The Federal Trade Commission is considering a new rule that would ban non-compete language from employment contracts in the United States. While the argument is this would free employees for more job opportunities and bolster wages, this raises serious concerns for employers; especially those employers whose business is based on confidential and proprietary systems. FTC “Matter Number” P201200 is portrayed as a freeing force for employee rights, when it could potentially be a draconian threat to investment and risk taking for employers.
According to the FTC:
About one in five American workers—approximately 30 million people—are bound by a non-compete clause and are thus restricted from pursuing better employment opportunities. A non-compete clause is a contractual term between an employer and a worker that blocks the worker from working for a competing employer, or starting a competing business, typically within a certain geographic area and period of time after the worker’s employment ends. Because non-compete clauses prevent workers from leaving jobs and decrease competition for workers, they lower wages for both workers who are subject to them as well as workers who are not. Non-compete clauses also prevent new businesses from forming, stifling entrepreneurship, and prevent novel innovation which would otherwise occur when workers are able to broadly share their ideas. The Federal Trade Commission proposes preventing employers from entering into non-compete clauses with workers and requiring employers to rescind existing non-compete clauses. The Commission estimates that the proposed rule would increase American workers’ earnings between $250 billion and $296 billion per year. The Commission is asking for the public’s opinion on its proposal to declare that non-compete clauses are an unfair method of competition, and on the possible alternatives to this rule that the Commission has proposed.
Personally, I’ve never asked any employee to sign a non-compete clause, nor have I ever signed one as a condition of employment. However, I’ve never invested millions of dollars into proprietary research or technology systems, so therefore never had to be concerned about my business secrets walking out the door and down the street to a competitor. By restricting the right of an employer to require a non-compete, the FTC would be potentially unlocking the door to broader theft of intellectual property. They are likely right that it will increase employee wages.
Some competitors will pay a pretty penny for your operational knowledge.
The administrative rule (lest we confuse this with an actual law – this is a bureaucratic endeavor by unelected government officials) would also force employers with existing non-compete clauses in their contracts to rescind them by the compliance date. No grandfathering here, apparently.
There is one exception to this proposed rule. Non-compete agreements may still apply to people selling businesses or otherwise divesting of their property. On that the proposed rule states:
The requirements of this Part 910 shall not apply to a non-compete clause that is entered into by a person who is selling a business entity or otherwise disposing of all of the person’s ownership interest in the business entity, or by a person who is selling all or substantially all of a business entity’s operating assets, when the person restricted by the non-compete clause is a substantial owner of, or substantial member or substantial partner in, the business entity at the time the person enters into the non-compete clause. Non-compete clauses covered by this exception would remain subject to Federal antitrust law as well as all other applicable law.
Certainly, the non-compete clause has been abused at times. It has been sometimes applied where no true reason for it exists. Still, this is an issue of personal choice and freedom; freedom of an individual employee to accept the agreement or move on. If someone objects to a non-compete requirement of a job, they do not have to accept the job. And an employer should be free to protect their trade secrets and proprietary information. Without it, they may simply stop investing in ideas.
After all, it would be much easier to create nothing and then just steal the employees of those who created something.
The FTC is taking public input on this rule through March 10, 2023. You can learn more about this and submit comments via their website.
If you’ve invested heavily in proprietary systems, you may want to speak up. The secrets you save might be your own.