The Federal Trade Commission (FTC) has proposed a new regulation that would effectively ban noncompete agreements between employees and employers in all 50 states. As a former employment law attorney who drafted, negotiated and litigated many noncompete agreements, I believe the impetus for the FTC's action is sound, but the proposed regulation is overly broad and unnuanced. I also think federal legislation would be a better way to go, especially since the regulation may not survive U.S. Supreme Court scrutiny.
The Case for Banning Noncompetes
The first noncompete agreement I litigated was a lawsuit against a boat mechanic who made little more than minimum wage. Unhappy with his boss, he left one boat company for another. There were no trade secrets or specialized expertise lost. The lawsuit was purely employer vindictiveness.
During my law career, I dealt with noncompete agreements directed against salespeople, printshop employees and technicians (including a woman who quietly quit rather than continuing to be subjected to her boss's unwelcome sexual advances). In these cases, the employers' argument for a legitimate protectable business interest was flimsy at best. However, the economic realities of the U.S. legal system heavily favor former employers. Few employees have the resources to contest the noncompete agreement's enforceability, and most prospective employers don't want to inherit a lawsuit.
The heavily tilted legal playing field often favors an ex-employer who acts like a cheated-on spouse. Say goodbye to reason. Vindictiveness and paranoia govern. Indeed, as a management attorney, I found that trying to persuade my client not to go nuclear through litigation was often bad for client relations. The safer and far more lucrative approach was to share their outrage and collect thousands of dollars in legal fees.
See How Should Employers Respond to Proposal to Ban Noncompete Agreements?
The Case for Using Noncompetes
There are circumstances in which a noncompete is justified and actually works to the advantage of both the employer and the employee. Situations I dealt with included a woman hired from out of state to be a local TV broadcaster. The station would be making a major investment in promoting her and establishing her in a market where she would not otherwise have had an opportunity.
I drafted noncompete agreements involving senior executives who were brought in at very high compensation levels, put in charge of critical company operations, given access to sensitive company information and promoted aggressively to the outside industry.
Other examples include IT professionals who were essentially given the keys to the information systems kingdom, and employees who required certifications to do their jobs (with the employer fronting substantial out-of-pocket costs while giving the employees paid time off to prepare) and who would be able to take their certifications with them post-employment.
In my view, the proposed regulation doesn't address such circumstances. If promulgated, I'm afraid it will cause a lot of employers to hedge on investing in employees in situations where it is in both parties' best business interest to do so.
The Case for a Uniform Federal Rule
Many organizations have employees in multiple states. Trying to account for each state's individual rules, processes, procedures and litigation idiosyncrasies can be daunting. Moreover, it often adds to the litigation burden and expense with fights over venue (where the case should be heard) and choice of law (which state's law should be applied).
Put simply: A uniform federal rule would be vastly more efficient.
The Case for a Nuanced Approach
One thing that's clear about noncompete agreements is that there are many nuances one can weave in. As a result, there's an opportunity for a bipartisan group with employee and employer representation to examine these nuances and seek a consensus solution. Ideally, it would be proposed as federal legislation, but it could still potentially be done as an FTC regulation.
Here are some examples of nuances that could be considered:
- Compensation minimum. A bright line could be created where, if the employee earns below a certain amount, a noncompete cannot be imposed.
- Advanced notice. A prospective employee should know at the earliest possible time that a noncompete will be required.
- Time limitation. In my experience, a year's restriction should probably be a maximum, and there could be circumstances where even that would be too long.
- Required compensation. In certain circumstances, if an employer wants a noncompete enforced, it should be willing to pay for it so the restricted employee does not suffer economic hardship.
- Mediation requirement. Too often in noncompete cases, the employer quickly jumps into court. What about a rule that would require the parties to have a mediated discussion, which could include "blue penciling" (a specific tailoring of the noncompete to fit the current circumstances)?
- Departing employee notice. As a corollary to the employer's agreement to mediate and not immediately sue, the employee could be required to give notice if he or she intends to work for a competitor. The idea is to get the parties communicating before the legal fireworks to see if a mutually acceptable solution can be achieved.
- Shoring up the preliminary injunction process. Typically, when noncompetes are litigated, there's a preliminary injunction hearing held relatively soon into the process. It's often the key event. Judges could be charged with proactively managing the preliminary injunction process by deciding what discovery will or won't be permitted and how the evidence will be presented. The judge's decision could be made final, or the party that loses at that stage and wants to continue would have to post a bond to cover the other party's legal fees going forward.
None of these ideas are magical, and there are probably other good ideas. Yet they're examples of ways that employers and employees could come together and craft something workable for both.
Jathan Janove is a former state bar "Employment Law Attorney of the Year," author of Hard-Won Wisdom: True Stories from the Management Trenches (HarperCollins 2017), Master Coach & Practice Leader with Marshall Goldsmith Stakeholder Centered CoachingÒ, and faculty member, University of California San Diego Masters Series.