Experts Debate Potential Impact of Banning Noncompetes

​Experts showcased widely different viewpoints on the Federal Trade Commission (FTC)'s recent proposal to prohibit noncompete agreements during a policy-driven webcast hosted by the Society for Human Resource Management (SHRM) on March 23. An attorney from the FTC defended the proposal, but a management attorney said the agency may have overstepped its authority and called the proposed rule overbroad.

SHRM—which is preparing a formal comment for submission to the FTC—believes the agency should differentiate between agreements designed to limit labor market mobility and those designed to protect confidential trade secrets or strategic planning.

"The broadly drafted regulation would jeopardize the ability of HR practitioners to require the repayment of education or training benefits; it would also endanger the use of nondisclosure and nonsolicitation clauses," SHRM said.

Defense of Proposal

Noncompete agreements stop employees from working for corporate competitors or opening their own competing business within a certain geographic area for a certain period of time after they leave the company.

The proposed federal rule would increase predictability and stability for employers because they won't have to deal with a patchwork of state laws that constantly change, said Karuna Patel, an attorney advisor in the FTC's Office of Policy Planning.

In addition, "it should become easier to find talent, talent that has been locked up by noncompetes to date," she said.

The proposed rule requires employers to rescind all of their existing noncompete agreements and notify their workers and former workers that the agreements are nullified.

In combination, a large number of noncompete clauses across a labor market reduces wages and hinders job opportunities for all workers in that market, not just those with noncompete clauses, the FTC stated in its proposed rule.

Research shows "there's significant harm both to the market and to individuals from noncompetes," Patel said. "We can show the aggregate harm across the nation from noncompetes."

The use of noncompete clauses by employers has increased in recent years, and many workers do not know whether their noncompete clause is legally enforceable or not, the agency noted.

Agency Authority

Noncompete clauses curtail individual liberties, and the FTC has the authority to address this, Patel said.

Michael Wexler, an attorney with Seyfarth in Chicago, disagreed: "There is a distinct, palpable legal disagreement that the FTC has any legal authority to do what it's doing here, and that should be a great concern for HR professionals. … The FTC may be overstepping their bounds and their authority given to them by Congress."

Wexler said the proposed rule would supersede state laws that have already restricted the use of noncompete clauses.

Banning noncompete clauses would be a departure from legal precedent, Wexler noted, and it would likely be subject to litigation. "It will likely go up to the Supreme Court. I can't predict one way or the other what will happen" in the courts, he said.

What about companies that are currently in the middle of litigation over a former worker who violated a noncompete clause? "The FTC doesn't even deal with that situation. It's a very real problem," Wexler said.

Investment in Training and Innovation

When businesses pay for college tuition, professional training or mentorship programs, they're hoping that the recipients don't leave quickly with their new knowledge and skills. Similarly, when companies invest in designing new products and innovations, they don't want anyone to bring those ideas and trade secrets to competitors. With that in mind, some employers only use noncompete agreements with highly compensated executives and employees with access to proprietary information and key customers.

Under the proposed rule, "businesses would have no way to protect investments they make in people, products, technology and innovation because people could go to any competitor," Wexler said. "Businesses would have to seriously consider whether they would invest in education and training. What happens if the person leaves? There's a huge problem with that."

Patel said employers should continue offering incentives for training and career development because it will help to boost productivity and retention of the most productive workers. She said workers may be willing to invest more in their own training when they know they can move more easily between jobs.

The proposed rule contains an exception to allow noncompete clauses between the seller and buyer of a business. The exception only applies to noncompete agreements with people who own at least 25 percent of the company.

Wexler brought up an example of a family business owned by five siblings who each have a 20 percent share, and they want to sell it. Without a noncompete agreement, "who would want to buy that organization then?" he said. "It would be unusual not to have a noncompete when someone sells a business."

Employers and individuals can submit comments on the proposed rule until April 19. After a final rule is published in the Federal Register, employers will have 180 days to comply with the rule.