Non-Compete Agreements: Analysis of the Usage, Potential Issues

Non-Compete Agreements:

Analysis of the Usage, Potential

Issues, and State Responses

May 2016

CONTENTS EMBARGOED FOR 6:00 A.M., May 5

, 2016

The U.S. economy has experienced a historic turnaround since the depths of the Great Recession.

The unemployment rate has fallen by half since its peak in 2009, and over the last six years,

American businesses have created more than 14 million new jobs, the longest streak on record.

Despite this remarkable progress, the U.S. economy faces a number of longer-run challenges,

some of which go back several decades. In at least part of the economy, evidence suggests that

competition for consumers and workers is declining, and the number of new firms each year is

experiencing a downward trend. In addition to this trend, there has been a decrease in ‘business

dynamism’—the so-called churn of firms and who is working for whom in the labor market—

since the 1970s.

One factor driving these issues may be institutional changes in labor markets, such as greater

restrictions on a worker’s ability to move between jobs. To address these and other issues that limit

competition in the marketplace, the President has directed executive departments and agencies to

propose new ways of promoting competition and providing consumers and workers with

information they need to make informed choices, in an effort to improve competitive markets and

empower consumers’ and workers’ voices across the country.

Building on these efforts, this document provides a starting place for further investigation of the

problematic usage of one institutional factor that has the potential to hold back wages—non-

compete agreements. These agreements currently impact nearly a fifth of U.S. workers, including a

large number of low-wage workers. This brief delineates issues regarding misuse of non-compete

agreements and describes a sampling of state laws and legislation to address the potentially high

costs of unnecessary non-competes to workers and the economy. It draws on a recently released

report from the U.S. Treasury Office of Economic Policy--

Non-Compete Contracts: Economic Effects

and Policy Implications—which provides an overview of the nascent research on non-competes’

prevalence, enforcement, and effects.

Introduction

Non-compete agreements, or “non-competes,” are contracts that ban workers at a certain company

from going to work for a competing employer within a certain period of time after leaving a job. The

main rationale for these agreements is to encourage innovation by preventing workers with ‘trade

secrets’ from transferring technical and intellectual property of companies to rival firms, even when

there are trade secret laws to protect companies. These agreements may also encourage greater

employer investments in worker training because they may reduce fear that workers will take skills

gained to a competitor.

Workers’ value comes in part from the skills and experiences gained on the job. Non-competes can

reduce workers’ ability to use job switching or the threat of job switching to negotiate for better

conditions and higher wages, reflecting their value to employers. Furthermore, non-competes could

result in unemployment if workers must leave a job and are unable to find a new job that meets the

requirements of their non-compete contract.

In addition to reducing job mobility and worker bargaining power, non-competes can negatively

impact other companies by constricting the labor pool from which to hire. Non-competes may also

prevent workers from launching new companies. Some critics also argue that non-competes can

actually stifle innovation by reducing the diffusion of skills and ideas between companies within a

region, which can in turn impact economic growth. Non-compete agreements may also have a

detrimental effect on consumer well-being by restricting consumer choice.

Research suggests that 18 percent, or 30 million, American workers are currently covered by non-

compete agreements. Even more workers, roughly 37 percent, report having worked under a non-

compete agreement at some point during their career. A 2013 study commissioned by the Wall

Street Journal signals either a rise in the prevalence of non-competes, or significant growth in their

enforcement. The law firm Beck Reed Riden LLP found a 61 percent rise from 2002 to 2013 in the

number of employees getting sued by former companies for breach of non-compete agreements.

Non-compete clauses are found not only in the contracts of senior executives or other highly

compensated employees, but also for comparatively low-skill occupations. Approximately 15

percent of workers without a college degree are currently subject to non-compete agreements, and

14 percent of individuals earning less than $40,000 are subject to them. Recent media coverage has

raised awareness of the usage and enforcement of non-competes among low-wage occupations

including fast-food employees, warehouse workers, and camp counselors.

Based on the impacts of unnecessary non-competes for workers, consumers, and the broader

economy, several states have passed, and many others are currently weighing reforms to the ways

non-compete agreements are regulated. Federal legislation has also been proposed to limit the use

of non-compete agreements in low-wage fields where they are less likely to have valid uses.

Continued state interest and a growing understanding of the prevalence of non-compete

agreements suggest that the time is ripe to consider how government can best ensure these

agreements are used appropriately.

