The federal government—specifically, the FTC—wants to ban non-compete agreements.
There’s a lot wrong with the idea.
For starters, it’s not clear the FTC can even do this. It has proposed a sweeping rule that would ban all employee non-competes. But does its authority to enforce consumer and antitrust laws allow it to do this? Can it act in this way without clear authorization from Congress? What about companies that operate within a single state—can a federal agency regulate non-competes for them?
These and other nerdy but important legal questions are sure to be litigated if the FTC moves forward with the ban.
Further—and we will hear more on this from the Chamber of Commerce crowd—banning non-competes will hurt business.
Compliance costs alone will be high. The rule would require every employer of any size to give notice to employees that their non-competes are canceled. And an employer could face costly legal action if it does not give notice in the right way.
A bigger problem for business is that banning non-competes would take away a powerful tool for protecting innovation and investment. Businesses in a range of industries use non-compete agreements to keep their hard-won trade secrets out of the hands of competitors.
I’ve beat this drum before and I’ll beat it again: Trade secrets are easy to steal. Non-competes help businesses keep their secrets safe.
A final point is critical but often overlooked. A total ban would erode the freedom of contract that is a bedrock of our economy. If a worker is willing to sign a non-compete to land a coveted job, why bar him or her from doing so? Signing the agreement may give that worker an advantage over others who do not want to sign.
Of course, freedom of contract is not unlimited. Courts will not enforce a contract to commit a crime, for example. But government can protect workers without eliminating the freedom to enter into non-compete agreements altogether.
In fact, many states do just this. Some require a waiting period. Some make non-competes off-limits for low-wage workers. Some disallow companies from enforcing non-competes against those who are laid off or fired. The laboratory of democracy has come up with many protective measures short of an outright ban.
These lesser measures respect workers’ autonomy by granting some protections while still letting them sign a non-compete if they so choose.
Yes, non-competes are widely abused. They are also invaluable when used properly. Let’s not throw out the baby with the bathwater.
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.