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Wall Street Journal Notes Growing Clouds Over Restrictive Covenants

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Harriett Torrey of the Wall Street Journal wrote on Monday of this week that there is a growing backlash against employers getting in the way of workers quitting jobs for better offers and to secure a better living.

There are two very strong public policies at war here.  One is that there should be no barriers to job-hopping, which if unrestrained could facilitate greater wage growth as employers compete for a shrinking supply of workers.  The counter-argument and policy opposed to that is that employers make a substantial investment in many of their employees beyond mere wages, and in many cases repose confidential and even trade secret information with them that, in the hands of their competitors, could cause great harm.  And of course, the sanctity of contract in a free marketplace weighs heavily in favor of allowing restrictive covenants. Traditionally, employers have used restrictive covenants like non-compete and confidentiality agreements to protect company secrets available only to the higher paid employees like executives, scientists and even lawyers.

More recently, restrictive covenants have been required of more generic workers, whose knowledge of company secrets may be limited only to customer lists and business practices that may not be all that secret.  California, Oklahoma and North Dakota have had a statutory bar against non-compete agreements except in limited circumstances, but other states like New Hampshire, Washington, Hawaii, and Utah have enacted legislation in the last few years limiting an employer’s ability to restrict the employment of its former employees.  Particular employers, too, have been targeted by states.  New York and Illinois recently obtained a concession from WeWork Cos to limit its practice of requiring most employees to sign non-compete agreements.  Jimmy Johns, too, entered into a similar agreement.

Ms. Torrey noted the findings of some economists that states continuing to enforce restrictive covenants experience slower economic growth.   The growing tide of sentiment against restrictive covenants will force employers to weigh their value against the risk of losing a prospective employee to a competitor that does not require such covenants.  In these very fluid and changing circumstances, the necessity of employers’ obtaining competent legal advice in both formulating and enforcing restrictive covenants is not a one time thing.  It’s a continuing concern.