Building and runninga successful business requires significant investments, both financial and in terms of time. Unfortunately, employees, staff members, partners, and collaborators may decide to take advantage of the business’s success by illegally “appropriating” its ideas and trade secrets to use them elsewhere.

To protect companies, therefore, confidentiality agreements and non-compete agreements are being used more and more frequently.

What are they?

A confidentiality agreement is an arrangement that, as a rule, binds only one party (though in certain specific cases, it may bind both parties) not to disclose certain shared confidential information. A non-compete agreement, on the other hand, is an agreement that formally restricts the ability of an employee, contractor, or company to engage in certain competitive activities. In recent years, non-compete agreements have been the subject of heated debate and controversy in the United States. To date, however, in the absence of definitive federal regulations, the matter is still governed by individual state laws.

Therefore, any company wishing to use non-compete or non-solicitation agreements to protect its trade secrets, confidential information, customer relationships, goodwill, or employees must necessarily stay up to date on the constantly evolving standards in effect in the various states.

The sudden shift to“remote”work has also altered fundamental aspects of the workplace, such as the ways and locations in which employees perform their work and how companies manage their business operations. Faced with these looming changes, companies have had to adapt to ensure the continued proper use of non-compete agreements and, consequently, adequate protection of trade secrets. Nevertheless, there has been a steady increase in lawsuits filed in federal courts invoking the Defend Trade Secrets Act is invoked, as well as a surge in cases before state courts involving breaches of trade secrets and non-compete agreements, which involve the world’s most prestigious companies and their top executives.

In this regard, however, it is worth noting that non-compete agreements are not easy to enforce in court and can entail high litigation costs. According to data released by the U.S. Department of the Treasury, more than 30 million workers—about 18% of the total U.S. workforce—are required to sign non-compete agreements as a condition of employment.

We are thus faced with the curious situation in which, very often, employees must decide whether to accept the job offer and sign the non-compete agreement, or to refuse it and forgo the job. It is worth noting, in this regard, that in the vast majority of cases, non-compete agreements are used in the context of business partnerships, within shareholders’ agreements, and in commercial transactions. With certain exceptions, it is accurate to state that non-compete agreements have historically been enforced by U.S. courts whenever their use is reasonably shown to be appropriate for the protection of legitimate business interests.

However, as mentioned earlier, recent legislative and jurisprudential developments, at both the federal and state levels, suggest that companies will face increasing difficulties in the future in enforcing such non-compete agreements.

On January 5, 2023, the Federal Trade Commission (FTC) proposed a new rule that would prohibit employers from requiring their employees to sign non-compete agreements, with a few limited exceptions. The proposal is based on the belief that non-compete agreements constitute a violation of Section 5 of the Federal Trade Commission Act regarding unfair competition.

The proposal would therefore have the stated objective of preventing employers from:

1. require or attempt to require their employees to sign non-compete agreements;
   
2. maintain such agreements with their employees. Although the rule technically applies only to non-compete agreements, in reality, its scope could extend to other restrictive agreements as well.

Consequently, employers should ensure that the content of any confidentiality or non-solicitation agreements is sufficiently detailed so as not to fall within the scope of the aforementioned provision. This provision would apply both to self-employed professionals and to anyone performing work for any employer, whether the work is paid or unpaid. Furthermore, the new legislative proposal would require employers to terminate any non-compete agreement signed before its effective date and to inform their employees that such agreements will no longer be enforceable.

Despite recent federal legislative initiatives, state and local authorities have historically been much more likely to rule on the enforceability of non-compete agreements, which, for this very reason, has given rise to significant developments in case law and legislation. To date, 30 states and the District of Columbia have enacted specific laws that limit, to some extent, the enforceability of non-compete agreements: some based on salary, industry, and/or duration, while others impose a near-total ban.

