Corporate (Mis)Use of Non-Compete Agreements as Insurance Against Ex-Employee Claims

Around 2010, non-compete abuse in America reached peak absurdity. As I have explained many times: This was a a product of the following factors: (1) The internet and the information age. (2) Widespread availability of copy and paste non-compete agreements. (3) Corporate lawyers pushing aggressive use of non-compete agreements as a revenue generation tool. Make money drafting the non-compete. Then make money encouraging clients to file non-compete lawsuits, no matter how absurd. (4) Judges who do not apply the proper legal framework (i.e. antitrust).

Against this backdrop, there was an explosion in (a) use of non-compete agreements and (b) non-compete litigation. Eventually, certain states reached a point where nobody is safe from non-compete abuse. In a non-compete happy state like Florida, it is tragically common to see janitors, security guards, factory workers, pre-school teachers, and even foster parents with non-compete agreements. I’ve gone over this in dozens of articles, videos, blog posts, and interviews. I won’t rehash all of that here. The upshot: Non-compete agreements have become ubiquitous. They exist at every level of every industry. Companies routinely abuse non-compete agreements. And contrary to popular belief, poor and working people are routinely victimized by non-compete abuse. This is the background. Now, I’ll get to the point of today’s discussion.

When companies aggressively use non-compete agreements, their motivation generally has nothing to do with preventing unfair competition. Let’s be clear about what unfair competition means: Unfair competition basically means that an employee had access to something truly top secret, proprietary, valuable, and otherwise unavailable to competitors in the industry. Then left Company A and used that information to the advantage of Company B. I have seen thousands of non-compete agreements. I only see the potential for unfair competition less than 10% of the time. Otherwise, companies routinely use non-compete agreements to restrain ordinary competition.

That’s bad enough. But the reality is far worse: Companies are using non-compete agreements to prevent departing employees from asserting their rights. Non-compete agreements have basically become a preemptive strike – and leverage – against lawsuits by former employees. Let me unpack this:

Departing Employees & Common Litigation Risks

When an employee separates from a company, the company always has a number of legal risks. Among these risks:

• If the separation was involuntary, the company is at risk under any applicable discrimination statute. Eg: Title VII, ADEA, ADA.
• If the separation was involuntary and the employee engaged in any conduct that arguably constitutes whistleblowing, the company is at risk under various whistleblower statutes and/or under state public policy.
• If the company spread falsehoods about the employee or the employee’s reasons for departure, the company is at risk for defamation/false advertising.
• If the company failed to pay the employee agreed upon compensation/bonuses, the company is at risk for breach of contract.
• If the Company failed to pay overtime/minimum wages as required by law, the company is at risk for a wage theft lawsuit under the Fair Labor Standards Act and corresponding state law.

Knowing that non-compete agreements have become normalized, and that many courts treat non-compete agreements as ordinary contracts, companies have seized this opportunity to use bogus non-compete agreements as leverage. Here’s an example:

Unenforceable Non-Compete Agreements as Insurance

A janitor (Joe) leaves one cleaning company (Company A) for another cleaning company (Company B). He doesn’t take any customers or customer information. He just goes to work for another cleaning company and performs work for their existing clients. Company A has never paid Joe legally required overtime. Under the FLSA, Company A easily owes Joe $5,000 in unpaid wages plus attorneys’ fees. This is one of the reasons why Joe left. So, Company A writes Joe or Joe’s lawyer and says: Joe is violating his non-compete agreement. We’re going to sue him for breaching his non-compete and seek an injunction. So he’ll be out of work. Plus, we’ll seek our attorneys’ fees. He can be out of work and bankrupt. OR, Joe can agree to waive his FLSA claim and we’ll waive our non-compete claim.

The harsh reality: Joe cannot afford a lawyer to defend him in the non-compete case. And there are very few lawyers out there who will (a) represent poor people in non-compete cases pro bono or (b) represent poor people in non-compete cases on a contingent-hourly basis. Basically, Joe is screwed. In some jurisdictions, courts quickly throw cases like this out — because such cases are absurd. In other jurisdictions, like Florida, non-compete agreements have become so normal – even for poor people – that courts feel constrained. In New York, I think it’s highly likely that a court, at its first opportunity, is going to throw out a non-compete case against a janitor, factory worker, security guard, etc. In Florida? I would be shocked if that ever happened. In pro-non-compete jurisdictions where non-compete abuse is rampant and normalized, courts tend to treat every non-compete claim as if it is plausible. Upshot: If Joe is in a place like Florida, it’s highly unlikely that the court is immediately saying, “The defendant is a janitor. This is completely unenforceable.”