In the large majority of states, non-compete agreements are enforceable for workers across all

income brackets, and many states do not have restrictions around the geographic or temporal

limitations of non-competes. Non-compete agreements are also prevalent in states where the courts

generally do not enforce them. For example, in California, which does not generally enforce non-

compete agreements, 22 percent of workers report that they have signed a non-compete. Survey

research shows that many workers are not aware of the lack of enforcement in these states,

suggesting that even unenforced non-compete agreements may have deleterious effects.

In the coming months, as part of the Administration’s efforts to support competition in consumer

product and labor markets, the White House, Treasury, and the Department of Labor will convene a

group of experts in labor law, economics, government and business to facilitate discussion on non-

compete agreements and their consequences. The goal will be to identify key areas where

implementation and enforcement of non-competes may present issues, to examine promising

practices in states, and put forward a set of best practices and call to action for state reform. By

facilitating a dialogue between academic experts and those with practical expertise, we aim to

identify policies that could be used to promote a fair and dynamic labor market, while remaining

cognizant of real world challenges to reform. We also aim to prompt further research exploring the

use and the effects of non-compete agreements.

Wall Street Journal. “Litigation Over Noncompete Clauses Is Rising.”

http://www.wsj.com/articles/SB10001424127887323446404579011501388418552

Summary of US Treasury Department Report on

Non-Compete Contracts Prevalence and Economic

Effects

Use and Misuse of Non-Compete Contracts

The main economically and societally beneficial uses of non-competes are to protect trade secrets,

which can promote innovation, and to incentivize employers to invest in worker training because of

reduced probability of exit from the firm.

However, evidence indicates that non-competes are also being used in instances where the benefit

is likely to be low (e.g., where workers report they do not have trade secrets), but the cost is still

high to the worker. For example:

• Only 24 percent of workers report that they possess trade secrets. Moreover, fewer than

half of workers who have non-competes report possessing trade secrets, suggesting that

trade secrets do not explain the majority of non-compete activity.

• If protection of trade secrets were the main explanation for non-compete agreements, then

one would expect such agreements to be highly concentrated among workers with

advanced education and occupations entrusted with trade secrets. However, 15 percent of

workers without a four-year college degree are subject to non-competes, and 14 percent of

workers earning less than $40,000 have non-competes. This is true even though workers

without four-year degrees are half as likely to possess trade secrets as those with four-year

degrees, and workers earning less than $40,000 possess trade secrets at less than half the

rate of their higher-earning counterparts.

• While engineering and computer/mathematical occupations have the highest non-compete

prevalence at slightly more than one-third, occupations like personal services and

installation and repair also include many workers with non-competes, at about 18 percent.

US Treasury Department, “Non-compete Contracts: Economic Effects and Policy Implications”, March 2016.

Starr, Evan, Norman Bishara and JJ Prescott. 2015. “Noncompetes in the U.S. Labor Force.”

When entry-level workers in low-wage jobs are asked to sign two-year non-competes, the

distributional impacts are particularly concerning.

Non-competes can also become overly

burdensome when they apply too broadly in terms of geography or time. Without restricting non-

competes to only apply in a specific region, or for a limited time period, job-seekers may be forced

to leave their industry in order to make a living in a way that does not conflict with their non-

compete agreement.

In addition, regardless of whether they promote the protection of trade secrets, the agreements can

sometimes be implemented in ways that create confusion or lack of transparency for workers.

• Many workers do not realize when they accept a job that they have signed a non-compete, or

they do not understand its implications.

• Many workers are asked to sign a non-compete only after accepting a job offer. One lower-

bound estimate is that 37 percent of workers are in this position.

• Many firms ask workers to sign non-competes that are entirely or partly unenforceable in

certain jurisdictions, suggesting that firms may be relying on a lack of worker knowledge. For

instance, California workers are bound by non-competes at a rate slightly higher than the

national average (19 percent) despite the fact that, with limited exceptions, non-competes

are not enforced in that state.

Evidence on the Effects of Non-Compete Contracts

Although non-competes can play a beneficial role when used in a limited way, evidence suggests that

in certain cases, non-competes can reduce the welfare of workers and hamper the efficiency of the

economy as a whole by depressing wages, limiting mobility, and inhibiting innovation.

US Treasury Department, see 1.

