In January 2023 the FTC proposed a nationwide ban on non-compete provisions in the workplace — but details may change and the process will take a while to play out. In the meantime, many companies still are trying to restrict the job options of their former employees. How can you fight back?
This article by
TELG managing principal R. Scott Oswald was published by The Employment Law Group, P.C. on January 25, 2023.
Five Steps to Fight a Non-Compete Agreement (While the FTC Tries to Make Them Illegal)
By R. Scott Oswald
IMPORTANT: The following article is intended as a general summary of facts and law and not as individual legal advice upon which you should rely or act. Every case is unique and specific. This article represents our firm’s best knowledge as of January 2023.
It’s the last thing you need as you contemplate a new job: An official-sounding letter from your old employer, threatening to enforce a non-compete agreement from years ago.
Are they serious? OK, so you signed some long-forgotten boilerplate document when you started that old job — but could it really endanger the shiny new position that you’ve just been offered, or even started already?
The short answer: Maybe so. And you’re not alone.
About 30 million people in the United States are subject to a non-compete agreement that purports to restrict the work they can do after leaving a job, often by forbidding their employment by rival companies or even in a whole industry. Such contracts may depress workers’ earnings by almost $300 billion a year, according to the U.S. government — even if, as is often true, the restrictions wouldn’t stand up in court.
Non-compete provisions may soon be outlawed entirely: The Federal Trade Commission recently proposed a nationwide ban after officially finding that non-compete clauses are — surprise, surprise — anti-competitive and thus harmful to the U.S. economy. If finalized in its current form, and if it survives court challenges, the FTC rule would require employers to rescind all existing non-competes.
Local governments have been acting, too: The District of Columbia, for one, recently outlawed most non-compete provisions signed after October 1, 2022, with some carve-outs. California also forbids such agreements with only a few exceptions, as do North Dakota and Oklahoma. Maryland and Virginia both recently banned non-competes for “low-wage” workers, a term that’s defined differently in each state. And even where some non-competes are legal, courts have strict standards for enforcing these “restrictive covenants” in employment.
Nonetheless, as we wait for the FTC’s nationwide rule-making process to play out, many employers continue to threaten their former workers with the enforcement of a non-compete — often at a time when those employees are vulnerable and conflict-averse, as they’re starting (or negotiating for) a new job.
It’s intimidating, but a smart response is possible. Here’s a five-step guide to handling to a non-compete inquiry from your old employer, in ascending order of escalation. Depending on the situation and your comfort level, you may even be able to hit back with legal claims against your former company.
Hopefully the FTC’s new rule will make this entire discussion obsolete — but for now, at least, non-compete disputes remain tricky to navigate.
Step One: Understand the Legal Situation
Before you’re trapped between two employers, neither of which truly cares about you, you’ll need some independent advice.
The law of non-competes is complicated and varies significantly from state to state. A good employment lawyer can help you to understand:
- Whether your non-compete agreement is likely to be enforceable;
- Whether it’s likely to apply to your specific situation;
- Some solutions that your old employer might settle for; and
- Some possible next steps.
Expect a lawyer to tell you the strengths and weaknesses of your situation, and to recommend a path forward. In California, it could be as simple as sending a reply to your old employer noting that it can’t enforce a non-competition agreement. In other states it may be a lot harder.
Step Two: Loop In Your New Employer
If your previous employer is aggressive, or just boneheaded, it may approach your new company and claim that your employment there is illegal. It could even demand that you be fired — or that you not be hired, if you’re still negotiating.
Such a demand can be illegal, as we’ll discuss below. Regardless, you don’t want it to come as a surprise to your new boss. With a lawyer’s advice, therefore, you should consider making a preemptive disclosure that’ll serve as damage control.
