Forum: It is time for the Legislature to ban noncompete clauses

On Nov. 15, Minnesota Attorney General Keith Ellison submitted a letter to the Federal Trade Commission signed by attorneys general from 19 states asking the FTC to "bring an end to the abusive use of non-compete clauses in employment contracts."

The letter endorses the arguments in a 53-page rule-making petition submitted to the FTC by a host of organizations and individuals. The petition asks the FTC to abolish noncompete clauses in the employer/employee context.

The Star Tribune on Dec. 1 reported that "across the country, lawmakers and labor activists are striking back at noncompetes." Similar articles are appearing in publications around the country.

Absent from these discussions is any mention of the difference between noncompete clauses and nonsolicitation clauses. A noncompete clause restricts an employee from going to work for a competitor at all. A nonsolicitation clause restricts an employee from soliciting customers but allows the employee to go to work for a competitor.

With a few very important exceptions, very few circumstances justify barring an employee from going to a competitor. Nonetheless, at least 75% of the employment agreements I review have a noncompete clause. The clause is included to intimidate employees without any thought to whether the clause is legitimately needed for the employer's protection. Well, the chickens are coming home to roost — there is a growing movement against the indiscriminate use of noncompete clauses as a club.

In contrast to noncompete clauses, there are very good reasons for limiting a departing employee's ability to solicit the customers with which he or she has developed strong relationships. The employer provides training and support and pays the salesperson to develop strong relationships that bind the customer to the company. It's not fair for the employee to leave and take those customers.

The problem is that some states' laws make no distinction between noncompete clauses and nonsolicitation clauses. California and North Dakota, for example, prohibit any "contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind." Oklahoma, on the other hand, does make the distinction and effectively converts a noncompete clause in an employment contract into a customer nonsolicitation clause. Massachusetts allows noncompetes but requires the employer to pay the employee 50% of the employee's wages during the period of the noncompete. Other states take different approaches.

Politicians love to cite the exception as if it were the rule; hence the frequently used example of when Jimmy John's made its sandwich-makers sign noncompetes. Clearly abusive. But legislation barring any restriction on a departing employee would allow an employee to take a large percentage of an employer's customers with him. This is a real issue for many small businesses which, if they survive the loss of revenue, have to, among other measures, lay off employees.

I've seen this issue from both sides during my 35-year law career. Most of my career I represented employers, but the past few years I have represented far more employees than employers. In truth, Minnesota has a well-developed body of case law in this area that is fair to both sides. Unfortunately, most employees do not have the financial wherewithal to challenge overly restrictive employment agreements and too often they are forced to abide by those restrictions. Legislation that bans noncompetes except under limited circumstances, provides employees with expedited access to the courts and requires employers to pay the employee's attorneys' fees if the court narrows, or voids altogether, the post-employment restrictions would go a long way toward leveling the playing field while leaving existing case law intact. It may seem odd for me to urge employers to be proactive about getting such legislation passed but, if they don't do it soon, the sledgehammer will fall and they may not like the outcome.

Wm. Christopher Penwell is an attorney and mediator with Siegel Brill PA. For 35 years he has provided legal advice and representation to closely held companies and employees.