Legal landscape for noncompetes increasingly complex, attorneys say

An FTC proposal to ban noncompete agreements may face an uncertain future, but one thing is increasingly clear: The use of noncompetes is increasingly under challenge and must be managed by employers to comport with a shifting legal landscape, two veteran employment attorneys say.

Kirsten Eriksson and Veronica D. Jackson, principals with Miles & Stockbridge, made those observations last week in a Daily Record webinar “Noncompete Agreements: What Employers Should Know.”

“Maryland generally has the same standard as virtually every other state that allows noncompetes in the sense that they are supposedly somewhat disfavored but permitted if required to protect a legitimate business interest of the employer,” Eriksson said.

Valid business interests include customer goodwill and/or confidential information. Maryland law prohibits the use of noncompetes for low-wage employees, those who earn no more than $15 an hour or $31,200 per year.

The standards an employer needs to observe when drafting a noncompete agreement vary.

“Different states have different standards for noncompetes, so the first step an employer should consider is where that employee will be located to guide what state law is applicable,” Jackson said. “Depending on the state, except for the states that outright ban them, an employer should be sure to narrowly craft a noncompete to be reasonable in scope and crafted to protect an employer’s actual legitimate business interest.”

Some of the problems Eriksson sees with employers’ or companies’ noncompete agreements generally involve either a lack of clarity or overreach.

Noncompete agreements, Jackson noted, are geared toward businesses that are operating in highly specialized areas, such as sales-driven business —  “a business with a sales force where, really, the heart of the business is that employee developing close relationships with the employer’s customers and cultivating those relationships over time.”

Other businesses that need noncompetes include those with robust research and development  operations, which have sensitive work products, and companies with narrow profit margins.

“If you think about it, these are agreements that represent promises made on both sides and a lot of times an employee might have received a higher salary because the very nature of the noncompete agreements,” Jackson said.

In January, the Federal Trade Commission unveiled a proposed rule to essentially eliminate most noncompetes. Following a blizzard of responses – both in support and in opposition to the rule – the FTC extended its public comment period until April 19.

“The rule would make it illegal for an employer to enter into a noncompete with a worker, attempt to do so or suggest that a worker is bound by a noncompete agreement when they are not, so they would have to rescind existing noncompetes and provide notices to workers who are parties to such agreement that they are void and no longer enforceable,” Jackson said.

Eriksson said that the federal rule would preempt state regulations, unless a state had an even more robust rule.

There are also a number of legislative initiatives in Congress, including the Workforce Mobility Act of 2023, a measure that would allow noncompete agreements only in connection with the sale of a business.

“I think the overarching take-away message is that hostility to noncompetes is here to stay so employers really need to focus on narrowly tailoring the scope of them and who they seek to obtain them from,” Jackson said.

Many of the comments submitted thus far to the FTC are from individuals who were subject to noncompetes and support eliminating the agreements. “I think both Congress and the executive branch are taking that sentiment seriously,” Jackson said.

Eriksson does not believe federal action will be happening any time in the near future. The final rule almost undoubtedly will be challenged in court by business groups, both attorneys agreed.

“I think employers need to pay attention to state law,” she said. “…The inability to get federal action on employment legislation generally has led more progressive states to take matters into their own hands and really has created a nightmare for compliance purposes for employers that operate across the country.

“That is going to continue, so employers need to pay close attention to state law.”