July 19, 2023 – Wisconsin employers and their lawyers are going to be busy next year if a proposed federal ban on non-compete clauses becomes law.
rule proposed by the Federal Trade Commission (FTC), non-compete clauses and, potentially, other restrictive employment covenants, would be illegal.
The proposed rule contains a broad definition of “non-compete clauses” – one that includes any contractual provision that bars a worker from looking for or accepting employment or operating a business after the worker’s employment ends.
The rule would require any employer that has an agreement with a non-complete clause as defined by the rule to both rescind the clause and provide an individualized communication about the recission to the worker. Any clause negotiated in exchange for agreement to the non-compete clause would remain valid.
The proposed rule contains an exception for the sale of a business, limited to persons who own at least a 25% ownership interest in the business. The proposed rule would preempt contrary state laws.
Biden Executive Order Prompted Rule
Sally Piefer, a partner at Lindner & Marsack in Milwaukee, said that employers will have their work cut out for them if the FTC adopts the proposed rule. “One of the concerns is that the language of the rule essentially says that it will also prohibit confidentiality and non-solicitation clauses if they’re drafted so broadly as to effectively create a non-compete clause.”
The FTC proposed the rule in January 2023, after President Joe Biden issued an executive order in July 2021 encouraging the FTC to restrict the use of non-compete clauses and other restrictive covenants that limit workers from changing jobs.
In May of this year, the FTC announced that it was delaying consideration of the proposed rule to April 2024, to give agency staff time to deal with the 27,000 comments submitted on the proposed rule.
Sally Piefer, a partner at Lindner & Marsack in Milwaukee, said that employers will have their work cut out for them if the FTC adopts the proposed rule.
“It would effectively eliminate all true non-compete agreements,” said Piefer, who represents employers. “One of the concerns is that the language of the rule essentially says that it will also prohibit confidentiality and non-solicitation clauses if they’re drafted so broadly as to effectively create a non-compete clause.”
“It’s really a matter of making sure from a drafting standpoint that you’re carefully drafting those restrictions, so they don’t cross the line,” Piefer said. “But at this point we don’t know what that line is. The FTC has sort of left that vague, which is a concern.”
Federal vs. State Law
Laura Lindner, a partner at Lindner Law LLC, has practiced employment law for nearly 30 years. Lindner, who represents workers, doesn’t think the proposed FTC rule will become law.
“I am very skeptical that it’s actually going to be implemented,” Lindner said.
One reason for her belief is the fact that, historically, non-compete agreements have been a matter of state law.
“We haven’t had any federal law on this,” Lindner said. “I think it should be a matter of state law because different markets have different considerations. If you’re in a big metro area – New York, Chicago, L.A. – it’s going to be different. It’s not a one-size-fits-all situation. That’s always been the problem with these agreements – employers overreach and draft these very broad agreements.”
That overreach, Lindner said, is one of the reasons behind the proposed rule.
“I see so many agreements that are overbroad, for jobs that don’t really create much of a competitive risk,” Lindner said. “I think that’s why there’s been this level of scrutiny.”
Lindner cited a class action,
filed in Illinois in 2016 after Jimmy John’s, the sandwich shop chain, attempted to enforce non-compete clauses against drivers who used to work for the company.
“That got everybody’s attention,” Lindner said. “You had companies doing things like that.”
‘They Get a Stack of Documents and They Sign Them’
Laura Lindner, a partner at Lindner Law LLC, has practiced employment law for nearly 30 years. Lindner, who represents workers, doesn’t think the proposed FTC rule will become law. “We haven’t had any federal law on this,” Lindner said. “I think it should be a matter of state law because different markets have different considerations. If you’re in a big metro area – New York, Chicago, L.A. – it’s going to be different. It’s not a one-size-fits-all situation. That’s always been the problem with these agreements – employers overreach and draft these very broad agreements.”
Lindner said the Jimmy John’s case is an example of employer overreach – attempting to apply a restrictive covenant in a situation where workers were not using information from their former employers to their competitive advantage.
Lindner, who represented employers for many years before switching to represent workers, said employment-related restrictive covenants are often unenforceable in Wisconsin because of poor drafting.
“Most of the time, there are problems with the agreements because they are drafted by people who aren’t in Wisconsin and don’t know Wisconsin law, which is more restrictive than other states,” Lindner said.