Effects of non-competes on wages

Worker bargaining power is reduced after a non-compete is signed, possibly leading to lower

wages. When workers are legally prevented from accepting competitors’ offers, those workers have

less leverage in wage negotiations and fewer opportunities to develop their careers outside of their

current firm.

The Treasury report indicates that stricter non-compete enforcement is associated with both lower

wage growth and lower initial wages, finding that an increase in one standard deviation in non-

compete enforcement reduces wages by about 1.4 percent. Recent work by Starr and coauthors

finds broadly similar results.

Given the potential for interaction between non-competes and on-the-job training, Treasury also

analyzes the impact of stricter non-compete enforcement as workers age. If non-competes promote

training, one would expect states with stronger enforcement to see faster wage growth as workers

age and gain the tenure and experience that is typically associated with higher rates of training. As

shown in the charts below, the analysis suggests that states with higher levels of non-compete

enforcement see lower wages in general, and that wage disparities between high and low

enforcements states actually grow as workers age.

Treasury uses the 2014 merged outgoing rotation groups of the Current Population Survey (CPS), which provide a

cross section of population-representative workers. Merged with this data is the Starr-Bishara index of non-compete

enforceability by state (generously provided by Evan Starr), as well as the fraction of workers with non-competes by

major occupation from Starr, Bishara, and Prescott (2015).

When interpreting any of the results just described, it should be remembered that we are not exploiting variation

over time in non-compete enforcement; rather, the wage estimates are derived from variation across states. Even

after controlling for available worker-level variables, states may differ in ways that are both relevant to wage growth

and non-compete enforcement. As such, the results shown here should be seen as merely suggestive.

Effects of non-competes on labor market dynamism

The broad geographic and time scope of non-compete contracts can limit the mobility of workers in

a long-lasting way, harming both the workers and the overall efficiency of labor markets. When

lower paid, entry-level workers are prohibited from taking related employment for some time, they

may lack the necessary skills to apply for other jobs, weakening their prospects for future

employment and even their labor force attachment.

A study from Marx, Strumsky, and Fleming shows that worker job mobility fell by 8 percent when

non-competes were made enforceable, with the effect even larger for workers with more narrowly-

focused skills. However, other authors dispute these findings, arguing that the inadvertent

legalization was not retroactive and that some states were inappropriately labeled as “non-

enforcing.” In separate work, Marx finds that workers who do switch jobs are more likely to leave

their industry if they are covered by a non-compete, with the attendant “reduced compensation,

atrophy of their skills, and estrangement from their professional networks” that would be expected

to occur.

Effects of non-competes on innovation, entrepreneurship, and regional economic growth

When firms in a given industry are clustered, it makes it easier for their workers to share expertise

and discoveries, some of which may not be protected by trade secret or intellectual property legal

provisions. Economists refer to geographic clustering effects of factors like a large, deep pool of

skilled workers, a more competitive market of suppliers, and information spillovers across workers

and firms as “agglomeration effects.”

While not necessarily in the interest of an individual firm, more rapid dissemination of ideas and

technology improvements can have significant positive impacts for the larger regional economy in

terms of innovation, entrepreneurship, and attracting more businesses and jobs to a region. Non-

competes that stifle mobility of workers who can disseminate knowledge and ideas to new startups

or companies moving to a region can limit the process that leads to agglomeration economies.

Overly broad non-compete provisions could prevent potential entrepreneurs from starting new

businesses in similar sectors to their current employer, even if they relocate.

Potential issues presented by non-compete

agreements

While we are still learning more about non-competes and their impact, the available evidence

suggests that they can be used or enforced in ways that favor the interests of the firm over the worker.

Because of the potential issues presented by some non-competes, there is a growing movement in

states to take action to limit the misuse of non-compete agreements. Several states are banning non-

compete agreements outright for certain sectors and occupations. This year, Hawaii banned non-

compete agreements for technology jobs, and New Mexico banned them for health care jobs. Others

have taken steps to limit the scope of non-competes. Oregon recently banned non-compete

agreements longer than 18 months, while Utah limited the agreements to one year.

See Marx, Strumsky, and Fleming (2009) and Marx (2011).

California’s legislature has rendered non-compete contracts generally unenforceable in their state.

Some researchers have suggested that California, and Silicon Valley in particular, have benefited from

this action, though compelling evidence is difficult to obtain

At the federal level, legislation has been proposed to limit the use of non-compete agreements below

a certain income threshold where they are less likely to have valid uses.

