Using Non-Compete Agreements in Employment Contracts to Protect Trade Secrets

Employers in many industries use non-compete agreements as a key tool to protect trade secrets.  According to U.S. Treasury reports, non-compete agreements impact approximately 30 million – nearly one in five – U.S. workers, including roughly one in six workers without a college degree.

Some employers have imposed non-compete agreements across a broad segment of their workforce, including imposing them on low-wage earning employees and employees who are not privy to trade secrets or other confidential information.  Non-compete agreement opponents argue that such broad non-compete agreements can interfere with the employee’s right to make a living without any off-setting benefit for the employer.  In the past few years, state attorneys general have been successfully suing companies to invalidate what many see as overly-expansive non-compete agreements.

For example, on October 25, 2017, Lisa Madigan, then-Attorney General of the State of Illinois, filed suit against Check Into Cash of Illinois LLC.  Check Into Cash allegedly required all employees, including employees making less than $13 per hour, to sign non-compete agreements effectively preventing them from getting another job in Illinois at anything from a bank teller to a retail cashier for one year after leaving.  The complaint alleged that Check into Cash’s noncompetition agreements violated the Illinois Freedom to Work Act because they “[were] not tailored to Check Into Cash of Illinois LLC’s actual legitimate business needs … [and] they severely limit[ed] employees’ future employment options, thereby harming these employees and the State.”

While the action did not make it to trial, it was a success for Illinois AG Madigan, as on January 7, 2019, she announced that she reached a settlement with Check Into Cash that would end its practice of imposing highly restrictive non-compete agreements on store-level employees at its 33 locations throughout Illinois.  Per the settlement, Check Into Cash can no longer require store-level employees to sign noncompete agreements, and it must train managers on the change and notify employees who are affected.  In addition, Check Into Cash must pay $75,000, which the Illinois attorney general’s office will use toward public outreach on noncompete agreements. However, Check Into Cash may still use noncompete agreements with its higher level employees.

This is far from Madigan’s first successful attack on what she has called the “growing use of inappropriate non-competes to bind low-wage workers.”  In December 2016, Madigan reached a settlement with Jimmy John’s to end the company’s requirement for employees such as sandwich makers and delivery drivers to sign non-compete agreements as a condition of employment, and also to inform current workers that the agreements would not be enforced.

What is the key takeaway of this trend?  We can expect that state attorneys general will continue to pursue similar actions against companies who use non-compete agreements.  This means prudent employers would be wise to re-examine their non-compete agreements to ensure they are narrowly tailored to their legitimate business needs, such as protecting trade secret information.  Employers should also be aware of any state legislation restricting their ability to use non-compete agreements, and carefully examine its use of non-compete agreements, particularly with low-wage employees.  For example, in North Dakota and Oklahoma, non-competes are entirely unenforceable, and in California, non-competes are illegal and unenforceable except in very limited situations.