Employers in the District of Columbia that use noncompete agreements take note: the D.C. Office of the Attorney General ("OAG") is aggressively using its powers to crack down and assess penalties on businesses that violate D.C.'s ban for lower-wage workers.
On November 17, 2023, the D.C. Attorney General, Brian Schwalb, announced three separate concluded investigations, one involving a healthcare staffing firm, another involving a ping pong social club, and a third involving a franchisor operating a food service business, all resulting in fairly significant fines and employment policy changes. OAG found that each of these businesses had violated the D.C. ban on noncompetition agreements for lower-wage workers. (On October 1, 2022, D.C.'s noncompete law took effect, making it unlawful for employers to impose noncompete agreements on D.C. workers who earn less than $150,000 a year. D.C. Code § 32–581.02.)
While D.C. businesses may think that simply having these agreements on paper, but not enforcing them, is no-harm, no-foul, the OAG's announcement shows that the new law has some teeth to it and the District will not hesitate to use the law's enforcement provisions to assess fines and penalties on companies just for having these written agreements in place. As a result of these investigations, 13 workers who signed noncompete agreements will receive $1,000 each in compensation, an employee who was unemployed for just 90 days as a result of the noncompete will receive over $100,000 in restitution (even though the worker earns less than $150,000 annually), D.C. will receive $25,000 in fines, and the companies all have agreed not to enforce their noncompetes in the District (and not just against low-wage workers – but all employees).
OAG's action against the franchisor is particularly notable. The franchisor, who operates more than 30 grocery stores and food courts, and who had a "no-poach" clause in its contracts with franchisees preventing employees from leaving one location to work for another in the same chain, tripped OAG's wires particularly with respect to the noncompete law but also the District's Antitrust Act. To settle the case, the franchisor opted to stop enforcing and to stop including these no-poach clauses in its contracts for all employees.
Next Steps for D.C. Employers
The OAG's action follows a pattern we are seeing throughout the U.S. and on the heels of the Federal Trade Commission's proposed nationwide ban on noncompetes. While this law is restricted to lower-wage workers, D.C. area employers should consider taking active measures to ensure future compliance, get ahead of the new noncompetition landscape, and to proactively protect competition-sensitive data in light of the difficulties of using noncompetition covenants previously enforceable under state law. We suggest at least the following steps:
- Begin to evaluate your agreements and bonus/equity plans that include any of the prohibited provisions.
- Develop a game plan for updating agreements, providing required notice and communicating with current and former employees impacted by changes in the noncompete enforcement landscape.
- Remind employees of their duty to safeguard company proprietary information and/or trade secrets. You could consider using training modules, requiring employees to acknowledge a log-in notification message when accessing information systems containing sensitive company information, or other regular reminders. These steps will become increasingly necessary as laws restricting post-employment covenants become the norm.
- Take technical measures to protect competition-sensitive data. Limit access on a need-to-know basis, implement basic data security steps (i.e., network, file, and individual document access levels), restrict use of USB drives and other methods of data exfiltration.
- Implement clean exit and clean entry processes to keep data from flowing out and from coming in when it should not. Make clear to new employees they cannot bring in proprietary information and/or trade secrets from a former employer or third party. And establish procedures for employees to return company data and devices before leaving.
Take precautions now as the crackdown on noncompetes only heightens the need for using other means of protecting sensitive business data. Stay tuned to our blog to learn more about these developments.