The State of Illinois, for example, has amended the Freedom to Work Act to prohibit the use of non-compete agreements for all employees earning $75,000 or less. The State of Colorado has also amended its legislation, stipulating that non-compete agreements may be enforced only if:

1. they are signed with high-earning employees (who earn no less than $112,500 in 2023);
2. they are intended to protect trade secrets;
3. structured in a way that is not overly broad but sufficient to protect the employer’s legitimate interests.

The states of Oregon and Nevada have also recently updated their laws on this matter. In Oregon, the maximum permitted duration of non-compete agreements has been reduced from 18 to 12 months, while in Nevada, non-compete agreements involving hourly workers have been banned. The District of Columbia has also enacted new legislation governing non-compete agreements, which took effect on October 1, 2022. The law permits the use of non-compete agreements for highly compensated employees, provided that such agreements comply with certain procedural requirements. However, it does not apply to independent contractors and does not contain provisions regarding non-solicitation agreements. All agreements signed on or after the effective date of the new law that contain non-compete clauses will be deemed null and void if their provisions conflict with the law.

Furthermore, it is considered illegal for an employer to take retaliatory measures against an employee who refuses to comply with the terms of a non-competition agreement. The new law does not, however, supersede the provisions contained in any collective bargaining agreements currently in effect. As mentioned earlier, the new legislation allows employers to enter into non-compete agreements with employees who receive high compensation, provided they are subject to certain restrictions and disclosure requirements. “Highly compensated employees” are defined as those who earn at least $150,000 per year. Employers may not, however, enter into non-compete agreements with employees who earn less than that amount. Non-compete agreements are defined as any provision contained in written agreements that prevents an employee“from working for compensation for another entity or from starting their own business.”

As we have seen, therefore, to date in the United States, more than half of the states have enacted legislation that imposes restrictions—to a greater or lesser extent—on the use of non-compete agreements. Among these is the State of New York, which in June 2023 passed a law that, if it goes into effect, will prohibit any employer from requiring, requesting, or accepting non-compete agreements with any New York employee.

The law will also render null and void any agreement “through which a person is prevented from engaging in any lawful activity or profession of any kind.” Although this law was intended to exclude certain specific agreements from its scope—provided they do not compromise competition in other respects—it is, in any case, the most restrictive legislation in the country. A key aspect of the new legislation is that it grants employees the right to bring a lawsuit against their employer, within two years of signing the non-compete agreement or becoming aware of it, of the termination of the employment relationship, or of the time when the employer took steps to enforce the non-compete agreement.

Courts called upon to rule on cases of this kind will be authorized not only to declare such agreements null and void but also to award damages of up to $10,000, in addition to any lost earnings and legal and court costs. The states of Colorado, Washington, and the District of Columbia are the only other jurisdictions in which employees are entitled to compensation for actual damages suffered, along with reimbursement of legal fees incurred.

In 1872, the State of California, bucking the trend set by common law principles and the view shared by numerous other states, formally declared non-compete agreements unenforceable, except under certain specific and limited circumstances. Since then, the crackdown has continued unabated, culminating in the passage of two bills approved in recent months. Specifically, on October 13, 2023, California Governor Gavin Newsom, signed Senate Bill 699, which will take effect on January 1, 2024, and will be officially incorporated into the California Business and Professions Code at Section 16600, subsection 5. The new law contains two significant provisions: the first extends the scope of the restrictions to non-compete agreements signed outside the state, while the second grants employees whose contracts contain restrictive clauses the right to take legal action. As noted, therefore, pursuant to the Senate bill, SB 699, set to take effect on January 1, 2024, any contract containing restrictions on the performance of work is to be considered null and void and unenforceable in court, regardless of where or when the contract was signed and regardless of whether the employment took place outside the state. Furthermore, it is established that an employer who imposes or attempts to enforce a non-compete agreement commits a civil tort. An employee who has been subject to such a restrictive measure also has the right to file a lawsuit to obtain an injunction against the employer, compensation for damages suffered, and, if successful, reimbursement of legal fees incurred.