Over the coming months, the White House, Treasury and Labor will continue to explore these areas

and possible solutions in engagement with states, businesses and experts. Below, we have listed

seven areas that highlight how workers may be disadvantaged by non-competes, and how some

states and state legislatures are attempting to address this issue.

1. Workers who are unlikely to possess trade secrets (in particular, low wage

workers) are nonetheless compelled to sign non-competes.

Fourteen percent of workers earning less than $40,000 have signed non-competes, although

those workers possess trade secrets at less than half the rate of their higher-earning

counterparts.

When an employer requires low-wage employees to sign non-competes, it can

effectively limit the ability of their workers to bargain for higher pay by making it harder for

them to find new jobs. This can cause particular hardship for lower-skill workers who may not

have marketable skills outside of their past employment. For example, a national sandwich

chain required its employees to sign an expansive non-compete agreement that would ban

them from working at just about any other fast-food restaurant.

Examples of Actions States or State Legislators Have Taken to Address this Issue: Because

non-competes are less likely to have the social benefit of protecting trade secrets when applied

to low-wage workers, some states have proposed, and Oregon has passed, legislation restricting

the enforceability of non-competes for employees under a certain income threshold. In New

Jersey and Maryland, bills were proposed, although they did not make it out of committee, that

would render non-competes unenforceable for any workers eligible to receive unemployment

compensation.

State legislators in Washington and Idaho have introduced bills that would limit the reach of

non-competes by designating certain workers who are more likely to have inside knowledge

and trade secrets given their positions as “key employees,” or by rendering void “unreasonable”

competition agreements.

For example, see Gilson, Ronald J. 1999. “The Legal Infrastructure of High Technology Industrial Districts:

Silicon Valley, Route 128, and Covenants Not to Compete.” New York University Law Review 74 (3): 575–629.

See Starr, Bishara and Prescott (2015).

http://www.njleg.state.nj.us/2012/Bills/A4000/3970_I1.HTM;

http://mgaleg.maryland.gov/2013RS/fnotes/bil_0001/sb0051.pdf

2. Workers are asked to sign a non-compete only after accepting a job offer, when

they have already declined other offers and thus have less leverage to bargain.

The Treasury report notes that at least 37 percent of workers are asked to sign non-compete

agreements after accepting a job offer. In cases where job offers have already been accepted,

workers often have less leverage to bargain, in part because they may have already turned down

other job offers. However, in many states, even if a worker was not made aware of a requirement to

enter a non-compete agreement when she was hired, courts have enforced a covenant signed after

employment commenced.

State Examples

• Oregon. (Rev. Stat. 653.295): Non-competes are voidable and may not be

enforced by Oregon courts unless several conditions are met. Examples of

those conditions include, with limited exceptions, (1) when the employee’s

gross salary and commissions, calculated on an annual basis, at the time of the

employees termination equal more than the median family income for a family

of four as calculated by the Census Bureau for the most recent year available at

the time of the employees termination, and (2) when particular compensation

is paid to the employee during the period in which the employee is restricted

from working.

• Washington. Proposed House Bill 2931 would render “unreasonable and void”

employment noncompetition agreements if the employee is a seasonal or

temporary employee, if the employee was terminated without just cause or

laid-off by action of the employer, The bill also would also render void and

unenforceable non-compete agreements that restrict employees from

competing for more than one year after termination of employment, and those

that apply to employees who are not executives. In addition, the bill would

make noncompetition agreements involving independent contractors void and

unenforceable. However, the bill is delayed for legislative consideration until at

least next year.

• Idaho. (Idaho Code Section 44-2701): In 2008, Idaho passed a law that

restricts non-competes to “key employees.” "Key employees" are those who

“by reason of the employer's investment of time, money, trust, exposure

to the public, or exposure to technologies, intellectual property, business

plans, business processes and methods of operation, customers, vendors or

other business relationships during the course of employment, have gained a

high level of inside knowledge, influence, credibility, notoriety, fame, reputation

or public persona as a representative or spokesperson of the employer, and as

a result, have the ability to harm or threaten an employer's legitimate business

interests.”

