On January 11, 2021, the mayor of the District of Columbia signed an Act prohibiting non-competition provisions in employment agreements entered into after the date of passage. While under the peculiar rules of the District of Columbia, Congress has a 30-day window to disapprove the Act, it appears likely that this Act will pass. The effect of passage is significant, in that this widely-used tool to protect ongoing businesses will be taken away.
According to D.C. Act 23-563, with limited exception, any business operating in the District of Columbia will be prohibited from requiring its employees performing work in the District to sign non-competition provisions, or from being punished for refusing to sign such agreements. Furthermore, employers must notify employees that such a prohibition exists for the District of Columbia.
The impact of the Act is damaging to any DC area business with trade secrets or which relies on the expertise and experience of employees. To see why, one must first look at the purpose behind non-compete agreements. First, such agreements protect the goodwill associated with the skill and reputation among employees in the respective industry. Good employees know business operations and are frequently the liaison between the customer and the business itself. Next, employees typically have numerous trade secrets of the business at their disposal, including, but not limited to, business methods, customer lists, operational contacts, manufacturing contacts, etc. The Act pays lip service to the trade secrets by providing that:
A non-compete provision does not include … an otherwise lawful provision that restricts the employee from disclosing the employer’s confidential, proprietary or sensitive information, client lists, customer lists, or a trade secret as that term is defined in § 2(4) of the Uniform Trade Secrets Act of 1988.
Nonetheless, while physical objects such as customer lists, recipes, formulas, and other items may be identified and restricted from making their way to a new employer, the general operational know-how that an employee has gained through his or her employment is difficult to restrain. Allowing an employee to immediately depart to a competitor, or allowing the employee to immediately resign and go into competition with his or her former employer, gives a great advantage to the departing employee at the expense of the employer.
For businesses operating in the District of Columbia, what can be done to protect the business? To some, the restrictions of the Act and the type of business of the employer may be significant enough for the employer to relocate operations from the District. For all others, the Act is a warning to tighten up all data that may constitute trade secrets, including the proper labeling of trade secrets, the shoring up of trade secret protection policies in employee manuals, and otherwise seeking to retain rights in confidential, proprietary information of the business, including where appropriate, employee acknowledgment of the confidential and proprietary nature of the various confidential information.
Is the Act an aberration or flash in the pan peculiar to the District of Columbia, or is it the start of a growing trend shifting employment rights away from employers and toward employees? Only time will tell. However, businesses across the United States, should monitor any proposed future legislation regarding the enforceability of non-compete agreements, particularly in those states in which one’s business or businesses operate.
