Brian Hall had a great job at Amazon, but he had an even better offer from Google. But when the former cloud services employee tried to switch jobs, Amazon sued him, noting a non-compete clause he’d signed several years earlier.
He’s not alone. Researchers estimate that as many as one in five U.S. workers are subject to non-compete agreements which restrict their ability to take a job in a nearby area or perform similar duties for a competitor.
Employers say these agreements are necessary to retain talent and prevent their employees from taking skills, resources and proprietary information to a rival or even starting their own business. But critics say that many non-competes are overly restrictive, hurting workers’ ability to move up the corporate ladder and hurting the economy overall.
In Hall’s case, the parties reached a confidential settlement which resolved the suit out of court. While we don’t know what was decided, we can say that his case shows how important the venue is in determining the outcome.
For example, Amazon is headquartered in Washington state, which has relatively lax non-compete laws when compared to California (home to Apple Inc. and Facebook Inc.) where they have essentially been banned.
Here, in the greater D.C. metropolitan area, where employees routinely cross state lines for their daily commute, state specific non-compete requirements and/or prohibitions range from aggressive outright bans to more narrowly tailored low-income based restrictions.
Given the different approaches adopted by the legislature, a key component of the non-compete equation is which state an employer calls home.
How Courts in the DMV Have Handled Non-Competes
Non-competes have traditionally been disfavored in D.C. and other surrounding jurisdictions because of their potential to drastically inhibit an employee’s ability to earn a livelihood and their restrains on competition. Judges here have narrowly construed clauses to give workers more freedom, and Courts within the DMV have applied one of three approaches when a restrictive covenant is overly broad and unduly burdensome.
- Simply strike down the non-compete completely even if only one element of the clause is considered to be overly broad. This approach has been adopted in Virginia.
- Under the blue-pencil doctrine, Courts can choose to excise the invalid parts while leaving the remaining portion in effect. In this approach Courts have discretion to cross out overbroad portions and keep the enforceable language in effect. However, it does not allow the Court to rewrite the clause; instead the Court is limited to deleting unreasonable terms or provisions to narrow the scope of the clause and allow the clause to remain intact. This approach has been criticized as being overly rigid and technical, as the Court cannot interject wording and substantially rewrite the clause, they are confined to only removing restrictive language and the clause must remain grammatically coherent. Maryland law has been interpreted to allow courts to “blue-pencil” restrictive covenants.
- The principal of equitable reformation recognizes that in some situations the wording of the contract does not lend itself to blue-penciling but there are valid justifications for upholding some, but not all, of the provisions in the non-compete. This approach allows Court to have greatly flexibility to modify a restrictive covenant when necessary.
Courts have not formally adopted any of these approaches, but have in the past leaned towards the equitable reformation approach while simultaneously weighing the countervailing considerations that (i) Courts should not rewrite contracts between parties; and (ii) that this approach in some ways rewards employers for writing overly board contracts.
Due to the negative ramifications non-competes can have on commerce, we have seen a trend by Courts across the country to adopt the first approach and refuse to rewrite overly broad agreements and to simply strike them down.
As these clauses garnered heightened scrutiny, in 2019 we saw an unprecedented surge in legislation either restricting non-competes or banning them completely. The new D.C. legislation goes farther than most.
New Legislation in DMV Surrounding Non-Competes
Beginning July 1, 2020, Virginia employers cannot “enter into, enforce, or threaten to enforce” a non-compete with any “low-wage employee.” In Virginia, compensation of a “low-wage employee” is defined as a person who earns less than the average weekly wage in the Commonwealth, which is approximately $62,600 or less annually, and with this current calculation could cover roughly half of Virginia employees. Virginia’s law does not have retroactive effect as to those non-competes entered into before July 1, 2020.
In 2019, Maryland passed a law barring all non-compete agreements for employees earning less than $31,200 a year, or $15 an hour. The law does have one explicit carve out to allow employers to contractually forbid the “taking or use of a client list or other proprietary client-related information.” In other words, the parties can enter into a contract which will prevent an employee from taking customer lists, however, they cannot enter into a contract prohibiting employees from taking co-workers with them when they leave. The Maryland law does not contain a grandfather clause; therefore it likely has a retroactive effect.
D.C.’s new ban on non-competes may come into effect in a matter of weeks.
On Dec. 17, the DC Council unanimously passed the Ban on Non-Compete Agreements Amendment Act of 2020. Mayor Muriel Bowser signed it into law on Jan. 11, setting off a 30-day congressional review process.
The Act does not have an income threshold like Virginia and Maryland, and applies to nearly all employees who perform work in the District with the narrow exception of: volunteers, lay members elected or appointed to office within any religious organization, babysitters, and certain medical specialists that have completed their residencies and make more than $250,000 per year.
D.C.’s law is not retroactive, so non-competes entered into before the effective date will remain valid and enforceable.
What’s Coming Next
New legislation illustrates a trend toward limiting the use of non-competes. This trend was first seen in judicial decisions throughout the DMV and is now shown by actions taken by all three jurisdictions to limit, or ban, the use of these clauses.
With the Biden administration in place and the economy still suffering from the toll of COVID-19 the viability and enforceability of non-competes will undergo even more increased scrutiny.