New Ban on Non-Compete Agreements in the District of Columbia
By Samuel N. Klewans, Esq. and Michael W. Skerritt, Esq.
Non-compete agreements have been the subject of much discussion, many scholarly articles, and numerous court cases dating back well over a hundred years. For many years, non-compete agreements were enforced provided they were reasonable in time and space (a discussion of this concept is beyond the scope of this article). However, they have come under fire especially in the last twenty years. They are disfavored by most courts on the theory that they are anti-competitive, stifle competition, restrain trade, and are manifestly unfair.
Several states have begun to implement conditions meant to further clarify or curtail the enforce-ability of non-compete agreements beyond the age-old requirement of reasonableness in time and space. For example, a typical covenant in a physician associate agreement might state that the employee cannot “practice medicine” within the restricted area for a certain amount of time after termination. In ruling on cases with functional similarity, the Virginia Supreme Court has held in essence that one cannot be prohibited from “practicing medicine” generally because there are several sub-specialties of medicine such as pediatrics, cardiology, vascular surgery, and so on, which may not compete with the employer’s medical practice and thus would not entitle the employer to such protection.
Other states have looked to tighten up these covenants via legislation. New York, for example, currently has two statutes now pending in its state legislature which would outlaw restrictive covenants of non-competition altogether, but they have yet to be passed. As always, what the legislature is struggling with is the ability to strike a balance to protect an employer’s legitimate interest in protecting its business, an employee’s ability to earn a living, and the public’s interest in free trade. There are states where restrictive covenants of non-competition have been outlawed altogether, such as California, and there are other states, such as Texas, where the legislature permits restrictive covenants of non-competition by statute but the courts will not enforce them. Finally, there are states like Florida where the legislature permits restrictive covenants of non-competition and carves out delineated safe harbors for them.
Now into this landscape comes the District of Columbia, which enacted the Ban on Non-Compete Agreements Amendment Act of 2020, D.C. Act 23-563 (the “Act”) effective March 16, 2021.
The D.C. Ban on Non-Compete Agreements
The main purpose of the Act is stated quite clearly in the preamble. It seeks (i) to ban non-compete provisions in employment contracts and employer policies, (ii) to protect employees from being required to sign non-compete agreements, (iii) to make void and unenforceable non-compete provisions entered into after the applicability date of the Act, and (iv) to prohibit an employer from retaliating or threatening to retaliate against an employee for refusing to agree to a non-compete provision, the failure to comply with the employer’s non-compete provision or policy, or inquiring about the employee’s rights or informing another person or entity about a possible violation of the Act.
The Act provides that no employer in the District may require or request that an employee sign an agreement that includes a non-compete provision. Any non-compete provision contained in such an agreement that is executed after the applicability date of the Act shall be unenforceable and void as a matter of law.
Further, no employer may have a workplace policy (which may be written or existing as a matter of practice) that prohibits an employee from (i) being employed by another person, or (ii) performing work or providing services for pay for another person, or (iii) operating the employee’s own business. In effect this means that not only does the Act prohibit non-compete provisions that restrict employees after employment, it also prohibits non-compete provisions that restrict employees during employment. In other words, employers can no longer keep employees from moonlighting, even with competing businesses.
For the sake of the Act, an “employer” is an individual or entity operating in the District of Columbia, or any person or group of persons acting directly or indirectly in the interest of an employer operating in the District of Columbia in relation to an employee, including a prospective employer, but does not mean the District of Columbia government or the United States government.
Employers must provide the following notice to employees no later than 90 days after the applicability date of the Act, or 7 days after an individual becomes an employee, or 14 days after the employer receives a written request for such statement from an employee (whichever is applicable):
“No employer operating in the District of Columbia may request or require any employee working in the District of Columbia to agree to a non-compete policy or agreement, in accordance with the Ban on Non-Compete Agreements Amendment Act of 2020.”
Finally, an employer may not retaliate or threaten to retaliate against an employee if the employee (i) refuses to agree to a non-compete agreement, (ii) fails to comply with a non-compete agreement or non-compete workplace policy prohibited by the Act, (iii) asks, informs, or complains about a non-compete provision the employee reasonably believes is prohibited by the Act, either to the employer, a coworker, the employee’s lawyer or agent, or a governmental agency, or (iv) requests the notice statement required by the Act.
