New Maine noncompete laws are game-changers for both employers and employees

New Maine noncompete laws are game-changers for both employers and employees

Maine in June 2019 significantly changed its laws governing noncompete agreements. The new rules will make it harder for employers to enforce these contracts, with a goal of allowing talent to switch jobs more freely and more often.

In a noncompete, an employee agrees not to work for her employer’s competitors for a defined period of time after her job ends. Not all employers use them, but they are common for companies nationwide, large and small. Employers often use noncompetes together with confidentiality agreements (NDAs), as both of them seek to reduce the risk of the employers’ secrets falling into competitors’ hands.

Maine Noncompete Law Until Now

Noncompete law in Maine, as in other states, has always consisted more of vague standards than easily applicable rules. In general, noncompetes must be “reasonable,” meaning no more restrictive to the employee than is necessary to protect the employer’s legitimate business interests. What that means in practice depends entirely on specifics: what does the employee’s job entail? Is she a salesperson, a software engineer or a warehouse worker? How long does the noncompete term last? In what geographic radius does it apply? Will the noncompete effectively prevent her from making a living in her chosen profession? Is a noncompete “reasonable” if lasts for two years and applies everywhere in New England?

To apply the standard to each particular noncompete agreement, courts generally have considered how long the restriction lasts, the geographic scope in which it applies, and the nature of the interest the employer is trying to protect. None of these is a bright-line rule. For example, one court enforced a one-year noncompete term against an employee of a paper product factory; one year was reasonable because it roughly covered the length of the factory’s product development cycles. The very same contract might not be enforceable against software developers, who often use fast-paced “agile” development processes.

These standards turn into clear rules only when courts apply them in specific cases. And in Maine, few of these lawsuits have resulted in court decisions. As a result, employees of Maine companies have always had a hard time knowing whether their noncompete agreements are really enforceable. That uncertainty has a chilling effect on employees as they consider leaving their current job for a competitor. A recent lawsuit between two of Maine’s largest employers was poised to clarify the law, but that case settled before the judge could rule.

Maine’s New Noncompete Law

The new law provides clearer noncompete rules than have existed in the past.

First, employers may not use noncompetes at all with employees earning less than 400% of the federal poverty level. This reflects a policy belief that lower-earning workers have less leverage to negotiate these agreements.

Second, for employees earning more than the threshold, noncompetes are frowned upon but valid as long as they restrict the employee no more than necessary to protect the employer’s trade secrets, other confidential information or goodwill (the company’s reputation and customer relationships). It’s hard to say whether this new statute changes Maine’s past case law or simply summarizes it, given the scarcity of reported cases. But it certainly clarifies that Maine allows noncompetes in fewer cases than other states that recognize more employer interests that these contracts can protect.

This reasonableness standard also begs the question whether there’s a role for noncompetes at all beyond protecting goodwill. Assuming Maine employers continue to use NDAs to protect trade secrets and other confidential information, noncompetes will serve no separate purpose except protecting goodwill.

Third, employers must follow strict new advance-notice rules. Before making an offer of employment, they must notify the candidate that they will be asked to sign a noncompete. The candidate must receive an actual copy of that document at least three days before they are asked to sign it, allowing them time to review, discuss with their own attorney and possibly request negotiation of it before signing.

Fourth, the law has teeth: employers that ask low-earning employees to sign noncompetes or fail the notice requirement can be fined $5,000 or more, with the Department of Labor enforcing these rules.

Fifth, noncompetes cannot take effect until after one year after the employee is hired or six months after the employee signs the agreement, whichever is later. Effectively, most employees will have a one-year grace period to leave a new job before the noncompete binds them. This part, frankly, may be the most important for employees, and incentivizes them to leave quickly if they plan to leave.

Finally, the new law takes effect on September 18, 2019, and applies to noncompetes that either are signed or renewed on or after that date.

Maine’s New Ban on Anti-Poaching Agreements

Maine also has adopted a new law targeting “anti-poaching agreements,” or agreements between two companies not to recruit or hire away each other’s employees. These agreements have always raised serious antitrust concerns — any time two companies agree not to compete with each other, antitrust alarm bills ring — and the U.S. Department of Justice has publicly waged war on many of them. But now Maine makes them illegal as a matter of state law too. Violations of these agreements, too, can warrant fines of $5,000 or more. Note that an agreement does not need to be in writing to be illegal; some of the largest fines in antitrust history involved oral or handshake agreements between competing CEOs.

Key Takeaways

Here are our takeaways on these new laws: some Maine employers will simply stop asking employees to sign noncompetes and simply rely on robust NDAs. For these companies, the hassle and legal cost of preparing yet another contract to address a fairly small issue — which a good NDA can already largely cover — is not worth it.

Other companies will continue using noncompetes, but will need to redesign their hiring practices to give the required advance notice; a safe practice would be to say right in a job listing that the applicant will need to sign a noncompete, and then present the document to them early in the recruiting process before an offer is even made. Companies should also carefully review their existing standard employment agreements and employee handbooks with counsel now — before the law takes effect in September — to ensure their noncompetes comply with the new law.

Those Maine companies that offer Employee Stock Option Plans (ESOPS) or similar equity incentive plans to their employees or consultants likely can use noncompetes in the context of those arrangements. In this case, if the person is asked to sign a noncompete not in their capacity as an employee but as a shareholder in the company, the new Maine law does not apply.

Maine is only the latest state to restrict noncompetes. Some states in recent years have outlawed them across the board. Others have added significant restrictions on enforceability as well as advance-notice periods. We can expect the trend to continue in the near term.

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Adam Nyhan

Adam Nyhan represents clients in Maine, Silicon Valley and globally in software, privacy, trademark and business law matters. He is also the co-founder of a Software-as-a-Service startup and a former in-house attorney at a software firm in New York City.