U.S. Senators Elizabeth Warren (D. Mass.), Ronald Wyden (D. Ore.) and Christopher Murphy (D. Conn.) recently introduced Senate Bill 2782 which, if enacted, would for all practical purposes amount to a nationwide ban on employee covenants not to compete. Dubbed the Workforce Mobility Act of 2018, Senate Bill 2782 (2018) would ban any company engaged in interstate commerce from requiring any employee to sign a covenant not to compete. The prohibition is fairly concise, providing that:
No employer shall enter into, enforce, or threaten to enforce a covenant not to compete with any employee of such employer, who in any workweek is engaged in commerce or in the production of goods for commerce (or is employed in an enterprise engaged in commerce or in the production of goods for commerce).
2782, sec. 2(a), 115th Cong. (2018). An identical Bill, H.R. 5631, was simultaneously introduced in the House of Representatives, co-sponsored by Representatives Crowley, Sanchez, Pocan, Ellison, Nadler and Cicilline.
Exactly What Types of Agreements Would be Prohibited? The Bill defines a covenant not to compete to be any agreement between an employer and an employee that prohibits the employee after termination of employment from performing (a) “[a]ny work for another employer for a specified period of time,” (b) “[a]ny work in a specified geographical area, or (c) “[a]ny work for another employer that is similar to such employee’s work for the employer that is a party to such agreement.” S. 2782, sec. 6(2)(A) – (C). The proposed law would render illegal all restrictive covenants that prohibit an employee from working for a competitor entirely, working for a competitor within a specific area, or working in a similar position or capacity at another employer. As such, it appears the Bill would invalidate not only agreements that prohibit working for a competitor at all, but also agreements that allow employees to work for a competitor company provided they initially work in a different business unit or geographical area.
Would This Impact All the Non-Compete Agreements Already Out There in Employees’ Personnel Files? The Bill is careful to define covenants not to compete that would be prohibited as only those covenants that are signed after the effective date of the Workforce Mobility Act. No doubt that was a conscious decision to avoid a challenge under the Takings Clause of the Fifth Amendment to the U.S. Constitution, which specifies that, “nor shall private property be taken for public use, without just compensation.” Private contract rights are deemed property for purposes of the Takings Clause, and while federal laws that incidentally limit the enforcement of contract rights are likely to be upheld as an acceptable “frustration” of contract rights, a law that expressly targets existing contract rights could be susceptible to a Takings claim. There also could be a concern about a challenge under an interpretation of the Takings Clause that would address a regulatory taking that limits a party’s rights under a contract after it has performed but before it has received its benefit of the bargain. Perhaps for both of these reasons, the drafters of Senate Bill 2782 opted to define prohibited covenants not to compete as being only those that would be entered into after enactment of the law. This means that even if the law is enacted, any employee who signed a covenant not to compete prior to the enactment date would still be bound by the terms of the covenant, subject of course to the usual enforceability analysis under applicable state restrictive covenant laws.
How Would the Bill Interact with Laws Protecting Trade Secrets? The Bill expressly provides that the Act would not “preclude an employer from entering into an agreement with an employee to not share any information (including after the employee is no longer employed by the employer) regarding the employer or the employment that is a trade secret, as defined in” the federal Defend Trade Secrets Act. Sen. B. 2782, sec. 5.
What about Covenants Not to Solicit Customers or Employees? The Bill’s definition of “covenant not to compete” appears to be written with an intent to have no impact on other types of restrictive covenants, such as the very commonly used covenants not to solicit customers and not to solicit or recruit fellow employees. However, in contrast to the Bill’s express statement that it does not impact agreements to protect trade secrets, the Bill does not disclaim any impact on non-solicitation covenants. The absence of such a clause is notable. California law provides an object lesson. Over the years, Cal. Bus. & Prof. Code Section 16600 has steadily been interpreted more and more broadly to the point that it now is held to prohibit even customer non-solicitation restrictions absent misuse of trade secret information.
Why is this Bill Being Proposed? In a press release from Senator Warren, the Senator’s office asserts that “[n]on-compete agreements result in lower wages and diminished entrepreneurship as workers have little leverage to negotiate with their employer, leave for a better opportunity, or start a small business,” and contends that “[m]any believe that California’s ban on non-compete agreements has been a prime factor in the state’s innovative and growing economy.” Press Release, “Warren, Murphy, Wyden Introduce Bill to Ban Unnecessary and Harmful Non-Compete Agreements” (April 26, 2918).
How Would the Law Be Enforced? Bill 2782 includes three primary enforcement mechanisms. First, all employers engaged in interstate commerce would be required to post a notice in workplaces advising employees of the law. See Sen. B. 2782, sec. 2(b). Second, the U.S. Department of Labor would be tasked with enforcement, and empowered to investigate, receive complaints and levy civil fines. See Sen. B. 2782, sec. 3(A) & (B). Third, the law would create a private right of action in federal courts for employees aggrieved by a violation, authorizing compensatory damages, punitive damages and attorneys’ fees. See Sen. B. 2782, sec. 4(A) & (B).
What is the Context for the Proposal? Senator Murphy and former Sen. Al Franken had introduced a bill in 2015 that would have prohibited non-compete agreements only with respect to low wage earners, which their prior bill had defined as employees making less than $15 an hour or $31,200 per year. See Mobility and Opportunity for Vulnerable Employees (MOVE) Act, S. 1504, 114th Cong. (2015-2016). After the failure of Senate Bill 1504 (2015-2016) proposing the MOVE Act, the Department of the Treasury and the White House under President Obama first issued reports asserting “overuse” of non-competes, and subsequently the White House issued a Call to Action in October 2016 which sought to spur state level legislative activity to limit or eliminate non-compete agreements. See Non-Compete Agreements: Analysis of the Usage, Potential Issues, and State Responses (White House, May 2016); Non-compete Contracts: Economic Effects and Policy Implications (Office of Economic Policy, U.S. Department of the Treasury, March 2016); State Call to Action on Non-Compete Agreements (White House, Oct. 2016). Both before and after the Call to Action, we have seen substantial activity in state legislatures around the country aimed at limiting the use and scope of covenants not to compete.
What is the Status of the Present Proposal? Senate Bill 2782 has been referred to the Senate Committee on Health, Education, Labor, and Pensions for consideration. House Bill 5631 has been referred to both the Judiciary Committee and the Committee on Education and the Workforce for consideration.