Out-Law / Your Daily Need-To-Know

Could US review of non-competes sway UK reforms?

Out-Law News | 23 Jun 2022 | 9:24 am |

New York lawyer Ben Stockman tells HRNews about potential reform of restrictive covenants in the US
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  • Transcript

    Eighteen months ago the government launched its consultation on measures to reform post-termination non-compete clauses in contracts of employment. We are still waiting for the response to that and, meanwhile, speculation continues as to what the changes will be. Will recent developments in the United States have an impact over here? We’ll consider that.

    The latest news we have on the UK government’s progress is the response given by Paul Scully MP on 2 March 2022 to a written question by his colleague Kate Griffiths. He said, essentially, that the government is in the process of analysing the responses to the consultation and a response will be published on the GOV.UK website ‘in due course.’

    A reminder. The government is considering two possibilities. The first is to make non-compete clauses enforceable only when the employer provides compensation during the term of the clause, and they are looking at whether this could be complemented by additional transparency measures and statutory limits on the length of non-compete clauses. Alternatively, the nuclear option, to effectively ban them by making them unenforceable.

    There is speculation that developments in the US might influence the UK government and it’s something Diane Nicol has flagged in her article for Out-Law: ‘US non-compete clause review could influence UK reform’. She points out that President Biden has already signed an executive order on promoting competition as the US economy recovers from the impact of the pandemic. The order, among other matters, encourages the Federal Trade Commission, the FTC, to consider developing rules to “curtail the unfair use of non-compete clauses”, along with “other clauses or agreements that may unfairly limit worker mobility”. Diane points out that non-compete clauses are already banned in some US states and in the wake of the pandemic, and, indeed, Brexit in the case of the UK, governments are increasingly focused on ways to boost ailing economies including removing anti-competitive practices.’ She says mandatory compensation and an outright ban are options under consideration in the UK – these would be pretty radical steps in the UK, although by no means unprecedented in other jurisdictions such as Germany, France and Italy.”

    So let’s take a closer look at what is going on in the US. Ben Stockman is a partner at US law firm Venable and he joined me by video-link from New York to discuss this. I started by asking Ben for the background:

    Ben Stockman: “In the US, currently, restrictive covenants, non-competes non-solicits no-poach agreements are creatures of state law. In the US Federal system the state's create their own laws, so long as they don't conflict with federal law, and currently virtually every state takes a different approach to the enforceability of restrictive covenants. So one really important thing to remember for employers operating United States is it's going to be a state-by-state analysis and you really do have to get down into the weeds on the state laws in which you're operating.

    Joe Glavina: “So where does the FTC come in? Does it dictate matters right across the states?”

    Ben Stockman: “Yes, the Federal Trade Commission is a federal agency and it's largely charged with regulating anti-competitive behaviour federally across all 50 States. President Biden issued an Executive Order asking the FTC to focus on the abuse of non-compete agreements in the United States and the FTC has begun fact gathering in this area and everyone presumes that that will end in a rulemaking process. It’s not clear and some have commented that the FTC may not even have the authority to regulate this area. That will not be litigated until the FTC takes official action. So the FTC is currently in fact gathering mode, we expect that that will result in some sort of rulemaking process and the issuance of some sort of rule that attempts to you make uniform the approach to restrictive covenants across all 50 states versus the current system in which large employers who are operating in 50 states have to do a state-by-state survey to ensure that they're complying with restrictive covenant laws in each state.”

    Joe Glavina: “If the FTC does engage in rulemaking, do you think it will seek to ban non-competes entirely?”

    Ben Stockman: “It's possible. The FTC may ultimately decide that a nationwide ban is appropriate. I think it's unlikely. What we've seen in the states which again, they are sort of public policy test kitchens for the federal government. The federal government very much is interested in what states have done and what has been successful and what has been unsuccessful. What we've seen in the states is, for the most part, not complete bans on non-competes. California is an exception – it has long had a law on the books that bans non-competes per se, you cannot enforce a non-competition agreement in California. Almost all the other states do not have such a ban, and instead of taking have taken a more nuanced approach. For example, some states have targeted certain subsets of the workforce, low wage workers for example, and have banned non-competes for low wage workers. Others have focused on what the standard of enforceability will be making it more restrictive, carving out certain types of scenarios from the use of non-competes. I would expect the FTC to study the state rules and take a more nuanced approach. It may be that the FTC decides to focus on establishing a standard of enforceability for such agreements across the country so that would not amount to a per se ban of non-competes, but would standardise how courts would examine non-competes in a similar manner across the country.”

    Diane Nicol’s article looking at the UK government’s options for reform and how that might be affected by developments in the US is called ‘US non-compete clause review could influence UK reform’. You can find that article on the Out-Law website.