This One Reason Justifies the FTC Rule Banning Non-competes

posted by Neil E. Klingshirn | January 12, 2023 in Noncompetes/Trade Secrets

The Federal Trade Commission (FTC) issued a proposed rule that will ban all noncompete agreements except those connected to the sale of a business. It has been the topic of much discussion, with experts weighing in on the fairness effectiveness of non-competes. Recently, I was quoted in a MarketWatch article about noncompetes, and I wanted to take this opportunity to expand on my thoughts on the subject.

What is a Non-compete?

First, it's important to understand what a noncompete agreement is. Essentially, it's a contract between an employer and an employee in which the employee agrees not to work for a competing company for a certain period of time after leaving their current employer. These agreements are often used to protect a company's proprietary information and trade secrets, as well as to prevent employees from taking their valuable skills and knowledge to a competitor.

While noncompetes can certainly serve a valid purpose, they can also be overly restrictive and harmful to employees. For example, if an employee is subject to a noncompete agreement that prohibits them from working in their field for an extended period of time, it can make it difficult for them to find new employment and advance in their careers. Additionally, noncompetes can stifle innovation and competition by preventing talented individuals from moving between companies and sharing their ideas.

The Proposed FTC Rule Bans Non-competes

The proposed FTC rule comes down squarely on the side of protecting employees. If it becomes a final rule, employers will not be able to enter into a non-compete agreement or enforce an existing non-compete clause. The rule defines a non-compete agreement as a contractual term between an employer and an employee that prevents the employee from working for a competitor after the employment ends. Banned non-compete agreements will include restrictions that have the effect of prohibiting the worker from seeking or accepting employment with a competitor, including non-disclosure agreements written so broadly that they effectively preclude the worker from working in the same field and any requirement that the worker pay for training costs if the worker’s employment terminates within a specified time period.

Marketwatch, a Wall Street Journal sibling, asked whether the FTC rule is necessary. Most state laws already prohibit overly broad agreements, so Marketwatch asked our firm if state law lets an employee can get out of one now.

An Employee Cannot Escape a Non-compete without $pending Thousands on a Risky Bet

As I said for the article, a non-compete “is binding to the extent it is necessary to protect an employer’s business interests, an employee violates it at their peril.” In addition, attempting to avoid a non-compete is expensive. An employee who challenges or ignores a non-compete can expect legal fees of $25,000 to $30,000 in a successful case. The worst case could be “hundreds of thousands of dollars in legal fees and a potential seven-figure settlement.” So an employee trying to avoid a non-compete has to ask, the question is, “do I feel lucky?”

Every case is different, but the basic dynamics are the same. An employer can easily get a non-compete agreement from an employee, at no cost. An employee cannot escape it without great difficulty and expense. The FTC rule will spell welcome relief to employees who do not pose a competitive threat to their employers.


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