FTC proposal to ban non-compete agreements is met with concerns from lawyers and companies
On Jan. 5, the Federal Trade Commission (FTC) proposed a rule change that would ban non-compete clauses from contract negotiations, rescinding existing contracts as well as banning new ones.
The basis for the rule change, according to the agency, is that non-compete agreements violate the FTC Act because they create an unfair method of competition and harm employees. The proposed rule is broad in its scope, prohibiting anything that restricts an employee’s ability to seek or accept employment with another company.
Non-competes are historically an area of drama and concern due to their incredibly restrictive nature. They can bar a worker from seeking employment with a competing company or individual or prohibit them from starting a competing company. These restrictions can often apply whether a company has laid off the worker or they left voluntarily. Simply put, non-competes can leave employees in impossible situations at times.
A dissertation by Cornell Ph.D. candidate Kwan Seung Lee in 2019 tracked the history of non-competes and found that they’ve been used since 16th century England. Lee found that despite their long history, they weren’t a regular employment problem until the late 20th century when companies began to use them regularly to restrict their employees.
“Most U.S. state courts began to recognize the importance of the protectable business interests and have attempted to strike a balance between business interests and employee freedom,” Lee wrote before concluding that there needs to be better organizational oversight over the use of non-competes.
While there is a firm position among human rights activists that this violates basic freedoms for workers, especially those that are low-wage, there is also a business argument against non-competes. Several states, in restricting or banning them, cite the belief from some economists that this practice harms fair competition and ultimately harms consumers.
At the same time, large business organizations like the U.S. Chamber of Commerce are rallying to block the FTC’s proposed change. They, along with the American Hospital Association, the American Bankers Association, the National Restaurant Association and dozens of other pro-business groups, sent a letter to the FTC opposing the rule change.
Lawyers online reacted with quick concern to the FTC’s announcement. Writing on JD Supra, a site that features user-generated blog posts written by lawyers, Virginia-based attorneys from Kaufman & Canoles urged their colleagues not to panic.
“Whatever the rule eventually states, it is unlikely to be a practical issue for some time,” they wrote. “Even when the rule goes into effect, detractors will undoubtedly file suit to challenge the FTC’s authority to implement the ban.”
On the blog of SixFifty, a legal software company, author Josh Baca suggested the proposal had caught lawyers off guard. “FTC surprised everyone and issued a proposed rule that works toward a non-compete ban,” he wrote, arguing that industry insiders were expecting restrictions instead of an outright ban.
Several states already have laws that set boundaries on when and how non-compete agreements should be used. According to the site HerLawyer, two states—California and North Dakota—currently ban non-compete contracts outright, with California making an exception for trade secrets. Many others stipulate that certain professions are exempt, like doctors or broadcasters. They also might ban non-competes that target low-wage earners and student employees.
Utah only restricts non-competes that target broadcasters, and only in certain circumstances.
“This is killing a mosquito with an elephant gun,” he says, “this is absolutely overreacting.”
The issue for him is that businesses would be unable to protect their interests or their investment in employees under this new rule.
“What the FTC rule doesn’t consider is companies don’t hire lawyers to start litigation unless the issue is important,” he says. “And, invariably, most of the cases I’ve worked on have been with sales reps. And the issue is they walk out the door with the employer’s sales information, their pricing information, and most importantly, their customer information.”
Non-competes are historically an area of drama and concern due to their incredibly restrictive nature. They can bar a worker from seeking employment with a competing company or individual or prohibit them from starting a competing company.
He suggested there was a clean way for this to take place. Currently, businesses send a letter to an employee when they believe a non-compete may be violated. Suflas says that usually goes unanswered, and then a company needs to decide whether to sue the worker. The natural block to this, in his argument, is that litigation is expensive, and companies will only pursue it if they think it’s worth it financially. Therefore, lower-level and lower-salary workers may not register as litigation-worthy.
“That factor kind of self-regulates,” he says.
Suflas bills himself as “a defender of the status quo” and believes that the best method would be for non-competes to protect high-salary jobs.
Back in 2016, Utah’s legislature limited how non-competes could be used. First, they made them unenforceable past one year and voided contracts already in place that exceeded that timeframe. On top of that, the legislature also required employers to pay the legal fees of their former employees if the business lost in court while trying to enforce a non-compete agreement.
At the time, there was a loophole in the form of Utah’s Trade Secrets Act, which would allow companies to argue that their work was protected in a different way.
Separately, attempts to enforce non-competes appear to have cut back against consumers in Utah. In November 2022, Taylor Stevens at the Salt Lake Tribune reported that Utah Behavior Services attempted to sue PBJ & Friends, a clinic for children and teenagers with autism, for allegedly violating non-compete contracts by hiring their former employees.
Parents told Stevens that they were worried the lawsuit would disrupt crucial care.
Utah Behavior Services hit back, blaming media coverage for creating a negative image of them. They called the reports “vicious and personally motivated attacks.”
Suflas sees the situation differently from companies like Utah Behavior Services. He argues that the reason they are useful is precisely because they can be difficult to enforce.
“This rule is coming up in response to some companies overreaching in this area,” he laments, arguing that non-competes should be limited to high-value positions with access to crucial information. Jimmy John’s was requiring their employees to sign restrictive covenants, he says. “So you’re telling a $10/hour employee that they can’t work at McDonald’s? That’s stupid.”
To him, the middle road is the only way that makes sense. He sees the FTC proposal as an overreaction in response to companies abusing non-competes.
“There’s never a perfect system,” he says. “I think the FTC’s world is fundamentally broken. They are addressing a problem in a way that overreaches significantly and creates way more problems for businesses.”
In the end, the tide may change on the law. While non-competes have dominated the workplace in recent decades, public support for the rule change is growing. Lawsuits across the country brought by former employees challenging their contracts are helping bring the issue grassroots interest.
For Suflas, this presents a problem because he believes companies need to be protected.
“An employee has sweat equity in the job,” he says. “Conversely, the company has sweat equity because, ‘I’ve paid you to do that.’”