Among the things you might decide to tell a new or prospective employer:
- That you previously signed a non-compete — plus the reasons you didn’t mention it before, if appropriate;
- That you’ve heard from your old employer, if that’s the case;
- The specific behavior that’s supposedly forbidden by the non-compete (and maybe the text of the agreement itself);
- Your attorney’s opinion on the applicability and enforceability of the agreement;
- The provisions of any other agreements that are relevant, such as confidentiality and non-solicitation pacts;
- Any trade secrets from your old employer that you won’t be allowed to use in your new job, or any clients you can’t contact; and
- Your plan for moving forward.
If you haven’t yet been hired and your skills are very valuable, your new company might offer to indemnify you — that is, to cover any money that your old employer might (but probably won’t) win in court. It might even agree to litigate any dispute for you, though you’d need to discuss that option with your lawyer.
A more common outcome, we’ve found, is that your new employer will acknowledge the heads-up and stand aside while you handle the matter.
NOTE: There’s a non-zero chance that your new company will overreact and terminate your employment, particularly if your new job has a probation period. Similarly, a job offer might be retracted or delayed when you disclose a non-compete. This is why you should act only after getting a lawyer’s individualized advice: You may want to postpone your disclosure. Your new employer might think that you’ve concealed the dispute, however, which could be even worse.
Step Three: Negotiate with Your Old Employer
Often an old employer isn’t really trying to prevent you from working at your new job. Instead, it might be satisfied with some common-sense assurances about what you will (and won’t) do at the new workplace — a watered-down version of the non-compete that both parties can live with.
In such cases, the threatening letter you received is just an invitation to negotiate a new deal.
Truth is, most companies won’t risk a full-on legal fight over a non-compete. Why? Like the rest of society, many courts disfavor these so-called “agreements,” which are often one-sided, formed under duress, and bad for society. Suppose a judge were to find that your specific non-compete is unenforceable: That’d set a precedent that could torpedo similar agreements between your old employer and all the other employees it’d like to keep intimidating.
You’re not the only party with something to lose here, in other words.
What assurances can you offer an old employer? You should consult with your lawyer, and maybe also with your new employer, but your options might include an agreement not to work directly with a very limited list of top clients, or on a very specific type of project, or in a very specific geographical area. You also could offer to add new restrictions — an agreement not to recruit a few named stars at your old company, for instance, if you didn’t already sign such a document.
If you can stomach such measures, you also might offer to make a longer commitment than the duration of your previous, possibly non-enforceable agreement: Three years instead of one year, for example.
In our firm’s experience, many employers will welcome a deal like this. With a lawyer’s help, the dispute can end with an agreement that allows you to move forward in your new job.
Step Four: Strike the First Legal Blow
Sometimes your old employer won’t even come to the negotiating table, or it’ll bargain but then refuse to make a deal. This might happen if you left the company on bad terms, for instance, or if your former company is getting bad legal advice. Once a fight becomes inevitable, you can ask your attorney to strike first.
Going to court is a serious matter, and it can be expensive and risky. On the other hand, your only alternative may be to abandon your new job — and maybe to put your entire career on hold. A lawyer can help you weigh the options, but litigation may be the best path. And if it is, you’ll want to control the narrative yourself.
There are two main scenarios here.
SCENARIO A: Your old company has never contacted your new employer
In this situation, you can file a motion for declaratory judgment. In essence, you’ll ask a court to tell your old employer that its non-compete agreement is invalid and can’t be enforced. In general, the burden will fall on your old employer to prove that the provision is valid.
Laws vary from state to state — with some outlier states banning non-competes very broadly — but judges generally will weigh the scope of a non-compete to see whether it’s too harsh or otherwise harms the public’s strong interest in protecting free competition. The more employment opportunities that an agreement shuts down for a former employee, the less likely a judge will allow its enforcement.
Scope can refer to a few things, including:
- DURATION. In general, the longer a period for which a former employee is supposedly restricted by a non-compete, the less likely a court will find the agreement to be enforceable.
- GEOGRAPHY. In general, the wider an area in which a former employee supposedly can’t seek work, the less likely a court will find the agreement to be enforceable.
- JOB ROLES. In general, the more types of employment that are supposedly forbidden to a former employee, the less likely a court will find the agreement to be enforceable — especially if the employee is trained only for those types of work.