A separate survey, exclusively focused on members of the Institute of Electrical and Electronics

Engineers, reports that “…barely 3 in 10 workers reported that they were told about the non-

compete in their job offer. In nearly 70% of cases, the worker was asked to sign the non-compete

after accepting the offer – and, consequently, after having turned down (all) other offers. Nearly half

the time, the non-compete was not presented to employees until or after the first day at work.”

Examples of Actions States or State Legislators Have Taken to Address this Issue: In New

Hampshire and Oregon, non-compete agreements may be rendered void for lack of consideration

when employers fail to include them in the original terms of employment. Requiring that non-

compete contracts be provided along with job offers and not after an offer is one possible solution

to protect workers. In the case of internal promotion, states could require that employers provide

employees with non-competes before the employee begins the new position.

3. Non-Competes, Their Implications, And Their Enforceability Are Often Unclear To

Workers

Many workers report that they do not realize when they accept a job that they have signed a non-

compete, or that they do not understand its implications.

Workers are often poorly informed

about the existence and details of their non-competes, as well the relevant legal implications.

Additionally, in states like California where non-competes are unenforceable, workers may be

unaware about their legal enforceability. States could consider taking steps to ensure that

important details on non-competes, like the duration and geographic scope of the contract, be

clearly explained to workers.

Starr, Bishara, and Prescott (2015) find that only 10 percent of workers with non-competes report

bargaining over their non-compete, with 38 percent of the non-bargainers not realizing that they

could negotiate.

Marx, Matt, and Lee Fleming. 2012. “Non-compete Agreements: Barriers to Entry…and Exit?” In Innovation

Policy and the Economy, Volume 12, 39-64. Chicago: University of Chicago Press.

Starr, Evan, Norman Bishara and JJ Present. 2015. “Noncompetes in the U.S. Labor Force.”

State Examples

• Oregon. (Rev. Stat. 653.295): In 2015, Oregon passed a law requiring firms to

make clear in offer letters if employees will be expected to sign non-compete

agreements. The non-compete must be provided at least 2 weeks before

employment or with bona fide advancement.

• New Hampshire. (Senate Bill 351): In 2014, New Hampshire passed a law

that requires that non-compete agreements that are executed as a condition of

employment should be provided to potential employees prior to the acceptance

of an offer of employment. Otherwise, the non-compete will not be enforceable

against the employee.

4. Employers Often Write Non-Compete Agreements That Are Overly Broad Or

Unenforceable

Some firms ask workers to sign non-competes that are entirely or partly unenforceable in certain

jurisdictions. For instance, California workers are asked to enter into non-competes at a rate

slightly higher than the national average (19 percent), despite the fact that, with limited exceptions,

non-competes are not enforced in that state.

Given the well-documented worker confusion about these contracts (as stated in Starr, Bishara and

Prescott’s findings above), employers can exert a chilling effect on worker behavior even when

their contracts are unenforceable.

There are three main approaches that states are taking to address unenforceable or overly broad

contracts, which vary greatly in terms of the incentives they provide employers.

• “Equitable Reform.” The majority (about 30) of states are implementing equitable reform

approaches, which are the most lenient on employers that require workers to enter into

partially unenforceable contracts. In these states, courts allow employers to rewrite non-

compete contracts to bring the contracts in line with state law.

• “Blue Pencil” Doctrine. Some states are implementing a “blue pencil” doctrine, which entails

striking offensive clauses from non-compete contracts if doing so renders the remaining

language enforceable under the state’s law.

• “Red Pencil” Doctrine. Lastly, some states provide disincentives for employers to write non-

compete contracts that are unenforceable by refusing to enforce and making void a non-

compete contract that contains any unenforceable provisions. This practice is known as “red

pencil” doctrine, and it can have the effect of increasing employers’ incentive to write a contract

that is fully enforceable. Research from the litigation firm Beck, Reed, and Riden LLP’s 50 state

non-compete survey indicates that three states—Nebraska, Virginia, and Wisconsin- are using

this approach.

