Nineteen State Attorneys General Urge Federal Trade Commission to Ban Non-Compete Agreements

Frank Kollman
Frank Kollman

The Attorneys General of nineteen states, including Maryland, have asked the FTC to ban non-compete agreements nationwide.  While each of their states has the power to ban non-competes, each wants to bypass the state legislatures and ban non-competes by federal agency rulemaking.

The letter states:

Non-compete clauses in employment contracts prevent employees of one business from leaving and working for or starting another. Using non-competes, employers have bound a wide range of workers—including baristas, engineers, journalists, home health aides, physicians, and sandwich makers—and deprived them of their freedom to use their labor as they choose. Non- competes deprive workers of the right to pursue their ambitions and can lock them into hostile or unsafe working environments. In total, nearly 30 million American workers, or one in every five, currently work under a non-compete while approximately 60 million workers, or two in five, have been bound by a non-compete at some point during their careers.

As the Comment and the Petition before the FTC make clear, the arguments in support of non-compete clauses are unpersuasive. Employers and their advocates argue that non-compete clauses allow employers to recoup their investment in job training, methods of business, and other intangibles. Employers, however, have much less draconian ways to recoup these investments. Instead of non-competes, employers can use negotiated non-disclosure agreements (NDAs) or trade secret and intellectual property law to protect their investment. Additionally, employers can provide term employment contracts with workers—offering workers job security in exchange for workers committing to a job for a fixed period. They can also offer regular raises and promotions to retain workers. All these options are effective at protecting employers’ investment in intangibles and much less onerous than a broad, one-sided restriction on where workers can use their experience, knowledge, and skills.

This effort fails to mention that non-competes are subject to serious judicial scrutiny whenever an employer attempts to enforce them in court.  In order for a non-compete to be enforced, the employer must show, among other things, that the clause is reasonable and necessary, does not impose an unfair burden on the former employee, and does not hurt public policy by improperly restricting competition.

While there are treatises addressing the subject of restrictions imposed on employees when they go into competition with their former employers, the rules can be summarized briefly.  First, employees preparing to go into competition with their employer, with or without a written non-compete agreement, must not divert any business or take action inconsistent with complete loyalty to the company BEFORE they leave.  They can take steps to prepare, like sign a lease, buy office equipment, or have business cards printed, but they better not use them before they resign.

Second, pure non-competes are subject to far more scrutiny than non-solicitation agreements.  If someone sells a business, it is perfectly proper to require the seller to agree not to compete with the company he just sold.  As far as an ordinary employee goes, pure non-competes are very difficult to enforce without compelling evidence that they are reasonable and necessary.

Third, these agreements cannot be forever.  One, two, and sometimes three years are reasonable.  The shorter, the more likely a court will enforce them.

Fourth, non-solicitation agreements are more enforceable and frequently can do the trick.  Even in these instances, the employer has to show that the obligation not to solicit business from customers of the company is reasonable, necessary, and appropriate under the circumstances.  The reason non-solicitation agreements are more likely to be enforced is that the former employee can go to work for another employer or himself, but he cannot steal his former employer’s customers or clients in doing so.  Even when enforced, however, these non-solicitation agreements must be limited in time.  Some jurisdictions also limit them to customers or clients that the former employee actually worked with, not every client or customer of the business.

Fifth, each non-compete or restrictive covenant is reviewed on a case by case basis by a court.  A court might say that language it approved in one instance will not be approved for another company or employee in different circumstances.  A restriction for sales employees might be enforced, but a restriction for production employees might not.

If you use non-competes or restrictive covenants with your employees, cutting and pasting them from one agreement to the next is not wise.  If the FTC bans non-compete agreements, it will certainly make national news.

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