An Appraisal of the FTC’s Ban on Non-Competes

May 16, 2024

Privacy Plus+ 

Privacy, Technology and Perspective

This week, let’s consider the Federal Trade Commission’s (FTC’s) new final rule imposing a comprehensive ban on non-competition agreements (NCAs) for all workers except a few senior executives. Citing an impressive array of pro-competitive benefits it expects to flow from the new ban (more jobs, more patents, more start-ups), the FTC has timed its new rule to take effect from September 4, 2024 (right after Labor Day). A link to the new rule follows:

https://www.ftc.gov/news-events/news/press-releases/2024/04/ftc-announces-rule-banning-noncompetes

The new ban prohibits new NCAs for employees. It requires employers to give notice to employees who are already subject to them that the employers will not enforce them. There is an exception for “senior executives” (earning $151,000 and change annually, and in policy-making positions) who are already subject to NCAs. However, newly hired senior executives will not be subject to NCAs. Hence, “senior executives” subject to NCAs will be a declining subset of employees.

What an NCA Is and Does  

Typically, an NCA is an employer-prepared agreement signed by an employee as a condition of starting work, promising that after s/he leaves employment for any reason, s/he won’t compete against the by-then-former employer at all, directly or indirectly, for at least a “reasonable” time within a defined geographic area. (The time-worn presumption is that not working within the scope of what s/he was doing for the employer, within the geographic area s/he was working, for up to 2 years, is generally “reasonable.”)

From the employer’s perspective, an NCA is a purely protective measure, designed to protect its trade secrets, other confidential information, and customer goodwill, including that the employee has developed while in the employer’s hire. An NCA removes the now-former employee from the competition for a couple of years, while the trade secrets s/he learned become obsolete and the former employer’s new hires are established with the customers. After all, thinks the employer, the defecting employee can’t readily misappropriate any trade secrets or goodwill if s/he is out of the business and is doing something wholly unrelated (“flipping hamburgers,” “selling shoes,” “on the bench,” or in coastal areas “on the beach” are common euphemisms). 

From the employee’s perspective, the view is quite different. The NCA means s/he cannot leave to take a better job without starting at the bottom of a whole new career, often uprooting home and family, and forfeiting his or her career progress and life’s learning to date. For the employee, the costs of NCAs get worse by the year as s/he grows older and more experienced, knowledgeable, and valuable.

In considering this, remember that the bedrock law of NCAs dates to a bygone economic era (1960 or earlier) – a time when there was no email; plane flights and long-distance calls were costly; life-long employment with one company was common; and “salesmanship” was thought to be its own specialty not requiring deep product or service knowledge and “good salespeople” could supposedly “sell anything anywhere.”

That is no longer our world, if it ever really was.

Balance and Overkill

NCA law has always been state-based, so states have long struggled to “balance” the competing interests of employers and employees. States that allow NCAs under some conditions require at least “reasonableness” of time, scope, and geographic area, but too often, this has looked barely workable even in theory, and has proven overbroad in practice. In Texas, from 1986 (when the Texas Supreme Court banned NCAs in “common callings”) to 1994, the court and legislature fought over NCAs annually until finally arriving at a “pro-business” structure that only specialists can love, which overlooks the irony that there are usually two businesses involved – that of the former employer, and that of the would-be new business.   

An Important Exception

The new rule is focused on employment-related NCAs.  NCAs related to the sale of a business are a different calculation (especially the sale of a closely-held business whose owner knows everything and is personally connected with the goodwill). There, longer NCAs are reasonable, so the buyer can enjoy what it has bought for a reasonable time, without the seller moving down the street a couple of blocks and starting up again. And, too, the seller will have negotiated the overall price under then-current conditions. 

Our Thoughts

We will not mourn the passing of employment-based NCAs. In our view, anything that begins with a non-competition agreement is anticompetitive and therefore deeply suspect; and if it is to show pro-competitive benefits (much less be “necessary!” as current hysteria claims), then those benefits had better be clear, unassailable, and unobtainable by less drastic means.

The supposed benefits of NCAs are none of those things. Instead, they are opaque, vague, and (in our experience) often misdirected from the actual, un-American objective of stopping competition. In today’s world, “IP” and “goodwill” “protection” are readily obtainable through less drastic means, like straightforward trade-secret enforcement. Against that, the employee’s hopes must also be considered, not to mention the hopes of the business that wants to offer him or her a better deal. (Remember that for every employee who wants to leave, there’s usually a business wanting to hire him or her, or a new business wanting to be started – either way, another step toward the American Dream.)

We note, too, something noticeably missing from many of the current articles on the new ban: several states disavow employment-based NCAs and won’t enforce them at all, or at least not absent exceedingly narrow circumstances.  These include California and Alabama, which already consider disavowing employment-based NCAs as part of their fundamental public policy.

 Consider that. When California and Alabama agree on something as a matter of fundamental public policy, that should get our attention. Certainly, it has captured the FTC’s.  

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Hosch & Morris, PLLC is a boutique law firm dedicated to data privacy and protection, cybersecurity, the Internet and technology. Open the Future℠.