while you take care of the situation.
NOTE: If your new job includes a probationary period, there’s a non-zero probability that your new employer may overreact and fire you. In a similar manner, revealing a non-compete might result in the withdrawal or postponement of a job offer. For this reason, you should take action only after consulting with a lawyer on a case-by-case basis. You might wish to delay disclosing information. Even worse, your new employer could believe that you have hidden the disagreement.
Step 3: Talk with Your Former Employer
Frequently, an ex-employer isn’t genuinely attempting to keep you from working at your new position. Alternatively, it may be satisfied with some reasonable guarantees about what you will (and won’t) do at the new job. This could be a more manageable form of non-compete agreement that works for everyone.
The threatening letter you received in these circumstances is only an offer to discuss a new agreement.
Actually, most businesses won’t take a chance on a full-scale legal battle over a non-compete. Why? These so-called “agreements,” which are frequently one-sided, created under coercion, and detrimental to society, are disliked by many judges. If a judge decided that your particular non-compete was unenforceable, that ruling may destroy identical contracts that your former company had with all the other workers it wanted to retain under duress.
Put another way, you’re likely not the only one with a stake in the outcome.
What guarantees would you provide a former employer? Your alternatives may include agreeing not to work directly with a very select group of top clients, on a very specific kind of project, or in a very specific location. You should discuss ideas like this with your lawyer and maybe even your new company. If you haven’t already, you may also offer to add further limitations, such a pledge not to hire certain high-profile employees from your previous employer.
Should you be willing to take such drastic steps, you may also offer to commit for a period of time greater than the prior, potentially unenforceable agreement—three years as opposed to one year, for instance.
Our firm has found that a lot of employers will be in favor of a deal like this. You can proceed in your new career with an agreement that resolves the conflict with the assistance of a lawyer.
Step Four: Deliver the First Official Legal Action
Sometimes your former company will negotiate but then refuse to strike a deal, or it won’t even come to the table. This might occur, for example, if you left the company amicably or if your previous employer is receiving subpar legal counsel. If a fight breaks out, you can request that your lawyer go first.
Attending court is a serious affair that carries some danger and expense. However, your only option could be to quit your new position and even put your career on hold altogether. While a lawyer may assist you in weighing your alternatives, litigation could be the best course of action. In that case, you may want to consider taking charge of the story.
Judges consider an agreement’s clarity. If any of its provisions are unclear, they may be deemed invalid. Other considerations could be whether the agreement serves a legitimate business purpose (non-compete clauses for highly trained or skilled workers, for example, may make sense, but restrictions on entry-level workers typically don’t). Additionally, you should consider whether your former employer is simply targeting you or if it regularly enforces its non-compete agreements.
Enforceability of non-compete agreements might not be a black-or-white decision. Judges may not be able to “blue pencil” the agreement by adding or removing unjust clauses, depending on the state; instead, a single unfavorable clause may invalidate the entire non-compete agreement.
Legally, taking the first action may force your former company to defend itself, hopefully leading to a negotiation table. But the subsequent response may possibly lead to a more intense response. For example, your former employer could launch counterclaims against you, expanding the scope of the legal dispute. In addition, your new employer will probably find out about the conflict and could become involved, so if you haven’t already, you should let them know immediately.
Just be sure to keep an open mind and act after carefully weighing all potential consequences. But keep in mind that if you don’t take action initially, you can find yourself in court.
Step 5: Build a Strong Defense
The law requires your former employer to submit the request with “clean hands,” meaning it cannot have acted improperly itself in connection with the topic being fought, because it is most likely seeking an “equitable” remedy—that is, it wants a judge to compel you to perform in a particular way.
Have you ever experienced any wrongdoing from your former employer? For example, did it withhold money from you that it owed you, permit harassment or discrimination at work, unjustly punish you for reporting illegal activity, or unilaterally alter your contract? If so, your lawyer can assist you in bringing up a “unclean hands” defense, which has the power to void even non-compete agreements that are otherwise legitimate.
QUESTIONS ASKED REGULARLY
Does this indicate that all non-compete agreements will soon be void indefinitely, as the FTC just took action?
