Jeb Gerth and Erik W. Weibust, Members of the Firm in the Litigation & Business Disputes and Employment, Labor & Workforce Management practices, co-authored an article in Benefits Pro, titled “Noncompetes Under Fire, the Benefits of Forfeiture-for-Competition Clauses Getting a Fresh Look.”
Following is an excerpt:
For decades, companies have used post-employment noncompete agreements to protect their confidential information, trade secrets, and customer relationships. An employee's contractual obligation not to leverage "insider" information and customer relationships for a competitor – enforceable by an injunction in court – has been a powerful proactive tool in keeping a company from picking off key employees of its competitors, poaching its customers, and stealing its trade secrets and confidential information.
The protective benefits noncompetes offer have always been in tension with the impact they have in limiting an employee who wants to secure a new job in his or her field. The current trend is toward increased restrictions on the use and enforcement of noncompetes, which are in the crosshairs. The Federal Trade Commission (FTC) recently adopted a rule that, if it becomes effective, will ban all post-employment noncompetes with only one narrow exception for certain senior executives. The rule does not apply to noncompetes entered into with the sellers of a business in a bona fide transaction or in certain industries the FTC does not govern, including nonprofits and certain banks, among others. The FTC has likewise used its enforcement powers to pursue employers that use and enforce noncompetes. The rule has been challenged in no fewer than three legal actions questioning the FTC's authority to regulate noncompetes, and trade organizations from virtually every industry have argued that the FTC's findings undergirding the rule have no rational relationship to what actually occurs in their respective industries, and is thus arbitrary and capricious. Most commentators expect that the rule will be enjoined and ultimately struck down by the courts.
The General Counsel of the National Labor Relations Board (NLRB) also considers the use and enforcement of noncompetes to constitute an unfair labor practice when applied to workers covered by federal labor law, and is similarly using its enforcement powers to pursue employers that utilize them. This, too, will undoubtedly be challenged in court.
And state legislatures across the country are getting in on the act as well, passing laws restricting the use and enforcement of noncompetes. In 2023, Minnesota became the first state in over a century to ban noncompetes, and a growing number of other states have limited noncompetes with salary thresholds, strict notice requirements, and other technical "hoops" through which an enforcing employer must successfully jump, lest it lose the contractual protections that were a condition of hiring its employees in the first place. Many states also restrict the use and enforcement of noncompetes for certain healthcare practitioners, and some have other industry-specific noncompete laws.
Against this backdrop, employers across the country are understandably concerned and are looking for alternative ways to protect their confidential information, trade secrets, and customer relationships. Enter the "forfeiture-for-competition" clause, a close cousin of the noncompete, but very different in many important respects.
