Idaho’s noncompete law bucks a national trend

It’s too soon to tell what effect a recent change in Idaho’s noncompete law will have, but detractors worry it will make Idaho less competitive in the entrepreneurial marketplace.

The bill, H0487, was passed this spring by the Idaho Legislature and took effect, as most new laws do, on July 1. Under the new law, employers can stop “key employees” – defined as employees earning in the top 5 percent of salaries for the company – from going to work for a competitor. That’s unless the employee can prove that working in the new company doesn’t cause irreparable harm to the former company.

What makes this a change is that now the employee has to prove the new job won’t hurt the old company, as opposed to the old company having to prove that it did. “It creates a presumption of irreparable harm to the employer, which is really important because the employer can then get a [temporary restraining order] or injunction to stop the employee from competing,” explained J. Kevin West, shareholder in Parsons, Behle, and Latimer, a regional law firm based in Salt Lake City with a Boise office.

But proving that a new job can’t harm the former employer’s business is hard because it means proving a negative – proving something can’t happen, said Lisa McGrath, a Boise attorney who represents both employees and employers in the startup scene. “That’s legally extremely difficult, if not impossible, to do,” she said. The new law might even apply to an employee who had been fired, she added.

Opponents to the bill said it could hurt Idaho’s economy by making it more difficult for employees to leave to work for startups and other small businesses. The Idaho Trial Lawyers Association said it was not needed, while Brian Kane of the Attorney General’s office said in an opinion requested by Rep. Ilana Rubel, D-Boise, that “the burden necessary to overcome this presumption [of adverse effect] may be extremely difficult, if not impossible.” Supporters of the bill included Micron Technology and the Idaho Association of Commerce and Industry. The bill passed with bipartisan opposition.

“This bill is one of the biggest economic mistakes Idaho has made in a long time,” Rubel said in an online comment after its passage. She had hoped Governor C.L. “Butch” Otter would veto the bill, and still hopes the Legislature might reverse it, she said. “Employers don’t need to pay market rates when their employees can’t look for higher paying work. And it will block new businesses from forming.”

Research bears this up. A 2010 Yale University study, Noncompete Covenants: Incentives to Innovate or Impediments to Growth, found that “the enforcement of noncompete clauses significantly impedes entrepreneurship and employment growth.” States that restricted noncompete agreements had more patents, more new businesses, and improved employment, researchers found.

Idaho’s new noncompete law was passed at a time when a number of states, including some that border Idaho, are weakening their noncompete laws. Washington and Utah have each recently passed bills limiting noncompete agreements, while California has banned them altogether, McGrath said. “The Legislature went the other way here,” she said.

“It’s all a matter of your point of view,” West said. “If you’re on the employers’ side it’s a very good, helpful law. Really, it’s only applying to a fairly small group of people. Those people are going to have very valuable information in their possession and can do a lot of damage if they leave and go to a competitor. I think it’s very reasonable for an employer to put some restriction on that. If you don’t want to be restricted, you don’t take the job.”

Both West and McGrath said they hadn’t heard of any cases where the new law was being applied, and suggested it was too early for employers and employees to know about it yet. “Most of my clients are unaware of this,” McGrath said.

“I haven’t noticed any impact on the noncompete law, and I bet that most MetaGeek employees aren’t even aware of the new law,” agreed Ryan Woodings, founder and chief geek of Boise tech startup MetaGeek.

The impetus for the bill, brought forth by Rep. Patrick McDonald (R-Boise), was a company called LeapFox Learning that had lost a key employee, who was covered by a noncompete agreement. Nonetheless, the employee left for a competing company and used LeapFox material, including a customer list, to put LeapFox out of business, testified LeapFox co-founder Codi Galloway. With the bill, LeapFox could have used an injunction to stop the former employee from doing that, she said. The case was in litigation at the time of the bill’s passage, and attorney William Mauk testified in opposition to the bill, saying that the Legislature should not be rewriting law based on cases that were not fully adjudicated.