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The U.S. Federal Trade Commission earlier this month proposed a sweeping ban on noncompete agreements in employment contracts, but opponents say its implementation could be delayed or prevented by litigation charging the agency has exceeded its authority.
Others, though, welcomed the move, saying a ban would increase wages and promote economic development in states that don’t already have such provisions.
The insurance sector, which has seen a proliferation in employment-related litigation, particularly among brokers, over the past several years, may be less affected than other businesses because companies in the sector usually rely on nonsolicitation or nondisclosure agreements rather than blanket noncompetes. The FTC proposal, though, does create some uncertainty on the issue, experts say.
The 216-page proposal issued Jan. 5 would ban employers nationally from imposing noncompetes on their workers, regardless of their salary level, and would apply retroactively.
Noncomplete clauses vary, but they often bar workers from working for a competing company while they are working for or after they leave an employer for a certain period or in a certain region.
The agency said stopping noncompetes could increase wages by nearly $300 billion per year and expand career opportunities for 30 million workers.
“Noncompetes block workers from freely switching jobs, depriving them of higher wages and better working conditions and depriving businesses of a talent pool that they need to build and expand,” FTC Chair Lina M. Khan said in a statement.
The proposal was approved 3-1 by the commission, with Trump administration appointee Christine M. Wilson objecting that it “represents a radical departure from hundreds of years of legal precedent that employs a fact-specific inquiry into whether a noncompete clause is unreasonable in duration and scope.”
The public can submit comments on the proposal until March 20.
A dozen states and the District of Columbia have enacted measures restricting noncompetes, but they are generally less sweeping than the FTC proposal. Colorado’s law, for instance, eliminates noncompete agreements for employees earning less than $101,250 a year.
The FTC proposal is a “blanket, not very nuanced solution on the issue of noncompetes,” and “there is going to be a lot of pushback from the business community on the need to have noncompetes, especially for senior workers who have access to trade secrets,” said James M. Witz, a shareholder with Littler Mendelson P.C. in Chicago, who co-chairs the firm’s unfair competition and trade secrets practice group
Many observers say the FTC has exceeded its authority. It “doesn’t have the authority to regulate noncompetes whatsoever, much less ban them,” said Erik W. Weibust, a partner at Epstein Becker Green P.C. in Boston. “Noncompetes have been regulated by the states for over 200 years, long before the FTC even existed.”
Some observers contend the proposal is unnecessarily broad.
“Why do you need a noncompete for somebody making $35,000 a year?” said Bennett Pine, a shareholder with Anderson Kill in New York. State legislation focuses on higher-paid employees where it makes more sense, he said.
The proposal also fails to balance employers’ desire to protect their training and proprietary information with employee mobility, said J. William Manuel, a partner with Bradley Arant Boult Cummings LLP in Jackson, Mississippi.
Amy Epstein Gluck, a partner with FisherBroyles LLP in Washington, said, “The FTC has never done anything like this.” She said she would not be surprised if a federal judge issues a nationwide injunction against its implementation.
Others, however, strongly endorse the FTC proposal.
Plaintiffs attorney David Fish, of Fish Potter Bolaños P.C. in Naperville, Illinois, said the proposal “makes a lot of sense, and it’s long overdue.”
Putting aside the question of whether the agency has the authority to issue such a rule, it has “started a dialogue” on the issue of noncompetes, said Carrie Hoffman, a partner with Foley & Lardner LLP in Dallas.
California has a law similar to the FTC proposal, experts note. Christopher J. Banks, a partner with Crowell & Moring LLP in San Francisco, said, “There’s a lot of literature out here” that California has developed its robust economy in part because of this rule.
Not all agree with that assessment, however.
“Whether it has been good for California business has been hotly contested and debated,” said Thomas E. Wallerstein, partner with Venable LLP in San Francisco.
In recent years, there has been frequent litigation related to insurance brokers who have left their employer to join a competitor or to start their own business.
Jeffrey A. Lehrer, a partner with Ford & Harrison LLP in Spartanburg, South Carolina, said traditional noncompetes are rare in the insurance industry, which generally uses nonsolicitation or nondisclosure restrictions instead to deter departing brokers from taking clients with them. Even if the FTC rule is approved, these arrangements will remain intact, he said.
Clifford R. Atlas, a principal with Jackson Lewis P.C. in New York, sees the FTC rule having an impact on the industry. “It leaves employers, particularly in the insurance world who utilize client restrictions on a regular basis, wondering what the impact of this ultimately will be.”
Eric E. Packel, Kansas City, Missouri-based chair of Polsinelli P.C.’s restrictive covenants and trade secrets practice, said that unless an employee is dealing with a function such as research and development, a preferable approach to noncompetes is for companies to ask their employees to sign nonsolicitation agreements. This, he said, is “probably going to accomplish their real goal” of preventing employees who have confidential information from going to a competitor and soliciting their customers.