Earlier this week, the Federal Trade Commission proposed a rule that would adopt a nearly-universal ban on non-compete agreements that restrict workers from switching jobs within an industry. While the rule will not go into effect for 120 days, it has already drawn legal challenges from business groups, including the Chamber of Commerce.
The rule is breathtakingly broad in scope. It does not merely outlaw non-competes for low and medium-wage workers (for whom it is generally agreed that non-competes should not apply), but also explicitly prohibits all non-competes for “senior executives,” defined as a person who (1) was in a policy-making position; and (2) received total compensation of at least $151,164 in the preceding year, or an pro-rated equivalent amount if the individual was employed for less than one year.
It is stunning that a non-compete ban would apply to senior executives. This is a stark departure from the laws of most states (including Maryland), which understandably recognize that non-competes are enforceable for executives, high-earners, and business owners.
Though the proposed rule contains an exception for bona fide sales of business entities, this exception would only apply when “all or substantially all” of the business’s entity’s operating assets are sold. The rule (unhelpfully) does not define “operating assets.”
Frequently, non-competes play a critical role in facilitating business transactions when partners or owners of a business are parting ways, regardless of the number of operating assets being sold. Potential buyers would be loathe to acquire a partial share in a business, only for the seller to open up a competing shop the next month.
Though proponents of the non-compete ban point to trade secret laws as alternatives to restricting unfair competition, the reality is that non-competes are a far more practical litigation tool for discouraging unfair competition than trade secret laws. The prosecution of trade secret cases often turns on subtle nuances in the type of information that a departing employee took, which can often be more difficult to prove than the simple fact of whether an employee is simply working for another employer.
The intentions behind a non-compete ban can be noble—there is no good reason for why low-wage or unskilled workers should be subject to non-competes. There is also an argument to be made that non-competes in the medical field should be outweighed by a patient’s choice of doctor—which is why the legal profession already prohibits non-competes among lawyers. Recognizing this, many states already outlaw non-competes for low and medium-wage workers.
The FTC rule is hopelessly overbroad. In failing to exempt senior executives, it makes it far easier for unethical executives to cheat their companies (and shareholders), with diminished fear of accountability. Non-competes are one of the best devices for keeping senior level executives from devolving into a purely self-interested corporate state of nature. The FTC rule discourages accountability among senior executives and makes companies and their employees more vulnerable to bad actors.