The FTC’s Proposed Ban on Non-Compete Agreements: An Interview with Attorney Rory Weiner.
On January 5, 2023, the FTC proposed a new rule banning non-compete agreements in the United States, claiming that non-competes are “a widespread and often exploitative practice that suppresses wages, hampers innovation, and blocks entrepreneurs from starting new businesses.” From the FTC Fact Sheet:
About one in five American workers—approximately 30 million people—are bound by a non-compete clause and are thus restricted from pursuing better employment opportunities. A non-compete clause is a contractual term between an employer and a worker that blocks the worker from working for a competing employer, or starting a competing business, typically within a certain geographic area and period of time after the worker’s employment ends. Because non-compete clauses prevent workers from leaving jobs and decrease competition for workers, they lower wages for both workers who are subject to them as well as workers who are not. Non-compete clauses also prevent new businesses from forming, stifling entrepreneurship and preventing novel innovation, which would otherwise occur when workers are able to broadly share their ideas. The Federal Trade Commission proposes preventing employers from entering into non-compete clauses with workers and requiring employers to rescind existing non-compete clauses. The Commission estimates that the proposed rule would increase American workers’ earnings between $250 billion and $296 billion per year. The Commission is asking for the public’s opinion on its proposal to declare that non-compete clauses are an unfair method of competition and on the possible alternatives to this rule that the Commission has proposed.
The Chamber of Commerce slammed the FTC’s proposal, insisting it is too broad and “unworkable” and expressing concerns about exposing trade secrets to competitors and foreign adversaries. Whether the ban will pass is still unknown. We sat down with our founder Rory Weiner, a small business attorney who advises on non-compete agreements, to discuss the potential ban.
What is the purpose of a non-compete agreement?
The purpose of a non-compete is to allow a company to invest its time and energy into innovation, client relationships, and employee training. It allows the employee to develop relationships with clients and learn about the intricacies of the business and its methods. The business doesn’t want its employees to share its “secret sauce.” If an employer spends all this time training its employees, they don’t want them to leave and take the information to a competitor; the idea is that competition wouldn’t be fair if the competitor had information about how your company works and who your clients are. So, a non-compete incentivizes a company to innovate and develop relationships without the fear that a competitor will use this information to compete with your business.
What is a real-life example of a non-compete in practice?
A good example is a medical office. If I’m a doctor, and if a medical practice group hires me, they will have a non-compete that prevents me for no more than two years from leaving and opening up a medical practice down the street. People don’t usually travel far from their homes to see their doctors, so in this case, there would be mild geographical restrictions in the non-compete. A standard radius is five to 10 miles. So, if I wanted to open my own medical practice, I would have to wait two years and open it at least 10 miles away.
What about national or global companies?
It can get trickier in other industries, like web design, where you have a presence nationwide. The non-compete cannot say, “You’re not able to work anywhere in the country”; it has to define a geographical area.
What are some misconceptions about non-compete agreements?
The biggest misconception is that non-competes are not enforceable. They are enforceable; we frequently work with employers to enforce them. Another common misconception is that it can’t be enforced if the non-compete creates a financial hardship for the employee. Financial hardship is not a defense against enforcement; it can be enforced, even if it prevents you from working in your industry for a couple of years.
What happens if someone violates a non-compete agreement?
If an employee violates a non-compete agreement, the employer will file a lawsuit and seek a “temporary injunction” which requires you to stop working for a competitor or refrain from opening a competing business. They will also usually sue the new employer or new company where you’re working for intentionally interfering with the non-compete agreement. This is one of the major reasons people want to ban non-competes; future employers are hesitant to hire anyone with prior non-compete agreements for fear of being sued.
Is there a gray area with non-competes?
Yes. Non-competes don’t mean you can’t generally compete. For example, let’s say you work at a physician’s office and leave. You can’t solicit existing or specific prospective clients, but you can advertise that you’ve changed offices and provide your new address. Or, for example, you could use a LinkedIn post or other social media to announce your job switch or mail a card to people generally stating where you now work. If that card sounds like soliciting, that’s where you’ll get into trouble or a gray area; but if it’s just a friendly note about your new location, you’re all right.
What’s the difference between non-compete agreements and non-solicitation agreements? Are they the same?
No, they are not the same. A non-compete typically means you’re prohibited from joining another firm or opening up a business that competes with your employer. When you’re asked not to solicit, that can mean you specifically cannot solicit both existing clients and employees of your employer. For example, you can’t leave the company and invite employees to accompany you.
Are there any industries that already ban non-competes now?
Yes – in the legal field, they are forbidden. If I hire an associate, and I spend two years training her and I introduce her to clients, and she decides to leave and open a practice right down the street, there is nothing I can do about it. The Florida Bar prohibits the use of non-compete agreements.
What about non-disclosure agreements? Let’s say the antitrust regulators successfully ban non-compete clauses. Would non-disclosure agreements still be helpful or effective?
Yes, NDAs would still be helpful because the employee couldn’t reveal confidential and secret information to a competitor whether there is an agreement or not. A lot of states, including Florida, already have statutes in place called “Trade Secret” statutes which forbid anybody who works for a company from misappropriating its trade secrets.
What would be a real-world example of that?
For example, an employee in Florida can’t take a client list their employer has developed and carefully created over the years and give it to a competitor. Even if they don’t have an NDA, the Trade Secret statute prohibits you from taking other people’s trade secrets. Either way, having a non-disclosure in place isn’t a bad idea, even though they are notoriously difficult to enforce.
Why are non-disclosures difficult to enforce?
They are difficult to enforce because it is hard to prove somebody used your information. You must have an insider or somebody willing to testify about how the information was used to compete with your company. Non-disclosure agreements are very difficult to enforce compared to non-compete agreements, where it’s obvious when someone has taken clients.
Are there any particular industries that tend to enforce non-competes more than others?
The medical industry is notorious for enforcing them. But especially Silicon Valley and high-tech businesses tend to have strict ones in place because they don’t want employees, especially developers, taking a job with a competitor and sharing secret technological innovations. Innovation is the tech company’s livelihood.
Is the ban legal?
Yes, since under our Constitution, federal law is supreme and overrides state law when they conflict. But there will likely be court challenges. They will argue that states should be allowed to legislate if they believe there are good reasons to have the legislation; for example, it protects innovation and fair competition.
What are the dangers of banning non-competes?
Many people say you should have a free labor market and that people should come and go as they please. But there is a reason non-competes exist. Without them, companies would not be incentivized to train people, especially in sensitive areas. That protection fosters an environment of creativity, innovation, and growth.
Another danger is when businesses rely on relationships, like sales teams. Removing non-competes in this situation leaves the business very vulnerable to its competitors.
What are the dangers of keeping non-competes?
Keeping them would decrease competition in the labor market and remove the personal choice of where one wants to work or what business one wants to open. It will also lock people into their jobs and prevent them from growing in their industry.
You represent both employees bound by non-competes who want to get out of them and employers who want to enforce them. What is your personal opinion on whether or not non-competes should be allowed?
I believe they should be allowed but narrowly tailored to protect the business from unfair competition and not stifle employees from leaving and getting better jobs. Non-competes should be limited to one year and extend to a small geographical area.
Non-compete attorney in Florida
Whether you’re an employee looking to get out of a non-compete agreement or an employer looking to enforce one,contact us today for advice.