In addition to rendering a non-compete agreement executed in violation of the Act void and unenforceable, the Act provides that an employer in violation could be subject to administrative penalties assessed by the Mayor and liable to the aggrieved employee for civil damages under the Act’s relief provisions.
The applicability date of the Act, i.e., when the ban will begin to apply to non-compete agreements, has not yet been determined. This is crucial because non-compete provisions executed prior to the applicability date will not be void and enforceable as a matter of law, but instead would continue to be governed by the reasonableness standard contained in D.C. common law. Under the Act, the applicability date will be the date of inclusion of its fiscal effect in an approved budget and financial plan, which is ultimately at the discretion of the Mayor and D.C. Council. Budget approvals typically occur in the fall at the start of the District’s fiscal year (October 1), but based on the decision of the Mayor or the D.C. Council the Act may be included in earlier or later budget proceedings. D.C. employers should monitor updates closely.
Exception for Medical Specialists
For purposes of the Act, an “employee” means an individual who performs work in the District of Columbia on behalf of an employer and any prospective employee who an employer reasonably anticipates will perform work on behalf of the employer in the District. The Act, however, specifically excludes volunteers, lay members appointed to office within a religious organization, casual babysitters, and most importantly for the purposes of this discussion, medical specialists.
A “medical specialist” is an individual who performs work in the District of Columbia on behalf of an employer engaged primarily in the delivery of medical services and who (i) holds a license to practice medicine, (ii) is a physician, (iii) has completed a medical residency, and (iv) has total compensation of at least $250,000 per year. Note that this exception specifically applies to physicians and does not include other types of licensed healthcare providers such as dentists, chiropractors, podiatrists, and veterinarians.
An employer seeking to have a medical specialist execute a non-compete provision as a condition of employment must provide the medical specialist employee with the following notice at least 14 days before executing the agreement containing the provision:
“The Ban on Non-Compete Agreements Amendment Act of 2020 allows employers operating in the District of Columbia to request non-compete terms or agreements (also known as ‘covenants not to compete’) from medical specialists they plan to employ. The prospective employer must provide the proposed non-compete provision directly to the medical specialist at least 14 days before execution of the agreement containing the provision. Medical specialists are individuals who: (1) perform work on behalf of an employer engaged primarily in the delivery of medical services; (2) hold a license to practice medicine; (3) have completed a medical residency; and (4) have total compensation of at least $250,000 per year.”
Finally, the same restrictions on retaliation or threatening retaliation described above that apply to employers generally also apply to employers of medical specialists who are excepted from the Act.
Exception for Sale of Business
Notably, non-compete agreements prohibited under the Act do not include non-compete provisions contained in a purchase and sale agreement for a business in which the seller agrees not to compete with the buyer’s business. This exception upholds a critical protection for business buyers who do not want sellers to be able to compete with the business after the sale, though the Act does not further define or discuss the term “seller” and whether it may include, for example, the sale by employees of ownership interests in the employer.
Ban on Other Restrictive Covenants?
The Act expressly permits otherwise lawful provisions restricting the employee from disclosing the employer’s proprietary or confidential information, trade secrets, customer lists, and so on.
Further, the Act does not expressly prohibit non-solicitation provisions protecting the employer’s customers, other employees, or referral sources. The question of whether the Act will be interpreted to include a ban on such provisions has not yet been addressed by the D.C. courts. In most states passing on such questions, courts have distinguished non-compete provisions from non-solicitation provisions.
The Act represents a seismic shift in local regulatory policy on the issue of non-compete agreements. Employers in the District must prepare now to comply with the Act going forward and to ensure that properly drafted and enforceable non-compete agreements are implemented prior to the Act’s applicability date. As part of this preparation, employers are strongly urged to review their existing forms, agreements, and workplace policies (including but not limited to employee handbooks) with respect to covered employees to ensure compliance with the Act. Employers should also develop plans and procedures for providing the required notices to covered employees and for training staff in matters of compliance.
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