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The Federal Trade Commission building in Washington
The Federal Trade Commission has been particularly aggressive in the Biden administration trying to rein in the power of large companies. The Federal Trade Commission building in Washington is pictured on Jan. 28, 2015. (AP file photo)

Perspectives: Noncompetes, NDAs, nostrums, and nonsense

Marshall H. Tanick

Marshall H. Tanick

Noncompetes can be “a form of industrial peonage without redeeming value in the American enterprise system.”

Eutectic Welding Alloys Corp. v. West, 281 Minn. 13, 160 N.W.2d 566 (1968)

Fulfilling an obscure campaign promise, President Joe Biden had his administration roll out a proposal two months ago to effectively ban noncompete agreements in workplaces throughout the country. 16 C.F.R. chapter I, §910 (Jan. 5, 2023). It is one of a trio nostrums recently propagated at the federal level impacting laws and practices in the workplace.

The noncompete initiative was made in early January in a 3-1 vote by the Federal Trade Commission (FTC), an agency that has been particularly aggressive in the Biden administration trying to rein in the power of large companies. The commission’s chair, Lena Khan, is a longtime critic of these restrictive arrangements, which limit employees from moving from one job to another or starting their own that competes with a former employer.

The customary 60-day rulemaking period to accept public comments expires Friday, March 10, prior to further deliberations and probable adoption by the agency. That will precede the inevitable litigation by employers or their affiliated organizations challenging the measure, which may well last for years with an outcome that will have substantial impact here in Minnesota.

Fast-food frenzy

These limiting devices have been around for a long time, dating back to the horse-and-buggy era in Minnesota in the late 19th century. But they have bugged employees and their advocates as they have taken on additional impact and become more prevalent in recent years, especially with the growth of the high-tech industry.

But the restrictive instruments are not confined to that field: Some estimates indicate that anywhere from 20% (according to the FTC) to as much as 45% of the workforce is subject to some form of post-employment restrictions, although the actual figure is probably closer to the lower number than the higher one. Nonetheless, they are pervasive, and many say perverse, among sales personnel, customer service representatives, medical and scientific personnel, and even fast-food employees, among others.

The latter caught the attention of Congress about a decade ago, when a frenzy of criticism was accompanied by proposals were circulated to limit the use of noncompete agreements for low-income fast-food workers, championed by then-Sen. Al Franken of Minnesota.

The proposition, however, did not get very far at the federal level, although some states, such as New York, did impose restrictions on the use of noncompetes for many fast-food employees and other low-level personnel. But they remain widely used elsewhere, including here in Minnesota, affecting those in mid-level and higher-income ranges.

Salary suppression

The FTC action, stemming from one of a pair of nostrums that have formed the bases for recent federal measures, comes at an opportune time for employees as many large companies prune payrolls that rapidly expanded during the COVID pandemic lockdown and afterwards. Amazon, for instance, announced at the beginning of the year that it would cut 18,000 positions, a sizeable number, but a mere drop in its 1.5 million global workforce bucket. Disney followed with laying off 4% of its workers; another large entity, Sales Force, announced it was laying off of about 8,000 employees, 10% of its work force at the beginning of the year; Google and Microsoft chopped large portions of their workforces. Others have done so or will do so soon, including some of the Fortune 500 and other large, mid-size and small companies here in Minnesota, particularly in the Twin Cities area.

Minnesota matters

Minnesota has long been one of the jurisdictions that does not have any statutory provisions specifically regarding noncompetes. The applicable rules and guidelines have been developed through common law cases decided at various levels of the judiciary, which often are varied and somewhat inconsistent among tribunals.

Efforts in Minnesota have failed to enact uniform statewide laws regarding noncompetes, which exist in many states, such as neighboring Wisconsin, Wis. Stat. § 103.465. The attempts here have not been successful, largely due to opposition from the business community. But now, if the federal proposal goes into effect, state legislation might be considered superfluous, although it still could be desirable to flesh out various provisions not contained in the proposed federal prohibition.

But that lacunae in Minnesota law may soon be filled. Two companion bills, sponsored by DFLers, who hold majorities in both legislative chambers, are pending this session. They would radically alter noncompete law in this state, as reported in this publication last month. See “Renewed effort to ban noncompetes” in the Feb. 2, 2023, edition of Minnesota Lawyer. The measure, H.F. 295 in the House of Representatives and parallel S.F. 405 in the Senate, would limit noncompetes to middle- and high-level wage earners and also require them to be paid one-half of their pre-termination compensation while under a noncompete restraints.

Prospective implementation of the FTC ban, along with enactment of the Minnesota measure, could lead to the rather nonsensical situation of Minnesota permitting some form of noncompetes that are proscribed under Federal law, a dichotomy that will need some ironing out in the spirit of federalism.