The answer is no. The FTC’s proposed regulation is only effective as of April 2024; the final rule may change even further, depending on the outcome of the various expected legal challenges to the rule.
Furthermore, no rule that is approved by a governmental agency becomes an actual law. The latest move by the FTC is the function of the current presidential administration and is subject to revision or reversal through the same rule-making procedure by a subsequent commission. Furthermore, future U.S. legislation might supersede the regulation if passed by Congress. Finally, the next President of the United States could order a reversal of the new FTC rule.
Regarding the new D.C. Is the non-compete legislation applicable retroactively?
No, it only applies to non-compete clauses in contracts made after October 20, 2022. The Washington, D.C. Medical professionals are among the sorts of employees for whom non-compete agreements are still permitted by law. Although they remain unaffected, prior agreements are nonetheless subject to legal challenges.
The broader agreement that regulates my non-compete clause states that it is established under Maryland law (or Virginia law, or D.C. law). In practice, does the state legislation really make a difference?
The enforcement of non-compete agreements is governed by legislation and judicial decisions that vary from state to state. Step Four above outlines the general concerns for places where non-competes are not generally prohibited. Nonetheless, each state may have a distinct formulation and balance for them. Here are brief summaries of Maryland, Virginia, and Washington, D.C. non-competition laws. The range of differences is comparable in other states.
Low-wage workers are classified as those who make $15 per hour or less, and they are not subject to non-compete clauses. If not, courts often restrict the execution of non-compete agreements to workers who offer special services. The terms of an agreement must be limited in scope, legally safeguard the previous employer’s business, and not cause the employee undue hardship or interfere with the public interest.
Low-wage workers are those who make less than the average weekly pay in the state or, for independent contractors, the median hourly rate in the state; non-compete agreements cannot be enforced against these individuals. In all other cases, non-compete agreements are disliked and unenforceable unless they are deemed to be “reasonable”—that is, not excessively onerous on the employee’s means of subsistence, not more restrictive than necessary to safeguard the former employer’s legal business interest, and in line with good public policy.
Non-compete agreements are only upholdable provided they do not “unreasonably” restrict commerce. In general, the approach is comparable to that done in Maryland and Virginia; it looks at two things: first, whether your former employer has a genuine interest in limiting your alternatives, and second, if the hardship you would face as a result of that interest outweighs it. The extent of the non-compete clause is important as usual.
Can I get an instant legal opinion on whether my non-compete agreement is enforceable?
On occasion. The answer could be rather obvious if it fits into a group that is forbidden by law, such as contracts signed after October 2022 in D.C., those covering low-age workers in Maryland, or those covering almost anybody in California.
If not, forming an opinion will usually require considerable investigation. Since enforceability is determined on a case-by-case basis by the courts, your attorney would probably search for instances of comparable agreements that were declared unenforceable. In particular within your jurisdiction, you will have a better chance of succeeding if there are any notable cases.
The attorneys from your former employer will do the same investigation, though, and they may come to a different decision. If the conflict cannot be settled, a court may have to make a decision. The discussion normally ends with a court’s ruling, but appeals are permitted.
According to my non-compete agreement, individual arbitration must be used to resolve any disputes instead of going to court. Does that make a difference?
It varies. Certain agreements requiring arbitration are unlawful in and of itself. And in any case, it probably doesn’t matter too much if your non-compete is explicitly unenforceable. If not, an arbitration clause could provide your former employer a slight advantage because arbitration is often confidential and doesn’t establish a precedent, which makes the business less wary of conflict.
Also, since the same legislation applies, arbitration outcomes may be unduly biased in favor of employers and are not appealable. Concerningly, just 2% of arbitrations pertaining to employment result in victories for employees.
The world of non-competes is now in flux. The trend appears to favor employees, but given the number of court challenges and the potential for congress to take up the issue in the future, it’s best to take a conservative path when dealing with potential non-compete issues. Best course of action is to discuss your unique case with your attorney. This way you’ll likely avoid some potential pitfalls in case the FTC ruling gets overturned.