Are Noncompete Clauses Going Out of Style?

The subscription-based legal news publication Law360 and the provolone-cheese-friendly sandwich chain Jimmy John’s seem to have little in common.

But both have been targets of scrutiny by state governments over the companies’ noncompete clauses, and both recently made agreements with New York state to stop using the clauses entirely.

Law360, which barred most of its employees from working at another legal news outlet for a full year after leaving the company, was called out by the state’s attorney general for the “unscrupulous” agreements, which hurt future job prospects even for first-time employees out of college and put companies at risk of potential lawsuits.

“Unless an individual has highly unique skills or access to trade secrets, non-compete clauses have no place in a worker’s employment contract,” A.G. Eric Schneiderman said in a news release last month  (opens in a new tab).

That point is doubly true for Jimmy John’s, which also agreed last month to drop a noncompete clause  (opens in a new tab) that barred its low-wage workers from going to competing restaurants within two miles of a Jimmy John’s location if that restaurant made 10 percent of its revenue from sandwiches. (Schneiderman called that contract “unconscionable.”)

The two incidents, as different as they are alike, highlight what’s likely to become a larger issue in the coming years, as such contracts become more controversial for both states, which worry about the prospect of losing residents, and for employees, who might find themselves tied to a specific employer even if they want to leave.

Last month, The New York Times reported  (opens in a new tab) that such agreements were coming under regulatory scrutiny, particularly at the state level. Massachusetts, for example, passed a bill i  (opens in a new tab)n June that limits the scope and enforcement of noncompete agreements, improving the odds of it being signed by Governor Charlie Baker by the end of the current session.

The Massachusetts case comes as a major employer in the state, EMC, is attempting to merge with Dell, leading to the creation an employee group  (opens in a new tab) that is hoping to renegotiate noncompete clauses, in case of layoff. The Employee Association to Renegotiate Noncompetes: Team for EMC Employees, the group representing EMC employees in this conflict, is billing itself as single-issue labor-organizing campaign  (opens in a new tab).

The New England Venture Capital Association, a major tech group in Massachusetts, has also spoken out against such measures, noting that it has hindered the state’s growth as California has flourished.

“It’s hurt our economy in the past, and it’s a statement of values about entrepreneurship and mobility that Massachusetts has noncompetes and California does not,” NEVCA President Stephen Kraus told the Times.

What the White House Thinks

The issue is likely to grow in importance in the coming months and years, as both the White House  (opens in a new tab) [PDF] and the Treasury Department  (opens in a new tab) [PDF] have spoken out against the use of noncompete clauses.

But the White House emphasizes that the states are likely going to do the heavy lifting on this issue.

“Ultimately, most of the power is in the hands of State legislators and policymakers in their ability to adopt institutional reforms that promote the use and enforcement of non-competes in instances that appropriately weigh their costs and benefits and in ways that provide workers appropriate levels of transparency about their rights,” the White House wrote in a report earlier this year.

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