So, instead, Joe is going to be faced with defending himself in litigation over the course of several months or longer, a potential injunction, and total financial ruin. What happens? Joe agrees to waive all of his claims for unpaid wages/overtime if the company releases him from the non-compete agreement. The outcome: Company A robs a poor person of $5,000+ in wages and gets away with it by leveraging a bogus non-compete agreement.

This is commonplace. I have been involved in more than 1,000 non-compete matters (ranging from reviewing non-compete agreements to mediation to litigation to appeals). And I see this all the time. I have seen a company egregiously violate an employee’s rights, then escape millions of dollars worth of exposure by leveraging a bogus non-compete agreement. How is that possible? Because people have to survive. People have to pay rent and buy groceries. Try getting a job when your former company is threatening a non-compete lawsuit. It’s nearly impossible. Even if an ex-employee has a $5 million defamation and whistleblower claim, the urgency of needing to work, survive, and put food on the table takes priority. Company A is beyond dirty. But they will skate and never pay a dime. Why? Because that bogus employee non-compete agreement operates like an insurance policy.

Policy Solutions: Non-Compete Reform & Penalties

That’s the problem. And it’s an incredibly ugly one. Here are the solutions:

• America desperately needs national non-compete reform. Some states have already realized that non-compete abuse is rampant and have taken steps to address the non-compete crisis. If we wait for reform on a state-by-state basis, it will take 10 to 20 more years before we see adequate progress. That’s why we need a national law. At a minimum, that national law needs to ban non-compete agreements for at least low-wage workers, but preferably for anybody making less than, e.g., $100,000 a year.
• We need a penalty regime. As it currently stands, there are never any penalties for non-compete abuse. If you want to recover for non-compete abuse, you have to do it under an existing legal theory (e.g. tortious interference, antitrust, etc). That needs to change. We need to create disincentives for companies to abuse non-compete agreements. Something like this: Any company that uses, threatens to enforce, or files suit on a non-compete agreement that is proven to be unreasonable as written shall owe the employee the greater of (a) $10,000 or (b) 1-year of his/her most recent salary. Create these penalties and watch just how quickly these companies change their tune. The same companies that claimed non-compete enforcement was necessary to protect their businesses from certain devastation will suddenly decide it’s no longer worth it the risk. There is no way we’ll ever see this sort of penalty regime at the national level. So this is where the states come in.
• We need regulatory action. Even without non-compete reform, federal and state regulators can use existing law to police non-compete abuse. Last year, the New York AG’s office learned that WeWork was making all of its employees sign absurd non-compete agreements. The New York AG stepped in and threatened to sue WeWork (technically WeCo). WeCo caved and eliminated non-compete agreements for the vast majority of its employees. Whether it’s state AGs, the DOJ, or the FTC, government actors have tremendous power in the fight over non-compete abuse
• We need courts to correctly apply injunction law. Temporary or preliminary injunctions are supposed to be extraordinary remedies. Such injunctions should only be issued in rare circumstances. In the non-compete context, companies routinely obtain preliminary injunctions based on facts that clearly do not support the issuance of such relief. Both federal and state appellate courts need to reign in judicial misuse of preliminary injunctions in the non-compete context. These appellate courts must clearly articulate the following premise: The applicable rules (e.g. FRCP 65) that govern preliminary injunctions apply in every such case. A party seeking a preliminary injunction in a non-compete case is not somehow exempt from satisfying the well-established factors. 
• We need more media attention. Around five years ago, we started seeing widespread media coverage of non-compete abuse. In the past two years, we have seen several states pass non-compete reform. This is not coincidence. Media coverage and public pressure over non-compete abuse triggers political action and reform. We need some nationally prominent journalists to regularly cover non-compete abuse. One time features are good. But an ongoing column focused on non-compete abuse would be more powerful.

Jonathan Pollard is a competition lawyer, expert witness, writer, and consultant based in Fort Lauderdale, FL.