By Shelby A. Hicks-Merinar

The Biden administration has initiated numerous legal changes against employers, and most of you no doubt have been closely following the major disputes surrounding the federal COVID-19 vaccine mandates. Nevertheless, you shouldn’t sleep on seemingly more mundane matters that don’t attract the big headlines. One thing is certain for 2022: The coronavirus is here to stay. The fate of workplace noncompete agreements, however, is much less certain under the current administration.

Agreements ‘Unfairly Limit Worker Mobility’

Noncompete agreements serve a valuable purpose for employers. They provide peace of mind that an employee won’t take business or protected trade secrets to a competitor immediately after departure. Although the clauses have traditionally been used for professional employees and officers, they are now customary in most employment contracts.

In July, President Joe Biden issued an Executive Order (EO) encouraging the Federal Trade Commission (FTC) “to curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.” Among other measures, the order empowered the FTC to use its rulemaking authority to prohibit or ban the agreements between employers and employees to promote a competitive economy.

Traditionally, individual states have regulated noncompete agreements, and the somewhat cryptic EO doesn’t change their status. It’s clear, however, the administration has given the FTC the green light to scrutinize the agreements more closely than ever and strike them down if they unduly restrict worker mobility. And while it’s still unclear how extensively, if at all, the federal agency will reach into the agreements, the administration’s mission to curtail the use of noncompetes is part of a larger, growing trend among the states.

No ‘One Size Fits All’ Approach: Know Your State Law!

A noncompete clause’s boundaries—or whether it’s permitted at all—depend on the state you’re in. For example, California, North Dakota, Oklahoma, and Washington, D.C., now all largely ban the agreements except in very limited circumstances. Other states permit noncompetes to varying extents. Currently, the standard used by most states permitting the agreements involves a multifactor balancing test focused on “reasonableness.”

In West Virginia, for example, courts generally enforce noncompete agreements if they are:

• Supported by adequate consideration (i.e., something of value received in return for signing them);
• Ancillary to the employment contract;
• Limited in geographic scope and duration to what is reasonably necessary to protect the employer’s business; and
• Consistent with public policy.

Additionally, a court reviewing a noncompete clauses in the state is more likely to enforce an agreement protecting trade secrets than one seeking to guard customer contracts.

Likewise, in Kentucky, a noncompete is likely to be upheld so long as it’s reasonable in duration, geographic scope, and purpose. Similarly, North Carolina follows a careful balancing approach, although the state’s courts have found popular customer-based restrictions are unenforceable if they extend beyond the patrons with whom the employee had contact. Although South Carolina has no statute regulating noncompetes, its courts have clearly held the agreements will be disfavored, critically examined, and strictly construed against the employer.

In a nutshell, courts will often look to whether the noncompete’s terms are reasonably tailored to protect the employer’s legitimate business interests without being too restrictive against the departing employee’s right to find employment elsewhere. Case law in the individual states, however, will likely establish other unique parameters for enforceability.

Help from Courts Might be Limited

If a noncompete agreement is invalid because of its language or scope, some states allow courts to modify or narrow the clause to make it enforceable, a process otherwise known as “blue-penciling.” Here, too, state approaches vary quite a bit. Some states allow extensive blue-penciling to salvage an agreement while others permit very little.

Kentucky. Case law setting the state’s standard appears to place very little restraint on the court’s ability to reform an overly broad noncompete.

West Virginia. Courts will modify a noncompete to make it enforceable as long as the agreement is facially reasonable and appears to have been made in good faith.

North Carolina. State courts also use a more limited blue-penciling approach: Overbroad portions of a noncompete can be severed or deleted, but the court won’t rewrite the agreement to make it enforceable.

South Carolina. Its state courts won’t be so generous. If a noncompete isn’t facially valid, they won’t use the blue-pencil method to make it so, but they may replace an overbroad territorial restriction with a narrower one.

In sum, courts can sometimes save a defective noncompete agreement, but it’s not a guarantee.

Bottom Line

Although most states have historically permitted noncompete clauses, President Biden’s EO and the trend from several states forecast a possible sea change. If you’re drafting a noncompete in 2022, be sure to stay up to date with the applicable state laws and the possibly shifting legal analyses defining valid agreements.

As a general matter, make sure your noncompetes are reasonable and not too restrictive on the employee’s right to secure future employment. Particularly in light of the EO, a covenant that goes beyond what is reasonably necessary to protect your organization’s legitimate interests will be at risk of being invalidated.

Shelby Hicks-Merinar is an attorney with Steptoe & Johnson PLLC in Morgantown, West Virginia. Shelby has advised clients and defended them in matters involving sexual harassment, wrongful discharge, disability, and age discrimination, as well as day-to-day human resources management. You can reach her at shelby.hicks-merinar@steptoe-johnson.com.