If you’ve ever been an employee — or an employer — then you’ve probably run across a non-compete provision. Formally titled an “Agreement Not to Compete”, these agreements are meant to prohibit employees (or, in rarer cases, independent contractors) from engaging in any activity that might be deemed competitive with their employer. Some non-competes only bind an employee during their term of employment with employer, while others seek to bind the employee for a period of time (typically years) after their employment ends.
Sometimes a non-compete agreement is meant to protect a legitimate proprietary interest of the employer. For example, some employers take fresh employees, train them in a new skillset, help them obtain licensure, and give them valuable experience. Having such an employee “jump ship” to a competitor immediately after receiving the training and licensure would make the process of training new employees untenable for that employer — so a non-compete might be reasonable to ensure that the employer receives some benefit from their investment into new employees.
Many non-competes, however, don’t protect any proprietary interests at all. They’re often slipped into employment agreements as a means of coercing an employee into remaining with the company indefinitely for fear of losing their livelihood, even if the employer has provided that employee nothing beyond basic employment in that moment. It is these non-competes that have driven the growth of a new area of employment law having to do with non-competes, and these laws are increasingly taking the side of employees.
Unenforceable as a matter of public policy
In the State of New Mexico, non-competes for employees have, for years, been disfavored by the courts as a violation of New Mexico public policy — which the courts are bound to interpret and uphold when lacking any other legal authority, such as legislative statutes. In order for a non-compete against an employee to be deemed enforceable at all, the non-compete must be reasonably limited in geographic and temporal scope and must be reasonable and necessary to protect a legitimate business interest of the employer (for the lawyers among you, see Kidskare, P.C. v. Mann, 2015-NMCA-064, ¶10). There aren’t ‘hard and fast’ rules for what is considered a reasonable geographic and temporal scope, but here are a few (glaringly obvious) examples of non-competes that don’t pass muster:
- Barring a restaurant line cook from working for any competitive restaurant in the City of Albuquerque forever
- Prohibiting a CPA from working for another accounting firm, in-house for any business or governmental entity, or providing any independent accounting services for five years within the State of New Mexico
- Barring a delivery truck driver based in Albuquerque from providing any delivery services within the State of New Mexico for one year after their services contract ends
That first non-compete failed to pass muster because it had no temporal (time) limits or expiration and because it didn’t protect a legitimate business interest of the employer. Restaurant employees (particularly low-paid employees) come and go, and locking them in with non-competes has famously placed large, multinational sandwich corporations in a heap of PR trouble in recent years.
The second non-compete fails because it’s both temporally and geographically overbroad. Even if you accept the idea that the original employer of that CPA had a legitimate interest to protect (because of the client relationships that particular CPA developed), five years is longer than most any court will enforce and, since CPA licensure is state-specific, barring them from providing services anywhere in the state effectively prevents them from working and earning a living. The third non-compete fails because it’s geographically overbroad and just isn’t reasonably necessary to protect the employer’s legitimate interests. What it does do is keep that truck driver out of work and unable to earn a living. Public policy strongly favors people being able to work and earn a living!
Unenforceable as a matter of law
In addition to the “public policy” standards, many state legislatures are adopting even more specific prohibitions on the use of non-competes. For example, the State of New Mexico recently barred any non-competes from being enforced against medical providers (See § 24-1I-2 NMSA 1978). The law specifically applies to dentists, physicians, osteopathic physicians, podiatrists, certified registered nurse anesthetists, certified nurse practitioners, and certified nurse midwives. While policy rationale for this law was to help remedy a health care provider shortage in rural areas, it’s in line with the ongoing development of non-compete laws over the course of several decades, both in New Mexico and elsewhere.
Other states have taken even more concrete steps. California, North Dakota, and Oklahoma have largely banned their use, while Oregon and many others have dramatically narrowed their potential uses against employees. Additionally, President Biden directed the Federal Trade Commission (FTC) to exercise its authority in cracking down on the practice of improperly using non-competes against employees. While the FTC has yet to take any concrete steps to address the issue, it’s indicative of the general trend against non-competes.
Still enforceable in some cases
If you’ve read this far, you might be thinking that non-competes are more trouble than they’re worth — and you may be right, but they’re still useful (and enforceable) in some cases. As mentioned above, there are some instances where an employer may want have a reasonable interest in protecting their investments into employees to whom they provide substantial training and opportunity. Moreover, non-competes are still useful (and typically enforceable) in other contexts — such as when the seller of a business agrees not to compete with the business they just sold, or between businesses (such as some sort of vendor agreement).
Non-solicitation agreements: very different, and often enforceable!
Non-solicitation agreements are typically agreements whereby a former employee agrees not to actively solicit the clients or employees of their previous employer. These sorts of agreements are distinct from non-competes because they do not prohibit the employee from engaging in a competitive venture, from servicing clients of the former employer who the employee did not actively solicit, or from hiring employees of the former employer who left of their own volition.
Non-solicitation agreements, which often go hand-in-hand with non-compete agreements, are considered separately and are often enforceable even when non-competes aren’t. In the previous example of the CPA being barred from competing, the non-compete would be considered unenforceable — but an agreement prohibiting that CPA from soliciting the clients or employees of their former employer would probably be enforced. These “anti-poaching” clauses are often conflated with non-competes, but they serve a very different and often legitimate purpose.
Don’t get confused by the headers in a contract — they can often be incorrect or mislabeled. What matters is the actual language within a contract. So, if you look at the headers, and only see a “non-solicitation” paragraph, that doesn’t mean non-compete language is also included in the language, or visa-versa.
Non-solicitation agreements can be deemed unenforceable if they integrate parts of a non-compete or otherwise read as non-compete agreements. For example: an agreement not to solicit the clients of a former employer would often be enforceable, whereas an agreement not to solicit or service the clients of a former employer might not be. Similarly, an agreement not to solicit the employees of a former employer would often be enforceable, whereas an agreement not to solicit or hire the employees of a former employer might not be. This goes back to the public policy considerations mentioned earlier that encourage the freedom of mobility for workers and for workers to be able to earn a living. There is a similar public policy interest in allowing customers the freedom to take their business where they please, so prohibiting former employees from servicing customers of their former employer is, in addition to a back-door non-compete against the employee, also considered a prohibition on who customers can do business with. The courts by-and-large do not like these provisions.
What do I do here?
If you’re an employee and you’re wondering if the non-compete you’ve signed (or are being asked to sign) could be enforced or not, you may want to have your contract reviewed by an attorney who is experienced in contract and business/employment law. Similarly, if you’re an employer and you want to lock your employees down with a non-compete, non-solicitation, or other restrictive covenants, it’s important to consult with an attorney who can advise you on how to best proceed in a manner that is legally above board.
Law 4 Small Business, P.C. (L4SB). A little law now can save a lot later. A Slingshot company.