- COMPETITORS. In general, the more specific companies that are supposedly off-limits to a former employee, the less likely a court will find the agreement to be enforceable.
Judges also look at the clarity of an agreement: If it’s ambiguous in its terms, it may be found to be invalid. Other factors may include whether the agreement serves any legitimate business purpose — non-competes for highly skilled or heavily trained employees could make sense, for example, while restrictions on entry-level workers usually don’t — and whether your old employer usually enforces its non-competes, or is just picking on you.
When it comes to non-competes, enforceability can be all-or-nothing affair. Depending on the state, judges may not be free to “blue pencil” the agreement by modifying or deleting unfair terms; instead, a single bad provision may kill the whole non-compete.
By striking first legally, you’ll put your old employer on the defensive and hopefully bring it to the bargaining table. The fight also could escalate, however. Your old company may file counterclaims against you, for example, and broaden the legal battleground. Plus your new employer will likely learn about the dispute, and may get dragged into it — so you should inform them now, if you haven’t already.
In short, consider all the possible outcomes and act with your eyes open. But remember: You may end up in court even if you don’t act first.
SCENARIO B: Your old company HAS contacted your new employer
In this situation you probably should still file a motion for declaratory judgment, as above, but you also can consider filing a claim of “tortious interference” — especially if your old employer has sent a demand letter to your new company asserting that you can’t legally work there. (Doubly so if its action caused your firing or some other harm.)
Tortious interference happens when a third party, here your old employer, intentionally damages a valid business relationship between two parties, here you and your new company. The details and terminology of the claim vary by state, but it’s available nationwide in some form, including in D.C., Maryland, and Virginia.
In very broad strokes, and depending on the jurisdiction, you must meet these conditions to prevail:
- You must have a valid contractual relationship or business expectancy with your new employer. This likely depends on your noncompete being found unenforceable.
- Your old employer must know of the valid relationship or expectancy. This likely means that your old employer knew (or, more likely, should have known) that its non-compete was unenforceable.
- Your old employer must actually and intentionally disrupt the relationship.
- You, as the plaintiff, must have suffered some damage as a result.
In Virginia you’ll need to prove that disruption was your old employer’s primary goal — and other states may add other wrinkles.
Adding a claim of tortious interference raises the stakes for your opponent and gives you a path to monetary damages. Like any legal maneuver, it could cause your former employer to look for a quick and easy solution, like a settlement.
However, your old company might also dig in its heels. And your new employer will likely get dragged in, too, affecting your work situation. Again, discuss the risks and rewards with your lawyer.
Step Five: Defend Yourself Vigorously
Regardless of whether you strike the first blow, any court battle will likely include a claim by your old company that you shouldn’t be allowed to violate your non-compete agreement. Besides saying that the agreement was never valid, which you certainly should do, how else can you defend yourself?
Because your old employer is likely seeking an “equitable” remedy — it wants a judge to order you to act a certain way — legal doctrine requires it to make the request with “clean hands.” In other words, it can’t have acted wrongfully itself in relation to the matter being litigated.
Has your old employer previously wronged you in any way? For instance, did it fail to pay you some money it owed you; or allow you to endure workplace harassment or discrimination; or penalize you unfairly for raising concerns about lawbreaking; or unilaterally change your terms of employment? If so, your attorney can help you to assert an “unclean hands” defense that could cancel even an otherwise valid non-compete agreement.
FREQUENTLY ASKED QUESTIONS
Q: Does the recent action by the FTC mean that all non-compete agreements will soon become invalid forever?
No. As of January 2023, it’s just a proposed rule from the FTC — the final rule could be different. Lots of employers and trade groups are lobbying for changes or even a total withdrawal. Also, there are some exceptions to the proposed rule, although they’re narrow right now. And even assuming the rule becomes final in its current form, it’ll likely be challenged in court. An injunction could delay its implementation for an indefinite period.
