Breaking Free: The Case Against Non-Compete Clauses
A landmark ruling by the FTC promises to change the face of employment in the US
Non Competes… What are They?
In short these clauses prevent employees from leaving one employer and going to another that is deemed to be a competitor. many have geographic, industry and time considerations. For nearly two centuries these have been a staple of the US employment contract.
However these clauses, a longstanding staple in many employment contracts, are increasingly being recognized as harmful to employees and detrimental to economic growth. Delaware in fact, last year ruled against them in 3 separate cases.
The recent Federal Trade Commission (FTC) ruling against non-competes signifies a major shift in labor policy. Businesses argue that without these clauses that employees will take their IP and secrets to other businesses and cause irreparable harm. In reality there are already other laws in place ot protect these businesses.
The Original Golden Handcuffs
Non competes trace their history back to 1414, in a case called Dyer's Case. English common law decided not to enforce non-compete agreements because they restricted trade. This ban stayed in place until 1621, when a restriction limited to a specific area was found to be an acceptable exception. Almost a century later, in 1711 case of Mitchel v Reynolds the exemption became the rule, which set up the modern way we look at non-compete agreements today.
The FTC’s Landmark Decision
In April 2024, the FTC's ruling against non-competes highlights a significant change in the regulatory landscape. The commission ruled that these clauses are illegal, fundamentally altering the dynamics of employer-employee relationships. The FTC has stated that new contracts cannot include non-compete language (except in the case of very senior management, and in some cases the sale of a company) and that current non-competes are null and void.
Under the final Noncompete Rule, the FTC adopts a comprehensive ban on new non-competes with all workers, including senior executives.
The final rule provides that it is an unfair method of competition—and therefore a violation of Section 5—for employers to enter into non-competes with workers.
For existing noncompetes, the final rule adopts a different approach for senior executives than for other workers. For senior executives, existing non-competes can remain in force. Existing non-competes with workers other than senior executives are not enforceable after the effective date.
Of course businesses have pushed back and filed lawsuits so this is far from settled. The US Chamber of Commerce is currently suing the FTC in federal court in Tyler, Texas, over the FTC's ban on non-compete agreements. If you are considering leaving an employer and “breaking” your non-compete I strongly urge you to consult with a labor attorney.
California's Success Story (This Pains me to Say)
California, a state synonymous with tech innovation and economic growth, has not allowed non-compete clauses for over 100 years. Despite the absence of such restrictive covenants, the state has experienced robust economic development, particularly in sectors like technology and entertainment. This flies in the face of businesses who claim that non-competes are essential for business growth and protection.
The growth in California provides clear evidence that removing non-competes does not hinder economic expansion. Instead, it promotes a dynamic job market where employees can seek better opportunities without fear of legal repercussions. This fluidity encourages innovation and competition, key drivers of a healthy economy.
But What about IP, Trade Secrets & Customers?
One argument against removing non-competes is the concern that employees might share intellectual property or trade secrets. However, existing laws already address these issues adequately. Laws governing intellectual property, confidentiality agreements, and trade secrets provide protection for businesses without the need for blanket non-compete clauses. As long as employees are not sharing these secrets, IP or “stealing” customers there should be no reason why they cannot work a competitor.
What is a Competitor Anyway?
One of the main arguments against non competes is the way many are phrased. Some are far too vague while others far too specific. I have seen NCs that cover the entire world while others only a 100 mile radius. Some define competitor in a vary narrow manner (even naming specific companies) and others that consider competitors to be anyone who does anything remotely similar.
I once defended two employees in a lawsuit when their previous employer claimed we were competitors. Despite not making the same products and not even selling to the same markets they ended up tying us up in litigation for over a year and cost tens of thousands of dollars. In the end they dropped the suit but we both had spent considerable funds.
And this is the power of non-competes. Employers can hold the threat of expensive litigation of the heads of their employees. In reality most non compete suit are never successful it case cause the employee considerable undue stress. Including the new employer to ether terminate their employment or not consider it in the first place.
Personally my reaction to an employer trying to enforce a illegitimate non-compete is much like Starlord’s response in Guardians of the Galaxy. However I’m not a lawyer and I advise you to seek counsel before doing anything brash.
Elimination Increases Prosperity & Innovation
The FTC estimates that eliminating non-competes will increase the average salary by $500, as workers will be free to seek better-paying jobs. Non-competes have often suppressed wages by limiting job options but by removing these barriers, employees can negotiate better salaries and improve their financial positions, boosting overall consumer spending and economic health.
The FTC goes on to name other net positive effects including:
Reduced Physician Service: $74-194 billion in reduced spending on physician services over the next decade as employers move to jobs with better healthcare insurance.
New business formation: 2.7% increase in the rate of new firm formation, resulting in an additional 8,500 new businesses created each year.
Rise in innovation: an average of 17,000-29,000 more patents each year.
Higher worker earnings: $400-$488 billion in increased wages for workers over the next decade.
The imposition of non-competes on minimum wage jobs is particularly egregious. These clauses often trap low-income workers in jobs with limited advancement opportunities. In my opinion, such practices are not only morally questionable but also counterproductive, as they stifle the ambition and mobility of workers who are trying to improve their circumstances.
My Personal Experience with Non Competes
As I have mentioned before I have been on both sides of non competes. When I first started RND I had a normal semi-broad non-compete that I had new employees sign. It stated you could not work for another “custom automation” company within 300 miles. That pretty much covered all of Florida and only 2 other companies.
After defending the two employees mentioned above I began to rethink my position and I only named a few specific companies (at this point we had become a nationwide company) that I felt were DIRECT competitors. While I still had trade secret, non solicitation. and non disparagement clauses I still felt the need to name a few of my direct competitors.
Years later I dropped them all together. I figured if I was not doing enough to keep that employee happy at RND then I deserved for them to go wherever they wanted. Would I still enforce the trade secret and non solicitation clauses? Hell yeah. But if they wanted to work for another automation company then more power to them.
The FTC is Making the Right Decision
In the end workers should have the right to work where they want. Just because I choose to work for employer A I should not be prevented from working for employer B. I should not be allowed to share trade secrets, steal customers or employees or other nefarious activities, but most people are just happy to do their jobs at a new employer. California with their long standing ban on non-competes has proven this won’t wreck the economy. Google is not going out of business because a few employees went to the Bing division of Microsoft. For perhaps the first time ever, the rest of the US should follow California’s lead (yes I will get emails about this statement…😊)
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