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Pending noncompete ban raising concerns

FTC Building

The Federal Trade Commission last month proposed a sweeping ban on noncompete agreements in employment contracts, but opponents say 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 a provision.

Employers may have to reconsider how they deal with the issue in light of the FTC activity, experts say (see related story, below).

The insurance sector, which has seen a recent proliferation in employment-related litigation, particularly among brokers, may be less affected than others because companies in the industry usually rely on nonsolicitation or nondisclosure agreements rather than blanket noncompetes. The FTC proposal, though, does create some uncertainty, 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. Comments on the proposed rule must be filed by March 20.

Noncompete 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.”

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, bars noncompete agreements for employees earning less than $101,250 a year.

The FTC proposal is a “blanket, not very nuanced solution,” 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. “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,” he said. 

Many observers say the FTC has exceeded its authority.

The agency “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.”

Observers also 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 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.”

“Businesses have been putting noncompetes in place for years” for employees who have no business having one, he said. 

He pointed to Champaign, Illinois-based Jimmy John’s Franchise LLC, which in 2016 agreed to stop distributing sample noncompete agreements in hiring packets it sent to its franchisees after then-New York Attorney General Eric T. Schneiderman said they were unlawful.

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 there” that contends California has developed its robust economy, in part, because of the rule.

A September 2021 report, for example, states that “researchers have hypothesized that the lack of enforceable (noncompete agreements) in California … was a key factor behind the clustering of highly innovative IT firms in Silicon Valley.” The report, which reflected the view of earlier studies, was published by IZA World of Labor, an online platform that provides information on labor market issues.

Some, though, question the California law’s economic impact. 

“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 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 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.”

Employers on notice

Employers should consider how they may have to change their current policies in response to the Federal Trade Commission’s proposed rule to ban noncompete clauses.

“We’re definitely having difficult discussions” with clients as to what it means and how to proceed, said Carrie Hoffman, a partner with Foley & Lardner LLP in Dallas.

Erik W. Weibust, a partner at Epstein Becker Green P.C. in Boston, said that even assuming there are no challenges to the rule, it will be at least eight months before it is implemented “and likely to be far longer than that.” He said he is telling clients to “stay the course” and continue to comply with state law.

Mr. Weibust also said that the publication of the proposal “might be an opportunity to have a conversation” as to whether a “full” noncompete is needed or whether a nonsolicitation or nondisclosure agreement might be sufficient. 

Clifford R. Atlas, a principal with Jackson Lewis P.C. in New York, said agreements with employees should be reasonable and narrowly focused to protect trade secrets and confidential information.

Eric E. Packel, Kansas City, Missouri-based chair of Polsinelli P.C.’s restrictive covenants and trade secrets practice, said it’s usually better for companies to ask employees to sign a nonsolicitation agreement unless they’re dealing with a function such as research and development. 

Such an approach is “probably going to accomplish their real goal” of preventing employees who have confidential information from going to a competitor and soliciting their customers, he said.