Missouri In House Counsel Legal news, updates and analysis
Duke Manufacturing, a food service equipment company, routinely uses noncompete agreements for its salespeople and engineers, according to John Schierholz, general counsel of the St. Louis-based manufacturer.
For salespeople, that is because of the concern they could share their knowledge of contacts and product development activities with a competitor, said Schierholz, who has been with the company for 15 years.
For engineers, the concern is also product development insight.
“I believe that there are very valid reasons why companies have” such noncompete agreements, Schierholz said.
The Federal Trade Commission disagrees. Earlier this year, the agency proposed a ban on such agreements and described companies’ use of them as “a widespread and often exploitative practice that suppresses wages, hampers innovation, and blocks entrepreneurs from starting new businesses.”
While Schierholz agrees that some businesses have abused noncompete agreements, he and other attorneys say a ban could affect local companies that are just trying to protect confidential information.
“With any company — I think in particular technology companies —the client relationships you have — and also the relationships you have with your current employees — are critical,” said Carly Duvall Le Riche, assistant general counsel of TreviPay, which is based in Overland Park, Kan., and operates a business-to-business and invoicing network. “What we are doing is using agreements to try to protect that which we hold dear.”
A noncompete agreement is a contractual term between an employer and a worker that blocks the worker from joining a competitor, or starting a competing business, typically within a certain geographic area and period of time after the worker’s employment ends, according to the FTC.
The agency announced the proposed ban in January and stated that it could help 30 million workers and increase wages by nearly $300 billion per year.
While three states have largely banned noncompete agreements and 11 states have banned them for low-wage and hourly workers, Missouri is among the remaining states which allow such agreements if not overly broad, according to a Bloomberg Law analysis.
At TreviPay, the company uses noncompete agreements to protect its innovations, client lists and research to help with targeted marketing, said Duvall Le Riche, who joined the company in January 2021.
The agreements are particularly valuable to TreviPay as its competes with cryptocurrency firms and similar digital payment companies, among others, she said.
“All of those areas are growing [quickly]; there’s a lot of investment in them; and they are very quickly changing, and so there is a real value to the innovations that your company develops,” said Duvall Le Riche, who previously worked in private practice and handled noncompete and unfair competition litigation. “We have a real fear or nervousness that the information that has proprietary value to our company” could be “shared with a competitor in a manner that would harm our ability to grow.”
While at TreviPay, the company has not filed suit against any former employees, she said.
Still, any new restriction or ban would “require time, effort and resources to evaluate what we have and determine if it’s permissible under the new law or if there are any changes that need to be made and then roll out those changes,” she said.
Duke Manufacturing salespeople and engineers have left and taken jobs in which they directly competed with the company and therefore violated their noncompete agreements, Schierholz said. The company has also had hired people who had noncompete agreements at their previous jobs.
“We work very hard to ensure that” the new hires “do not violate those agreements,” Schierholz said.
For example, if a salesperson joins the company, they are not allowed to call customers they worked with at their last job.
Still, the company has been involved in litigation concerning noncompete agreements, according to Schierholz. He declined to provide specific information.
While the agreements have been useful to his company, Schierholz thinks there are instances where they should not be allowed.
About a third of U.S. workers without a bachelor’s degree have entered a noncompete at some point, according to a 2014 survey published in the Journal of Law and Economics.
Roughly the same amount of people who made less than $40,000 a year reported that they had signed such an agreement.
“You shouldn’t be able to restrict a security guard from going to any other company. You shouldn’t be able to restrict someone who worked in McDonald’s from going to a Burger King or Wendy’s,” Schierholz said.
The FTC is expected to vote on its proposed ban on noncompete agreements in April 2024, according to Bloomberg.
If it’s implemented, Schierholz expects it to be challenged in court.
“I think there is a way that a well-drafted rule or statute could be implemented that would allow companies to restrain competition for somebody on a reasonable basis and a reasonable time period and reasonable geographic limitation if they have been exposed to genuinely sensitive information,” he added.
Still, even if the government implements a ban, there are other ways for businesses to protect themselves, said Dwayne Fulk, vice president and chief legal officer with City Utilities of Springfield, a public utility in southwest Missouri.
For example, the proposed ban does include non-solicitation or non-disclosure agreements, provided they are not so broad that they are essentially equivalent to a noncompete.
“If you have a sales employee” the proposed ban “doesn’t prohibit agreeing not to contact any of their current customers for a period of time. But I think it has to be very narrowly tailored, and I think that is something that might be challenged,” said Fulk, who previously worked in private practice and prepared noncompete, nonsolicitation, and nondisclosure agreements and advised them on such contracts.
He hopes that an FTC ban on noncompete agreements could help address concerns about a labor shortage in the United States. His utility has struggled to find middle managers, he said.
“Allowing people to move around more freely makes sense,” Fulk said, “so long as there are alternatives to protect what businesses need in terms of their own proprietary information and intellectual property.”
