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January 06, 2023

Non-Compete Abuse Brought the Hammer Down

Non-Compete Abuse Brought the Hammer Down

Corporations have themselves to blame.

The federal government took steps this week towards banning employee non-compete agreements.

Not merely reining in non-competes. Not just adding some new limitations. No, the FTC has proposed a new rule that would outright ban non-competes for use with employees. In every state. With retroactive effect, so that employers must rescind any non-compete agreements they already have in place.

We will be hearing from the business community in coming weeks about how insane this proposed rule is. And I will join the chorus. The government is using a sledgehammer to crack a nut.

Use and Abuse of Non-Competes

But first let’s pause and consider what got us here.

To be blunt: Non-compete abuse is rampant. Very often – and I do mean very often – companies wrongfully use non-competes to oppress employees and squelch competition.

This is why we can’t have nice things.

Rightly used, a non-compete agreement protects an employer’s trade secrets or other legitimate business interests by placing reasonable restrictions on where an employee may work after leaving the employer.

But sometimes the restrictions are anything but reasonable. For example, in my practice I often see non-competes with nationwide or even worldwide scope – even when the employee had no responsibilities outside a limited region.

And often there are no real business interests at stake, such as trade secrets. For example, Jimmy John’s once faced a crackdown for imposing non-competes on sandwich artists who likely had no access to the company’s precious secrets.

The Crackdown is No Surprise

Sophisticated companies know all this. Yet some (not all) persist in imposing badly drafted non-competes and enforcing them even when their legitimate interests are not at risk.

These companies know that most employees can’t afford to fight them in court.

The result is that employees are deterred from quitting and competitors are deprived of these employees’ talent, often for no good business reason at all.

There’s a name for this: Unfair competition.

To be clear, non-competes are vital to protecting trade secrets and other assets. As I’ll argue next time, the proposed non-compete ban is bad policy, and the FTC is overstepping its bounds in proposing it.

But given the widespread abuse, no one should be surprised that non-competes have attracted intense government scrutiny.

Maxwell Goss is a trade secret, intellectual property, and business litigation attorney. Max counsels clients regarding non-competes and represents clients in non-compete litigation and dispute resolution matters.