Document Type

Article

Publication Date

2024

Abstract

A growing consensus holds that employer overuse of noncompete agreements adversely affects workers and the economy. But there is little agreement on how best to regulate these instruments. States have experimented with an array of idiosyncratic reforms that capture the most egregious misuses, while the Federal Trade Commission (FTC), has issued an outright ban that would prohibit all employee noncompetes and comparable instruments nationwide.

This Article argues that any effective reform strategy must target what it terms “default-use” noncompetes—boilerplate restraints imposed by employers as a matter of course without close consideration of their underlying justification. Some unlawful noncompetes are clearly predatory, but others are likely due to legal and institutional factors. Vague, uncertain law as to what informational interests support a noncompete can lead employers to overestimate their need for such agreements and misconceive the lawfulness of their use. At the same time, standard corporate onboarding practices make it easy for companies to require workers to sign noncompetes along with other form agreements. The result is that companies impose standardized noncompetes whenever an employee might encounter assets they perceive (correctly or not) to be proprietary. These agreements subsequently deter employees from seeking or accepting competitive work irrespective of whether they might ultimately prove unlawful.

Thus far no enacted reform measure short of a ban adequately addresses this problem. But the American Law Institute’s recently adopted Uniform Restrictive Employment Agreement Act (UREAA) models how regulators might begin to do so. UREAA incorporates what the Article calls “front-end” reforms: rules that disrupt an employer’s rote decision to require a noncompete at the point of hire. Three innovations achieve this result: First, UREAA narrows the permissible bases for the use of a noncompete, eliminating employers’ ability to use noncompetes to broadly protect confidential information absent a genuine trade secret. Second, UREAA requires employers to use the least restrictive form of restraint whenever possible, replacing some noncompetes with more limited, tailored restrictions. Third, UREAA pushes employers to expressly articulate a legally cognizable justification for their chosen restraint through a novel, multi-tiered notice requirement. Through these drafting choices, UREAA forces employers to confront the critical but often overlooked question of what justifies so formidable a restraint on competition. By making noncompetes a restraint of last resort it provides a second-best alternative to full ban on noncompete use.

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