Legal experts chime in on the FTC’s noncompete ban
The Evil HR Lady shares insights from CEOs and legal experts on the FTC's noncompete ban and what it means for businesses – and offers her own perspective.
If you want to know what HR has been doing this week, it’s been talking with people about the end of noncompete agreements under the new proposed FTC ban.
On the one hand, CEOs (who generally have noncompetes themselves) panic that their employees will be free to cross the street and work for their competitors, and on the other hand, employees rejoicing because they will be able to cross the street and work for the company’s competitors.
Both sides need to take a deep breath. This is not a done deal.
In fact, employment attorney David Miklas said, “As an FYI, I am changing nothing from last week to today. I am still drafting noncompetes for my Florida businesses.”
Just what are the experts saying about this proposed FTC ban on noncompetes?
Wait! A lawsuit?!
To no one’s surprise, the US Chamber of Commerce and the Business Roundtable already filed a lawsuit against the FTC in federal court in the Eastern District of Texas. The only surprise was that they managed to get it filed in less than 24 hours.
While how the lawsuit will go at this point is anyone’s guess (although I’m guessing it never goes into effect), there will undoubtedly be an injunction, and even if there’s not, it doesn’t go into effect for 120 days. Any agreement for executives entered into before the effective date will still apply.
Why noncompetes aren’t evil incarnate
While noncompetes are often seen as a threat and a punishment, that may not be the case. The FTC acknowledged that executives (defined as workers earning more than $151,164 annually and who are in policy-making positions) with access to expert advice weren’t being taken advantage of.
Related: Jimmy John’s famous noncompetes, which prevented former employees from working in any sort of food service that made sandwiches for two years, died in 2016, yet people still bring it up as a sign that noncompetes are awful.
Employment attorney Todd Stanton explains:
“Our Firm’s standard advice though, is to have narrowly tailored restrictive covenants (non-solicits, non-raiding/poaching, and confidentiality clauses) in most employment agreements. We only recommend noncompetes in very limited circumstances (mostly sales of businesses). Having those covenants in place gives employers options when they face a nefarious former employee, but we make sure we talk the client through every available option before will even discuss writing a demand letter, much less a complaint and TRO.”
While many people automatically assume business interests aren’t legitimate, anyone who has worked with actual people knows that there are terrible people who would happily destroy your business. Business owners take tremendous risks and responsibilities and, as such, need a way to protect that.
But, Todd says, enforcing a noncompete is often a last resort. When he has a client who wishes to enforce one against a former employee, he looks for a different solution:
“We start with, ‘did you pay them in a manner compliant with the FLSA?’ If the answer is no, we do not send them a letter they’ll take to a lawyer. Then we ask how much the employee’s activity is costing the company and how much they’re willing to spend to stop it.
“No matter what that number is, I ask if they can think of any other more productive ways to spend that money to protect their business interests. … $100k buys a lot more good will from wavering clients than it does attorney time. And your life is happier. Most clients realize how stupid it all is if they get a little perspective.”
And if it does go into effect?
Attorney Fitzgerald (“Jerry”) Bramwell says, “What happens, assuming the Supreme Court doesn’t kill the rule? Employers start relying on carrots instead of sticks to keep their best people engaged. There is a cascading effect leading to a much happier society overall.”
And maybe you don’t even need carrots.
Employment attorney Kate Bischoff tweeted:
“Folks. Business groups. If a noncompete ban will end your business, how do businesses in ND, OK, CA, and MN stay open?”
Folks. Business groups. If a noncompete ban will end your business, how do businesses in ND, OK, CA, and MN stay open?
— Kate Bischoff 🚁👩🏻💻🙋🏻♀️🥾 (@k8bisch) April 24, 2024
Kate has a strong point. noncompetes have been essentially unenforceable in California since the 1940s and that doesn’t seem to have driven away business or innovation. California has its problems, but no one is citing the lack of noncompetes at the center of those difficulties.
And lawyers will innovate and find ways around the ban, such as confidentiality agreements, partnerships, non-disclosure, and stronger IP protection.
Employment attorney Eric Meyer explains, “The new rule does not generally impact NDAs or non-solicitation agreements unless they prohibit a worker from, penalize a worker for, or function to prevent a worker from seeking or accepting work or operating a business.”
But there will be consequences to that as well.
Stephanie Raynor, an HR application specialist, says that, if the noncompete ban goes into effect, “companies may strengthen confidentiality agreements, limiting employee mobility and innovation.”
This is no magic fix for anyone. And we all have to wait for the lawsuits to sort out. My best guess is that noncompetes will ultimately be limited but not done away with altogether. As the FTC says, executives can represent themselves well.
Frequently asked questions
- What is the FTC proposing about noncompete agreements?
- The Federal Trade Commission is considering a ban on noncompete agreements, aiming to enhance job mobility and employee freedom. This move has generated both support and opposition, leading to legal challenges and a broader discussion on the necessity and fairness of such restrictions.
- How are CEOs reacting to the proposed ban?
- Many CEOs are concerned that the ban will allow employees to easily join competitors, potentially taking valuable knowledge and strategies with them. This fear is prompting discussions about alternative ways to safeguard business interests without relying on noncompete clauses.
- What legal actions have been taken against the FTC's proposal?
- Business organizations like the US Chamber of Commerce have quickly responded with a lawsuit in the Eastern District of Texas, challenging the FTC's authority to enforce such a ban. The legal outcome remains uncertain, with possibilities of injunctions and delays.
- How might businesses adapt if noncompetes are banned?
- Businesses might turn to other legal measures such as non-disclosure agreements (NDAs) and non-solicitation clauses to protect their interests. These alternatives focus on confidentiality and preventing unfair competition without restricting overall employment mobility.
- Are noncompete agreements considered harmful?
- While often criticized as restrictive, noncompete agreements are defended for protecting businesses against potential threats from former employees who may misuse confidential information. Critics argue they stifle innovation and limit workers' rights, pointing to states like California where such agreements have been largely unenforceable.
