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Noncompete agreements a tricky target for Obama administration

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A White House report that is critical of noncompete agreements could be influential in state legislatures but is unlikely to lead to federal legislation, experts say.

The May 5 White House report says, however, that in coming months the administration plans to convene experts to “facilitate discussion on noncompete agreements and their consequences.”

The White House report, “Non-Compete Agreements: Analysis of the Usage, Potential Issues, and State Responses,” cites a March 2016 U.S. Treasury Department report on the issue, and said evidence indicates noncompetes are being used in instances where the benefit is likely to be low “but the cost is still high to the worker.”

“While engineering and computer/mathematical occupations have the highest noncompete prevalence at slightly more than one-third, occupations like personal services and installation and repair also include many workers with noncompetes, at about 18%,” says the report.

“When entry-level workers in low-wage jobs are asked to sign two-year noncompetes, the distributional impacts are particularly concerning,” says the report. “Noncompetes can also become overly burdensome when they apply too broadly in terms of biography or time.”

Although they can play a beneficial role “when used in a limited way,” in certain cases they “reduce the welfare of workers and hamper the efficiency of the economy as a whole, while depressing wages, limiting mobility and inhibiting innovation,” the report says.

The report says there is a growing movement in states to take action to limit noncompetes' use, including in Hawaii, which banned noncompete agreements in technology jobs this year, and New Mexico, which has banned them for health care jobs.

In addition, Oregon recently banned noncompete agreements longer than 18 months, while Utah limited the agreements to one year. In California, noncompete contracts are “generally unenforceable,” says the report.

Christina H. Bost Seaton, an attorney with FisherBroyles L.L.P. in New York, said the report is a continuation of a trend in case law toward “very strictly construing noncompetes as opposed to other types of restrictive covenants.”

Ms. Bost Seaton said, “There's good reasons for this, namely that employers have significant other tools that they can use in order to protect their trade secrets and other relationships,” such as customer relationships.

She said, “I don't think it's coincident” that this report was issued at about the same time President Barack Obama signed into law the Defend Trade Secrets Act of 2016, “which makes it easier for employers to rely on that as opposed to relying on other devices such as the noncompetes.”

Among other provisions, the Defend Trade Secrets Act enables companies to file trade secret litigation in federal court.

Michael P. Elkon, a partner with Fisher & Phillips L.L.P. in Atlanta, said he doubts any federal legislation on this issue is likely to be approved. The Defend Trade Secrets Act was able to receive bipartisan support because “it's something American business wants” and “there's not really a natural constituency against it.”

“The noncompete issue, at least the way the White House is portraying it,” turns it into more of an employer vs. employee issue, said Mr. Elkon.

“The argument the White House is using is that employers have used noncompetes to depress wages and reduce mobility.” He said the report may be influential in Democrat-controlled states.

Thomas A. Muccifori, a partner with Archer & Greiner P.C. in Haddonfield, New Jersey, said there have been a “few high-profile cases” of noncompetes involving fast food workers.

“It's an easy political target,” although “I don't think the issue is as rampant as the White House report suggests.” There is room for “reasonably tailored” noncompete agreements, he said.

Ms. Bost Seaton said if challenged, it is more likely noncompete agreements that have a “reasonable time length and geographical scope” will be held to be enforceable.