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As States Limit Noncompetes, D.C. on Verge of Outlawing Them

Dec. 14, 2020, 10:30 AM

A near-total ban on employers barring their workers from jumping to jobs with competitors is on the District of Columbia Council agenda this week, placing the U.S. capital city at the vanguard of a movement to limit such restrictions.

The bill, which won unanimous support on its first D.C. Council vote Dec. 1, would bar employers from imposing noncompete agreements on anyone working for them other than doctors earning more than $250,000 per year. The legislation is scheduled for a final council vote Dec. 15.

Set as conditions of employment, such agreements are typically used to restrict a worker’s ability to leave one job for a similar slot with a rival business, taking with them proprietary information, trade secrets, knowledge of customers and sometimes the customers themselves. They can be subject to limitations in both duration and geographical scope.

If the proposal becomes law, the district would be adopting a policy that is stricter than those of eight states that have enacted such restrictions since 2016, including neighboring Virginia and Maryland.

Those states, along with Illinois, Maine, Massachusetts, New Hampshire, Rhode Island, and Washington state, banned noncompete agreements for low-wage workers, although their definitions of “low wage” have varied widely. New Hampshire set the threshold at twice the federal minimum wage, or about $30,000 annually, while Washington state set it at $100,000 annually for employees and $250,000 a year for independent contractors.

“It’s a pretty significant step if they were to actually do this” in the district, said Russell Beck, an attorney with Beck Reed Riden LLP in Boston who represents both employers and employees in disputes over enforcement of noncompete agreements.

“Even the Obama administration, which spent a good deal of time looking at this, came up far short of” recommending an outright ban on workplace noncompete policies, he said.

President-elect Joe Biden (D) has voiced support for largely banning noncompetes at the federal level but with exceptions for agreements that protect companies’ trade secrets. Congress has discussed but not passed several proposals in recent years that would limit employers’ ability to impose noncompetes.

It seems unlikely Congress would agree to an outright ban of noncompetes nationally, given the diverse business interests that would oppose it, Beck said, but he predicted the Biden administration might pursue a narrower form of restriction either through legislation or regulatory action.

Some advocates have pressed the Federal Trade Commission to ban or restrict noncompetes, including a coalition of 19 Democratic attorneys general in a November 2019 letter.

Good or Bad for Business Climate?

An outright ban on noncompetes would make it harder for businesses to prevent proprietary information, trade secrets, and customer lists being carried off to a competitor, Beck said.

Even though a company could still impose a nondisclosure agreement to protect sensitive information, “it’s not a prophylactic,” he said. An employer likely would only be able to enforce an NDA against a former employee after the employee had already gone to a competitor and begun using the employer’s proprietary info or customer lists in their new job.

D.C. Councilmember Elissa Silverman, a lead sponsor of the bill to ban noncompetes in the nation’s capital, said the overall business climate would benefit from prohibiting these agreements because workers would be free to take innovative new ideas and start their own businesses. This would be in addition to the benefits to workers who would no longer be stuck in dissatisfying or low-paying jobs due to agreements not to compete, she said.

“Noncompetes are really anti-competitive at any income level. They suppress wages,” Silverman said. “They can really stifle business development and entrepreneurship.”

If it does ban noncompetes, the district would join only three states—California, North Dakota, and Oklahoma—in largely barring the enforcement of such agreements. A number of other states restrict their use, in many cases requiring a company to show a legitimate business interest to enforce one.

State courts have struck down or limited enforcement of noncompetes that are overly broad. Some courts have shown reluctance during the Covid-19 pandemic to enforce noncompetes that limit workers’ ability to take a new job.

D.C. Mayor Muriel Bowser (D) raised concerns, however, in a Dec. 1 letter to the council that the noncompete ban, combined with a bevy of other legislative proposals moving at the same time, would be bad for businesses in the district.

The proposal “collectively with all of the laws the Council has sought to advance recently, creates further uncertainty for the business community at a time when businesses are struggling to survive,” Bowser wrote. She urged the council to withdraw the legislation and reconsider a proposal that would ban noncompetes involving low-wage workers such as the recently enacted laws in Maryland and Virginia.

Silverman dismissed concerns that Bowser might prevent the bill’s enactment into law. The bill passed 12-0 on its first vote, and Silverman said she’s heard no indication of any councilmembers withdrawing their support since then. A similar vote would be enough to override a potential veto by Bowser, she said, and noted it would be rare for a D.C. mayor to veto a bill that passed the council unanimously.

In Search of ‘Coherent Reform’

There are signs of growing support for limiting the use of noncompetes, both at the state and federal level, said John Lettieri, chief executive officer of the policy organization Economic Innovation Group, which promotes policies that benefit entrepreneurs, investors, and economic growth.

Bipartisan legislation has been introduced in the U.S. House and Senate to largely ban noncompetes, and Biden is the first ever president-elect to have campaigned on a promise to limit such employment restrictions.

Many of the proposals thus far and the laws passed in states have focused largely on limiting enforcement of noncompetes, Lettieri said, but he contends a more comprehensive approach is needed to prevent the common abuses of noncompetes by employers that restrain workers and would-be entrepreneurs.

In a report he authored as a visiting fellow for the American Enterprise Institute, Lettieri advocated for policies that require advance notice to job candidates if they’ll be asked to sign a noncompete and employer payments of a former employee’s partial or full salary while they’re subject to a noncompete (sometimes called “garden leave”).

Simply barring enforcement of the noncompete clauses isn’t enough, he said, noting that California employers still ask workers to sign them even though they can’t be enforced, and “it has the same chilling effect.”

“The prospects for this look very good, but we have to go from this very nascent state of reform to coherence,” Lettieri said.

To contact the reporter on this story: Chris Marr in Atlanta at cmarr@bloomberglaw.com

To contact the editors responsible for this story: Martha Mueller Neff at mmuellerneff@bloomberglaw.com; Andrew Harris at aharris@bloomberglaw.com; Karl Hardy at khardy@bloomberglaw.com

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