Minimizing mobility 

The FTC and DFL Minnesota lawmakers regard these instruments, usually entered into as the beginning of an employment relationship, as overly restrictive of employees’ ability to their leave jobs to join a competitor or start a competing business for some period of time after their employment ends. That affects not only those who are subject to noncompetes, but also other workers, who face a depressed wage scale. Critics also say noncompetes make the hiring process more costly for employers, especially small ones, who must spend more time and money deciding which candidates they can and cannot hire.

The FTC estimates that banning noncompetes could increase wages by nearly $300 billion a year, particularly with hikes likely in those states that currently find them to be enforceable as written or with some limitations. Minnesota is one of them, which generally is in the middle ground between states that allow noncompetes with very few limitations and some states, such as California, Oklahoma, and North Dakota, that effectively bar them altogether.

Minnesota subscribes to a few limitations, requiring that they be entered into at the beginning of the employment relationship or, if later, for a new consideration, usually some kind of wage emolument; that they are limited in geographic scope to the legitimate interests of the employer; and that they are “reasonable” in duration, usually based upon the amount of time that an employer would need to replace the departing employee.

Despite the scornful language in the Eutectic Welding case referenced above, Minnesota courts have generally upheld reasonably constrained noncompetes if they satisfy the state common law criteria — such as independent contracting unless entered without consideration at the outset of the employment relationship. Freeman v. Duluth Clinic, Inc., 334 N.W.2d 626 (Minn. 1913). E.g. Bennett v. Storz Broadcasting. Co., 270 Minn. 525, 134 N.W.2d 892 (1965); West Pub. Co. v. Fosshage, 426 N.W.2d 445 (Minn. Ct. App. 188). A few twists include the “blue pencil” rule allowing agreement modifications, unlike the all-or-nothing of Wisconsin law. See Head v. Morris Veterinary Center, Inc., 2005 WL 1620328 (Minn. Ct. App. July 12, 2005)(unpublished); (reduced from 3 years to six months). See also Dean Van Horn Consulting Assn. v. Wold, 395 N.W.2d 405 (Minn. Ct. App. 186) (three years sliced to one year).

Additionally, attorney fees may be awarded for tortious interference by a new employer who hires employees with existing valid noncompetes. Kallok v. Medtronics, 57 N.W.2d 371 (Minn. 1998). See also Hagen v. American Agency, Inc., 2000 WL 1577094 (Minn. Ct. App. Oct. 17, 2000)(unpublished). The courts here also tend to be more permissive in upholding longer durations for noncompetes in connection with a sale of a business than in employment relationships, recognizing the more equitable bargaining in those transactions than in the workplace. See Kunin v. Kunin, 1996 WL 486814 (Minn. Ct. App. July 13, 1999)(unpublished).

Many of these Minnesota proceedings are commonplace in state or case law in other jurisdictions, although the laws do vary from state to state.

Disclosure dilemmas

The pending FTC noncompete ban comes in the milieu of two major federal initiatives that substantially change long-standing workplace relationships and law.

One is the Speak Out Act, 42 U.S.C. § 19401-04, enacted with some bipartisan support and signed by President Biden on Dec. 7, 2022. The measure, which had been in the congressional pipeline for a while, establishes various limitations on use of nondisclosure agreements (NDAs) in connection with settlement of some workplace claims.

The law, long-advocated for by employees and their advocates, was sparked by the #metoo movement five years ago and materialized in the federal law proscribing use of the provisions that forbid employees from discussing settlements of their claims and the amounts they receive for them, proscribing use of these devices to shield scrutiny of their employment practices.

These devices are widely used throughout the country, with very few restrictions. Minnesota law has not imposed any significant restraint on their use, either by case law, statutes or otherwise.

The federal proscription late last year was supplemented a couple of weeks ago by a ruling of the National Labor Relations Board (NLRB), the agency that governs and oversees a large swath of management-labor relations in most of the private sector. In McLaren v. Macomb, 72 NLRB 58 (Feb 21, 2023), the board proscribed “gag” provisions in severance agreements that forbid employees, often subject to designated liquidated damages, from making post-employment disparaging statements about working conditions or discussing the terms of their settlements.

Now in Democratic control, the agency overturned a pair of contrary Trump Era 2020 decisions that refused to bar these provisions. The NLRB edict, sure to be subject to considerable litigation, would render these restrictions unenforceable because they are “unlawfully coercive” and impede the ability of employees to exercise their rights or actually engage in statutorily “protected” forms of “concerted” actions to bolster workplace rights under the National Labor Relations Act, 29 U. S. C. s. 151-169, particularly those encompassed with Section 7 and Section 8(a) of the measure.

The ruling, if followed, could effectively bar most nondisclosure arrangements, sweeping more broadly than the narrower harassment/assault prohibitions in the Speak Out law.

Boon or bane

Both of these noble appearing measures seem to be boons to employees and, for that matter, the attorneys who represent them. But they have some nonsensical features and imperfections that may amount to banes within the workplace.

