22 August 2023

Is it the Beginning of the End for Non-Compete Agreements?

Non-competition agreements (also known as non-competes) have been a tool used by employers since America’s founding. Non-competes prohibit employees from working for a competing employer or engaging in other competitive activities, such as starting a competitive business, within a certain geographic area during their employment and for a period of time after their employment ends. All fifty states in the United States have passed laws regulating non-compete agreements with varying amounts of permissibility.

Within the last few years, there has been growing backlash against the permissibility non-compete agreements. Prior to 2023, three states had banned non-competes altogether. Those states include California, Oklahoma and North Dakota. Several other states have passed laws prohibiting non-compete agreements for certain categories of employers. However, beginning in 2023, there has been a flurry of activity against non-competes.

In January 2023, the US Federal Trade Commission, the government entity tasked with enforcing civil antitrust law, proposed a rule that would stop employers from entering into noncompete agreements with workers and require employers to rescind existing noncompete agreements and provide notice that these clauses are no longer in effect. View our January 6, 2023 Client Alert about this. Although the current rule is overbroad and would inevitably be subject to extensive litigation, the proposal itself is indicative that weakening non-compete agreements is a priority for the current federal administration.

Not to be outdone by the federal government, several state legislatures have taken up the reins in the battle against non-competes. For example, in May, Minnesota passed a law which completely bans non-compete agreements. That law took effect on July 1, 2023.  The New York Legislature also recently passed a bill that would ban noncompete agreements, but New York Governor Kathy Hochul has yet to sign the bill into law.

For Michigan employers, the legal landscape has yet to change. On April 12, 2023, the Michigan House of Representatives introduced House Bill No. 4399, which would place additional restrictions on the use of non-competes by employers. However, no action has been taken on this piece of legislation other than referring it to the Labor committee and there has been no indication by the legislature or Governor Whitmer that HB 4399 is a high priority.

However, Michigan employers with employees in Michigan and other states should pay close attention to this recent trend. The changes in state law could potentially invalidate current non-compete agreements depending where employees are located, or may mean that employers need to modify current template confidentiality agreements to ensure compliance with the state law. On the other hand, these trends may ultimately not have much of an impact on employers, given that courts can simply strike out or revise invalid non-compete agreements while retaining the rest of the employment agreement. Given the complexity of state laws surrounding non-competition agreements, having the threat of a non-compete agreement may be just as valuable as having a legally enforceable agreement.

Ultimately, in light of the recent wave of laws regulating non-competes, it may be a good time for companies to conduct an internal audit of template agreements to evaluate compliance with state laws and reflect on the value of such agreements for the organization.


Contact the author Barbara Moore.