“Other times, the agreements are old and haven’t been updated to conform with changes in the law, and they’re not worth the paper they’re written on,” Lindner said. “I see that all the time.”
Lindner said that many workers don’t realize they’re subject to restrictive covenants.
“People sign these things at the outset of their employment,” Lindner said. “They don’t even read them – they get a stack of documents and they sign them.”
“Then, down the road when they want to leave, a lot of people think it restricts them in ways that it doesn’t,” Lindner said. “Some people come to me at the outset of their employment and say, ‘My employer wants me to sign this,’ and they’re written terribly and they’re overbroad.”
Lindner said it’s important that an employer identifies the evil it’s trying to guard against by having a worker sign a non-compete agreement.
“What is the protectable interest?” Lindner said. “What kind of access to truly confidential information do these employees have? How are you protecting it? Let’s talk about the competitive landscape and work out something that’s narrow.”
But, in her experience, too few employers give their non-competes that kind of thought.
“They go for these one-size-fits-all agreements that courts don’t favor,” Lindner said.
Law of Non-competes in Wisconsin
In Wisconsin, non-compete clauses and other employment-related restrictive covenants are governed by
Wis. Stat. section 103.465.
Jeff M. Brown, Willamette Univ. School of Law 1997, is a legal writer for the State Bar of Wisconsin, Madison. He can be reached by email or by phone at (608) 250-6126.
The statute refers broadly to restrictive covenants and applies to non-compete clauses as well as non-solicitation clauses and non-disclosure agreements.
Lindner said that in some states, if a court finds that an employment-related restrictive covenant is unenforceable, it will redraft the covenant to make it enforceable. For example, a court may narrow the geographic scope of a non-compete clause.
But under Wisconsin Supreme Court precent, Lindner said, Wisconsin courts may not rewrite an employment-related restrictive covenant to make it enforceable.
“A lot of these decisions are very fact specific, so it’s often hard to create bright lines in these areas,” Lindner said. “Courts are going to look at what is the competitive advantage, are these time periods reasonable, is information obsolete in six months or a week? How long does it take to cultivate new customer relationships in this industry – can it be done in a month, or does it take a year?”
That reality, Lindner said, cautions against making an employment-related restrictive covenant any broader than it needs to be.
“It’s easier to enforce customer non-solicitations that are reasonably drafted than non-competes,” Lindner said. “Most judges don’t want to restrict someone’s ability to get a job.”
“But they will enforce customer non-solicitations because that’s where they realize the business spent time and effort to develop these customers, and the employee is just going to take them and cost them business.”
‘It’s a Hodgepodge’
Piefer said one goal of the proposed rule is to bring uniformity to the law of non-compete clauses.
“The FTC is trying to harmonize this area of the law across the country, because right now it’s a hodgepodge,” Piefer said. “What’s enforceable in Michigan may be very different than what’s enforceable in Wisconsin.”
Complicating matters, Piefer said, is the fact that some states ban types of restrictive employment covenants other than non-compete clauses.
“California is one of those jurisdictions where at least one court of appeals has said that even a customer non-solicitation clause violates one of their statutes.”
Piefer said the welter of conflicting state laws means extra work for multi-state companies and their attorneys.
“It takes a lot of time to learn and understand what you can and can’t do in other states,” Piefer said.
Rule’s Uncertain Fate
According to Piefer, one problem with the proposed rule is enforcement.
In the past, the FTC has banned consumer products it deemed dangerous, like jarts – metal-tipped lawn darts whose use led to a spate of injuries to children – and three-wheeled ATVs, which were prone to rollover crashes.
But non-compete clauses are different, Piefer said.
“Everybody knows what a jart is,” Piefer said. “Is the FTC going to go out and find all these agreements, and read them all? The enforcement side is just as tricky or trickier.”
Piefer said the proposed rule will almost certainly be challenged in court, should it become law.
“From what I’ve read, the U.S. Chamber of Commerce has already come out and said that in the event this rule passes in its current form, they will immediately file suit and I’m assuming there will be a request for injunctive relief to prevent the rule from taking effect.”
Even if the rule doesn’t become law, Piefer said the move to ban non-compete clauses is likely to proceed on a state-by-state basis.
She cited a law, similar to the proposed rule, recently enacted in Minnesota, and a similar law making its way through the New York legislature.
“The liberal jurisdictions may do what California and now Minnesota and possibly New York are in the process of doing,” Piefer said. “I think it’s further evidence of angst between the political parties.”