It is also worth noting that, under the new legislation, employers are required to inform, no later than February 14, 2024, employees hired on or after January 1, 2022, who are subject to restrictive measures incompatible with current law, that such restrictions are to be considered null and void for all intents and purposes. Failure to comply with the specified deadlines may result in a fine of $2,500 per violation, payable by the employer. This provision does not apply, however, to non-compete agreements, for which the law recognizes specific exceptions.

These exceptions, expressly set forth in Section 16600 of the BPC, provide for the enforceability of non-compete agreements if they were entered into in connection with the sale of a business, the dissolution of a partnership, or the dissolution of a limited liability company. A separate discussion is warranted, however, for the states of Texas and Florida, where non-compete agreements are still considered valid under certain conditions, unlike in California, New York, Minnesota, Oklahoma, and North Dakota.

In Texas, in particular, the law provides that non-compete agreements are valid provided that:

1. they are an integral part of, or are otherwise closely related to, a legally valid contract, such as an employment contract;
2. the restrictions regarding the geographic area, purpose, and duration of the agreement are “reasonable”;
3. the protection of the employer’s interests does not impose restrictions on the employee that are more onerous than necessary.

Non-compete agreements typically contain provisions that limit an employee’s ability to work in a specific industry or geographic area for a certain period of time after leaving their job. Such agreements may also limit the employee’s ability to contact the former employer’s customers for a specified period of time. Although Texas law does not set a specific limit on the duration of non-compete agreements, state courts generally presume that agreements lasting longer than two years are unreasonable. Whether the duration of a non-compete agreement is reasonable depends on the circumstances of the specific case. At the same time, non-compete agreements of particularly long duration may nevertheless be deemed reasonable if they are appropriately structured to protect the employer’s legitimate business interests.

Finally, it is worth noting that certain professions are exempt from the provisions governing non-compete agreements, including, in particular, physicians, attorneys, and professional social workers.

Under current Florida law, non-compete agreements are valid provided they apply to certain industries and the restrictions they contain are:

1. “reasonable” in terms of both duration and geographic scope; and
   
2. “reasonably” necessary to protect a legitimate business interest.

With regard to duration, Florida law establishes a presumption that a non-compete agreement is valid if its duration is six months or less. Similarly, a clause setting the duration of the non-compete agreement at 2 years or more is deemed “unreasonable.” Both presumptions are rebuttable by either party. To prevail, the party in question must demonstrate, by a preponderance of the evidence, that the presumption should not be upheld.

As for the second aspect—which limits the conduct of competitive activities within a specific geographic area or zone—the provision must be “reasonable.”

Finally, the employer is required to demonstrate that the non-competition agreement is intended to protect a legitimate business interest. Among the interests worthy of protection, it is worth noting, among others:

• trade secrets
• valuable confidential business and professional information that is not considered a trade secret
• strong relationships with current or potential clients or patients
• business goodwill
• specialized training

Another aspect to consider is that, under Florida law, non-compete agreements do not automatically transfer to a new employer who succeeds the previous one. This means that if the current employer sells its business to another company, the non-compete agreements signed with the various employees do not necessarily transfer to the new employer. The new employer, in fact, will have to sign new agreements with those same employees.

Finally, it is worth noting that, in Florida, non-compete agreements do not apply to certain professional categories, including lawyers and doctors, as they are considered contrary to public policy, since they would limit these individuals’ freedom to practice their profession.

To conclude this brief overview of current regulatory developments in the United States—at both the state and federal levels—regarding non-compete agreements, it is important to reflect on the potential consequences this may have for a business owner.

In light of the points highlighted above, it seems clearer than ever that now may be the time to carefully reassess the company’s approach to this issue and consider alternative solutions should non-compete agreements become unlawful. Although it could take months for a ban to take effect, it is highly unlikely that any provision contained, for example, in an FTC ruling or other decision issued by a federal agency would exclude pre-existing non-compete agreements from its scope. Therefore, any non-compete agreement signed now could be deemed void in the future. Should this occur, the entrepreneur will need other forms of protection capable of safeguarding confidential information from any form of unfair competition.