Despite their onerous characteristics, noncompetes do provide benefits to the economy. Without them, employers might be more hesitant to hire high-level employees or place them in sensitive positions or customer centers, or provide training to them, for fear that they will leave and take their expertise with them elsewhere to a competitor. They also provide a degree of stability in the workforce, albeit at the expense of depressing wages.

NDA’s have taken their share of beatings and beratement, highlighted by the raising of them as an issue in the 2020 Democratic primary campaign against Michael Bloomberg, who was mutilated in one of the televised debates by Massachusetts Sen. Elizabeth Warren for his widespread use of them in his business activities prior to becoming mayor of New York City. His candidacy had many other problems, including his long-standing status as a Republican, but the NDA imbroglio effectively ended his candidacy.

Echoing Warren, other critics have pointed out deficiencies of these arrangements: They prevent the public from knowing about misconduct and prohibit the victims from speaking out against them, which ultimately allows it to persist without public scrutiny. That’s not only for workplace abuses, but also for product liability and other matters.

Yet, like noncompetes, NDAs have their benefits. For employers, they dispense with dubious claims, which may have been settled for a variety of practical reasons. The devices also can prevent exposures that would open the flood gates for a torrent of other litigation.

They can be beneficial for employees, as well. Employers often will pay extra consideration in order to secure the secrecy they seek; by the same token, they may be less inclined to settle cases without the protection of an NDA.

Indeed, the trio of new federal measures may all have a deleterious effect in compensation for employees. Restrictions on deploying noncompetes may cause employers to pay less to employees in sensitive positions in whom they have less confidence will be long-term employees, although the prohibition of noncompetes may have a contrary effect of raising wages by employers for fear of losing employees to competitors. The NDA restrictions and related NLRB proscription of “gag” clauses could reduce the amounts that employers are willing to pay to settle claims since confidentiality and nondisparagement often are major features that induce employers to pay departing employees.

For employees, and their lawyers, an NDA may be a pragmatic way to obtain the compensation and fees they seek. Many employees actually desire the confidentiality afforded by an NDA to shield their own privacy and to prevent others like relatives, creditors, divorcing spouses, or other prospective employers from knowing about their claims or lawsuits and the amount they received as a result of them.

Legal limitations

The banning of noncompetes and NDA’s may also raise legal issues that could limit the effectiveness of these measures. Both of them involve issues that are quintessentially matters of state law and have not previously been addressed at the federal level, an intrusion on the “laboratories of democracy” concept that permeates federalism. See Nev. State Ice Co. v. Liebmann, 285 N.W.2d 262 (1932) (Branders J., dissenting).

Had they been enacted at state levels, they may run into the claims of unconstitutional under the “impairment” of contract provision under Article V of the U.S. Constitution, which proscribes government actions that impose an “impairing the Obligation of Contracts.” But that provision only applies to the federal government and not to states, although the new law may be subject to various other limitations, such as Due Process considerations, and state law restrictions on retroactive contractual modifications in contractual or other arrangements, concerns are exemplified in the landmark case from Minnesota, Home Building & Loan Association v. Blaisdell, 290 U.S. 398 (1934), which recognized the constitutional provision but provides that it can be overcome in certain “emergency” situations or for other dire needs.

But apart from legal challenges, there are other “speak out” provisions that seem nonsensical, reflections of legislative compromise. The measure is limited on many grounds. It is restricted to harassment and related assault claims, which is understandable, but inapplicable to a vast number of other workplace-related abuses.

Moreover, it only applies to agreements that are entered into before the offensive behavior occurs, and not afterward. But relatively few employers and employees enter into these agreements prior to an incident. Because they generally arise after an incident occurs, the law, by its terms, would not seem to cover most of these devices.

Additionally, the law purports to extinguish existing NDAs, which will undoubtedly inspire litigation challenging retroactive changes to pre-settlement agreements, even if the constitutional provision does not extend to federal measures.

Both prohibitory measures, noncompetes and NDAs, may, of course, be subject to modification or elimination depending upon the political climate. Changes in administration could, at some future date, result in a rollback of the noncompete proscription. Likewise, a change in political control of both houses of Congress and a Republican in the White House could conceivably result in eliminating or diluting the NDA prohibition.

But those are long shots and unlikely to occur in the immediate future and, perhaps not at all. Thus it is probable that the bans on noncompetes and NDAs, are likely to persist, both as boons and banes for employers and employees in the workplace, mixed in with a bit of nonsense, too.

PERSPECTIVES POINTERS

Some grounds to challenge noncompetes

  • Not in writing
  • Vague terminology
  • Lack of “Independent consideration”
  • Broad geographic restraints
  • Excessive duration

Marshall H. Tanick is an attorney with the Twin Cities law firm of Meyer Njus Tanick.

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