What’s more, any finalized rule will never be the same as a law: It’ll be a product of the Biden-era FTC and could be changed or reversed by a future commission via the same rule-making process. Plus the rule could be overridden by a statute that’s passed by the U.S. Congress and becomes law.
In short, this proposed FTC rule is very promising for employees who want more freedom — but things still could go backwards, even after the rule is finalized.
Q: Does the FTC’s proposed rule invalidate non-competes that were already signed?
In the form it was proposed, yes. But again, there are some narrow exceptions to its coverage.
Q: How about the new D.C. non-compete law — is that one retroactive?
No, it applies only to non-compete agreements that are signed from October 2022 onward. The D.C. law still allows non-competes for certain types of employee, including medical specialists. Previous agreements aren’t affected but can still be challenged in court.
Q: My non-compete provision — or the larger agreement that governs it — says it’s made under Maryland law (or Virginia law, or D.C. law). Does the state law make much difference, in practice?
Every state has a different body of law on the enforceability of non-competes, both via its statutes and via the rulings of its courts. For states where non-competes aren’t broadly banned, the general considerations are outlined in Step Four, above. Still, they may be phrased differently and balanced differently from state to state. Below are quick thumbnails of non-competition law in Maryland, Virginia, and D.C. Other states have a similar range of variations.
Non-Compete Law in Maryland
Non-competes can’t be enforced against low-wage workers, who are defined as people earning $15 per hour or less. Otherwise, courts generally limit enforcement of non-competes to employees who provide unique services. An agreement’s provisions must be narrow in scope, must legitimately protect the business of the old employer, and can’t impose undue hardship on the employee or harm the public interest.
Non-Compete Law Virginia
Non-competes can’t be enforced against low-wage workers, who are defined as people earning less than the state’s average weekly wage or, for independent contractors, less than the state’s median hourly wage. Otherwise, non-competes are disfavored and can’t be enforced unless they are “reasonable”: No more restrictive than needed to protect the old employer’s legitimate business interest, not unduly burdensome on the employee’s ability to earn a living, and consistent with sound public policy.
Non-Compete Law in D.C.
Non-competes are enforceable only if they’re not “unreasonably” in restraint of trade. The analysis is generally similar to Maryland and Virginia, looking first at whether your old employer has a legitimate interest in restraining your options — and second at whether your resulting hardship outweighs that interest. As always, the scope of the non-compete provision is crucial.
Q: Can a lawyer tell me immediately whether my non-compete is legally enforceable?
Sometimes. If it falls under a category that is prohibited by statute — signed after October 2022 in D.C., for example, or covering a low-age worker in Maryland, or covering virtually anyone in California — then the answer may be pretty clear.
Otherwise, it’ll probably take some research to form an opinion. Courts decide enforceability case-by-case, and your lawyer will likely be looking for examples of agreements that are similar to yours and were found to be invalid. If there are some strong examples, especially in your jurisdiction, you’ll stand a good chance of success.
Your old company’s lawyers will do the same research, however, and they might reach an opposite conclusion. If you can’t resolve the dispute, a judge may need to decide. A court’s opinion usually marks the end of the debate, although appeals are possible.
Q: My non-compete agreement says I must settle any dispute via individual arbitration rather than in court. Does that change things?
It depends. Some forced arbitration clauses are themselves illegal. And if your non-compete is clearly unenforceable, it probably doesn’t matter much either way. Otherwise, an arbitration provision may give your old employer an incremental edge: Because arbitration is usually secret and doesn’t set a legal precedent, the company will be less scared of a fight.
What’s more, arbitration results can’t be appealed and may tilt unfairly toward employers — something that shouldn’t be true, since the same law applies. According to a recent study, however, employees win only two percent of employment-related arbitrations.
This doesn’t mean you need to buckle under, however. Talk with your lawyer about your individual situation. After all, your livelihood may be at stake.
Also, the FTC may be riding to your rescue — eventually.
R. Scott Oswald is managing principal of The Employment Law Group, P.C., a law firm that represents employees in disputes with their employers.