5. Employers Requiring Non-Competes Often Do Not Provide “Consideration” That Is

Above And Beyond Continued Employment

Not enforced

Undecided

Red pencil

Blue pencil

Reformation

Source: A State by State Survey of Employee Noncompetes, Beck Reed Riden

Non-compete Enforcement Regime

State Examples of “Red Pencil” Doctrine

• Virginia. Although the Supreme Court of Virginia has not expressly ruled on

the courts’ power to “blue pencil” a non-compete agreement, several Virginia

courts have declined to blue pencil non-compete agreements (Lanmark Tech.,

Inc. v. Canales, 454 F. Supp. 2d 524, 529 (E.D. Va. 2006); Better Living

Components, Inc. v. Coleman, 62005 WL 771592, at *5 (Va. Cir. Ct. Apr. 6,

2005)). In addition, some courts have found that blue pencil provisions

permitting judicial modification in non-compete agreements are invalid or

discouraged under Virginia law (Lasership Inc. v. Watson, 2009 WL 7388870,

at *9 (Va. Cir. Ct. Aug. 12, 2009); Pace v. Ret. Plan Admin. Serv., Ltd., 2007

WL 5971432 (Va. Cir. Ct. Sept. 28, 2007)).

• Nebraska. The Nebraska Supreme Court has refused to “blue pencil” or reform

non-compete clauses when certain elements are overly broad or vague. For

example, in the 2015 case Unlimited Opportunity, Inc. v. Waadah, the Court

found that the geographic scope of the non-compete was too broad, and thus

refused to enforce it. (Unlimited Opportunity, Inc. v. Waadah, 290 Neb. 629

(2015)).

In the majority of states, when a non-compete is offered to an existing employee after the original

offer of employment, continued employment is sufficient consideration for a non-compete to be

enforceable. “Consideration” in this context refers to a benefit received by the signatory of a

contract for a non-compete such as increased pay or more training.

Even for states that recognize

continued employment, questions often arise about how long employment must continue to count

as sufficient consideration. In addition, in the case where a worker with a non-compete is searching

for a new job, the non-compete combined with a lack of severance pay can create hardship for that

individual.

Examples of Actions States are Taking to Address this Issue: Currently, some states require that

firms provide some “consideration” above and beyond continued employment such as pay raises,

training, and promotions to workers who sign a non-compete after they have already worked for a

firm for some amount of time. Just 11 states do not view continued employment as sufficient

consideration” for the signing of a non-compete in this circumstance, and in DC, Illinois and

Mississippi continued employment only counts as consideration if it is for a certain period of time.

A study by Evan Starr finds that when states require firms to offer substantial consideration along

with a non-compete (e.g., promotions, training, and higher wages), both training and wage

outcomes for workers can be improved.

6. In Some Cases, Non-Competes Can Prevent Workers From Finding New

Employment Even After Being Fired Without Cause

In several states, non-competes are enforceable even for workers fired without cause (e.g., a

layoff). Worker bargaining power can be particularly negatively affected when employers have

the ability to unilaterally determine whether the worker may continue to be employed

See Beck Reed Riden LLP.

State Examples

• Wyoming. In Wyoming, a court found that continued employment alone does

not provide the necessary consideration to support a covenant not to compete

entered into after the employment relationship has already begun. Instead,

separate consideration, such as a change in the terms and conditions of

employment, must be given contemporaneously with the making of the

covenant. This requirement apparently applies whether the employment is at-

will or not (Hopper v. All Pet Animal Clinic, Inc., 861 P.2d 531, 540 (Wyo.

1993)).

• Illinois. In Illinois, continued employment for a “substantial period of time” is

sufficient consideration for a non-compete agreement. A substantial period of

time is generally two years.

For example, in the case of Brown & Brown, Inc. v.

Mudron, the court held that seven months of continued employment was

insufficient consideration for a non-compete agreement. (Brown & Brown, Inc. v.

Mudron, 887 N.E.2d 437 (Ill. App. Ct. 2008)).

anywhere in his or her occupation. The requirement of having been fired “without cause” would

prevent workers from easily evading a non-compete obligation through behavior calculated to

force an employer to discharge them.

Examples of Actions States are Taking to Address this Issue: While very few states have

legislation prohibiting the enforcement of non-competes when an employee is fired without

cause, in some states, courts have found that there is no “legitimate business interest” in a non-

compete when the employer initiates the termination without cause. In this case, the non-

compete is rendered unenforceable.

7. In Some Sectors, Non-Competes Can Have A Detrimental Effect On Health And

Well-Being By Restricting Consumer Choice

In some instances, non-competes through imposing a restriction on free trade can interfere with

consumers ability to acquire critical goods and services. For example, in the case of consumer

choice for health care services (i.e. physicians, nurses, psychologists, social workers and other

medical professionals), non-competes have the potential to interfere with the quality of care.

