As a business owner, your customer base, your reputation, your team, and your operations are your most valuable assets. A great way to protect your business is by making robust non-compete, non-solicitation, and non-disparagement agreements with your employees. However, depending on your state, these clauses may be enforced differently.
Non-Compete, Non-Solicitation, and Non-Disparagement
Most states allow for non-compete agreements (“non-competes”) that are reasonably limited in time and geographic scope. For example, courts may enforce a non-compete that prevents an employee from being your direct competitor within a 15-mile radius for 2 years. But a court would generally not enforce a non-compete that covers an entire state and is for more than 2 years. To be enforceable, non-competes must be reasonable. A good way to strengthen a non-compete is by making the language flexible enough for courts to be able to interpret it with changing standards of what is considered reasonable.
Non-solicitation clauses can prevent a current or former employee from soliciting clients, employees, and vendors away from you. New communications applications, like Instagram and TikTok, have made building relationships with clients into an informal and accessible process. A medspa does not want its star injector opening a competing business and soliciting former clients and employees on Instagram. Most states allow for non-solicitation clauses in employment or independent contractor agreements, even if that state prohibits non-compete agreements. For example, Arizona prohibits non-compete agreements but still uses the following factors to determine whether a non-solicitation agreement is reasonable:
- The agreement protects a legitimate business interest.
- The agreement is reasonable in both duration and scope.
- The agreement does not violate Arizona public policy.
Non-disparagement agreements typically state that neither party shall disparage the business, its employees, or its affiliates in any media. In an employment agreement, it is important to specify that disparagement is not allowed on “any media” since negative remarks may be made on social media.
Non-disparagement agreements are generally enforceable, except if signed by clients as part of the intake process. The Consumer Review Fairness Act of 2016 protects clients who post negative reviews online, in the newspapers, or through other channels. The Act prohibits non-disparagement agreements in form contracts, like intake documents. However, it does not prohibit a non-disparagement clause in a settlement agreement following a dispute.
Federal Law on Non-Competes
While each state’s laws vary greatly, there is no current Federal ban on non-competes. However, it is important to note a recent Executive Order issued by President Biden entitled Promoting Competition in the American Economy. The order does not ban non-competition agreements, but it makes it clear that this administration is not in favor of non-compete clauses. The reasoning for this is that such clauses, “…can impede workers’ ability to find jobs and move between states.”
State-Specific Updates on Non-Compete Law
Recently, in an effort to create a more fair labor market, several other states have made updates to their laws to further limit the ability to engage in non-compete agreements. In Nevada, Assembly Bill 47 was passed in 2021 to prohibit non-compete agreements for hourly employees. In Oregon, pursuant to Senate Bill 169 in 2022, a noncompete agreement is void and unenforceable unless numerous conditions are met such as written notice and the existence of trade secrets. Also, in early 2022, Illinois amended its Freedom to Work Act to prohibit non-competes and similar non-solicitation agreements for employees who make less than $75,000 a year Washington D.C. is currently going through a two-year process of trying to pass a law that would ban almost all non-compete agreements, with a current expected effective date of October 2022. These developments show that many states are moving towards abolishing non-compete covenants entirely.
Although there is no federal law on non-compete agreements and similar restrictive covenants, these types of agreements can be tricky to draft in accordance with the anti-competitive trends of most U.S. jurisdictions. It is recommended that a business consult with a law firm experienced in employment contracts for your specific industry. These agreements may be the best way to protect your trade secrets, customer base, and the intellectual capital you invest in your employees.
*The above is meant as general guidance and not legal advice specific to your situation. It is important that you consult with an attorney well versed in the laws of your state and the industry. Failing to get it right at the beginning can end up being a costly mistake.
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