Over the past year, our firm has received multiple client inquiries about recent statements from the Federal Trade Commission (FTC) regarding non-compete clauses. Many of our business clients employ these clauses in specific circumstances, so that ex-employees can not use their knowledge of the company and its customers to unfairly compete for company clients and business.
The genesis of this discussion was a 2021 executive order from President Biden which contained a generic statement asking the FTC to use its regulatory authority “to curtail the unfair use of non-compete clauses and other clauses or agreements that my unfairly limit worker mobility.”
While we cannot predict what the FTC will ultimately do on this count, we know a few things. First, the primary concern of the executive order was not the use of non-compete clauses in connection with well-compensated salaried employees; the concern, instead, was the abusive and unfair use of such clauses, which were either overbroad in scope, unfairly restrict competition, or applied to lower wage workers who were not in a position to damage their ex-employer.
Second, almost all states continue to allow some use of non-compete clauses, with typical requirements regarding reasonableness in scope, time and geography. It is unlikely that the FTC will move to overturn the current law in more than 40 states. Only a few states have completely prohibited the use of non-compete clauses: California, North Dakota, and Oklahoma. Another small handful of states prohibit the use of non-compete clauses for certain employees: these include hourly wage workers, workers making under a stated amount, certain union workers, etc.
More recently (as reported by the Wall Street Journal), the FTC Chairwoman, Lina Khan, indicated that the agency is contemplating new regulation to restrict the use of non-compete provisions, stating that they “hurt lower-wage workers” and “stifle competition for talent.” She further stated that “We feel an enormous amount of urgency given how much harm is happening against the workers.”
Notwithstanding these statements, there is substantial pressure from industry groups to protect the reasonable use of non-compete clauses, and there are additional questions regarding whether the FTC even has the power to establish nationwide non-compete rules which supersede substantial state law on these matters.
Further, the statements from the FTC do not suggest a significant departure from current law, at least as it applies to well-compensated, salaried employees. These employees require significantly less protection with respect to the balancing of equities that is employed by courts in analyzing non-compete clauses. Additionally, these employees often have substantially more valuable employer-specific knowledge or information, which could be used to unfairly compete against employers. Instead, the FTC aims to protect the rights of lower wage workers, who are much more likely to experience significant adverse financial outcomes should they lose the ability to work in a certain geographic region or industry. Also, with respect to the interest of employers – there is often much less of a reasonable basis to restrict these employees, as they often do not access valuable information with respect to employers’ products, services, or customers.
In addition to its statements regarding worker rights, the FTC also has recently taken action against a group of companies regarding contractual restrictions pursuant to an acquisition agreement. In an official statement from Ms. Khan issued contemporaneously with the filing of its administrative complaint, the FTC made clear that “firms may not use a merger as an excuse to impose overbroad restrictions on competition or competitors,” and that the FTC “will evaluate agreements not to compete in merger agreements with a critical eye.”
We will continue to track these developments and their effect on our clients. We continue to believe, however, that employer-employee non-compete clauses can serve legitimate and important client policy goals when they are reasonable in scope and duration and apply to those employees who are well-placed to use company-information and client knowledge to unfairly compete against their former employers.
Please contact us if you would like us to review your existing policies or assist in updating them.
YMFZ provides full service business representation for many local and regional companies, including with respect to employee policies.