Little is known regarding the ubiquity of non-competes throughout differing job categories within

the health care service sector. For physicians, it is plausible that there may be “legitimate business

interests” that hospitals and service providers seek to protect. However, more attention on lower-

wage segments of the industry, particularly within the home health care workers space, may

State Examples

• Montana. The Montana Supreme Court has found that it is difficult to establish

a legitimate business interest for enforcement of a non-compete when the

employer initiates the termination without cause. A 2011 Montana Supreme

Court decision stated that a Montana employer— as in several other states —

ordinarily will not be permitted to enforce a non-compete provision in an

employment agreement where the employer was solely responsible for ending

the employment relationship. Importantly, the court noted that circumstances

may exist that could provide an employer with a legitimate business reason to

enforce a non-compete such as in cases where the employee misappropriated

trade secrets. Wrigg v. Junkermier, Clark, Campanella, Stevens, P.C., Case No.

DA 11-0147, 2011 MT 290 (Nov. 22, 2011).

• New York. In Arakelian v. Omnicare Inc. 735 F. Supp. 2d 22, 41 (S.D.N.Y.

2010), the court affirmed that New York courts will not enforce non-compete

agreements if the termination was involuntary stating that, “[e]nforcing a

noncompetition provision when the employee has been discharged without

cause would be ‘unconscionable’ because it would destroy the mutuality of

obligation on which a covenant not to compete is based”

(internal quotations

omitted).

provide much needed insight into a sub-sector that is poised to grow substantially over the next

decade. These workers are less likely to possess knowledge of trade secrets and pose little to no

competitive risk.

Examples of Actions States Are Taking to Address this Issue: Several states will not enforce non-

competes where a “public interest” exists in the consumption of critical goods and services.

Depending on the state, courts have recognized the importance of preserving the physician-patient

relationship and have exempted them from being bound by a non-compete agreement (Delaware,

Illinois, Tennessee, Texas, and Massachusetts). Yet in many states, no physician exemption exists.

These states generally move toward limitations on enforceability, and in some cases, outright

exemption.

Conclusion

In some cases, non-compete agreements can play an important role in protecting businesses and

promoting innovation. They can also encourage employers to invest in training for their employees.

However, as detailed in this report, non-competes can impose substantial costs on workers,

consumers, and the economy more generally. This report informs future discussions and potential

recommendations for reform by providing an overview of the research on the prevalence of non-

State Examples

• Delaware. Delaware statute limits enforcement of non-competes against

physicians, stating that “Any covenant not to compete provision of an

employment, partnership or corporate agreement between and/or among

physicians which restricts the right of a physician to practice medicine in a

particular locale and/or for a defined period of time, upon the termination of

the principal agreement of which the said provision is a part, shall be void...”

The statute also expressly provides for reasonable damages provisions (6 DEL.

CODE § 2707)

• Colorado. Colorado statute similarly states that, “Any covenant not to compete

provision of an employment, partnership, or corporate agreement between

physicians which restricts the right of a physician to practice medicine, as

defined in section 12-36-106, C.R.S., upon termination of such agreement,

shall be void…” (COLO. REV. STAT. § 8-2-113(3))

• Texas. Texas code allows non-competes to be enforced against physicians only

in narrow circumstances. Among other things, the covenant must (1) allow the

physician access to his/her list of patients seen or treated within one year of

termination of the contract or employment; (2) allow the physician access to

patient medical records upon authorization of the patient; and (3) provide that

the physician will not be prohibited from providing continuing care and

treatment to a specific patient or patients during the course of an acute illness

after the contract or employment has been terminated. (TEX. BUS. &

COM.CODE § 15.50(b)-(c)).

competes, evidence of their effects, and examples of actions states are taking to limit the use and

enforcement of unnecessary non-competes.

There is more work to be done. The Administration will identify key areas where implementation

and enforcement of non-competes may present issues, examine promising practices in states, and

identify the best approaches for policy reform. Researchers must continue to assess and identify

promising policy reforms and the potential impact of those reforms including unintended

consequences. Ultimately, most of the power is in the hands of State legislators and policymakers in

their ability to adopt institutional reforms that promote the use and enforcement of non-competes

in instances that appropriately weigh their costs and benefits and in ways that provide workers

appropriate levels of transparency about their rights.