SHRM Objects to Banning Noncompete Agreements

​SHRM is urging the Federal Trade Commission (FTC) to allow employers to continue using noncompete agreements with certain employees.

Employers and trade groups flooded the FTC with almost 27,000 comments on its proposed rule that would ban noncompete agreements and nullify existing noncompete agreements.

If that's not a record for comments to the FTC, "that's really close to it," said Scott McDonald, an attorney with Littler in Dallas. "It strongly calls for some response from the FTC. It provoked a very large reaction."

The FTC released a proposal on Jan. 5 to ban noncompetes, which 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 a company.

The FTC said noncompetes constitute an unfair method of competition and therefore violate Section 5 of the Federal Trade Commission Act. It concluded that noncompetes suppress wages, stifle innovation and make it harder for entrepreneurs to start new businesses. The proposal's comment period ended on April 19.

It's unclear when the agency might issue a final rule or what revisions it might consider.

When a final rule comes out, Pete Steinmeyer, an attorney with Epstein Becker Green in Chicago, said he expects many lawsuits to follow, including injunctive relief that would stop the enforcement of the noncompete ban.

Three states—California, North Dakota and Oklahoma—have banned noncompete agreements entirely, and many other states have enacted restrictions, such as setting a compensation threshold or requiring advance notice, Steinmeyer said.

SHRM's Position

In comments to the FTC, Emily M. Dickens, chief of staff, head of public affairs and corporate secretary for SHRM, said the FTC's proposal would "impede SHRM members' ability to balance the needs of workers and employers and will reduce the contractual capabilities of reasonable and consenting parties. The sweeping proposal significantly complicates HR professionals' responsibility to protect their workforces' intellectual property."

She agreed that noncompetes are unnecessary and inappropriate for low-wage workers, but called the proposed rule overbroad. 

"Without the use of reasonable, narrowly tailored noncompete agreements, employers will be precluded from recouping their investments in employees, as well as intellectual capital," she said.

Because the rule would apply retroactively, it would "deprive employers of existing contractual rights and obligations that were freely negotiated and entered into with their workers," Dickens said. "Voiding existing agreements will arbitrarily and unfairly result in a taking without due process and an unearned windfall."

Instead, she said the FTC should consider "less onerous alternatives," such as those some of the states have done, including:

• Establishing a minimum compensation threshold.
• Limiting noncompetes to managerial and executive positions.
• Creating presumptions of enforceability and unenforceability, depending on duration, geographic scope and/or activity restrictions.
• Limiting noncompetes on the precondition that material compensation and/or benefits be provided to the employee.
  

"I think we will see some modifications to the rule," McDonald said. "I don't see the FTC stopping this process and not going forward with this rule at all."

Even without the new rule, "noncompetes are only enforceable if they protect a legitimate business interest," such as trade secrets, customer relationships or customer goodwill, said Erik Weibust, an attorney with Epstein Becker Green in Boston. "There are outlier cases where there's abuse," but most companies are using noncompete contracts responsibly, he noted.

Employer Objections

Some employers have argued that the FTC doesn't have the authority to ban noncompetes. "It would take Congress to enact a national ban on noncompete agreements," Steinmeyer said.

The proposed rule is "constitutionally suspect. It's an issue of federalism and states' rights," Weibust said.

Employers also have argued that noncompete agreements are necessary to protect their trade secrets, customer relationships and investments in training workers. When businesses pay for college tuition, professional certifications or mentorship programs, they're hoping that the recipients don't leave quickly with their new knowledge and skills.

SHRM noted in its comments one organization's statement that: "In a competitive industry, client and service information are the value of our business. Being unable to protect that information devalues our enterprise. We do not use unreasonable time periods or distances, just what makes sense in our small territory with multiple competitors." Many business groups don't object to a noncompete ban for low-wage workers. "That's a common refrain," said David Woolf, an attorney with Faegre Drinker in Philadelphia. "I don't know anyone who says, 'No, we need to have noncompetes for low-wage workers.'" 

In a tight labor market, some understaffed employers support the FTC's proposal because it would make it easier for them to recruit talent with relevant industry experience, Woolf said.

While waiting for the next steps from the FTC, employers should focus on complying with applicable state laws regarding noncompetes. If you're complying with state law, "you're not likely to be in the crosshairs of FTC enforcement," Weibust said. "We expect that they would go after the worst actors."