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July 14, 2021

Slow Train Coming: The Federal Crackdown on Non-Competes

Slow Train Coming: The Federal Crackdown on Non-Competes

The Biden administration has ordered the Federal Trade Commission to crack down on the “unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.”

In the words of Bob Dylan, this was a “slow train coming.” Non-competes have long been under fire, and some have called for the federal government to get involved. Now it has.

Let’s talk about what got us here, and what comes next.

Non-Competes Protect Trade Secrets

In the employment setting, a non-compete agreement prevents an employee who leaves one job from taking a competing job with another company in a certain territory for a specified period of time. Non-competes are used in many industries, especially the tech sector.

If you ask me, non-competes are a valid, sometime vital, tool for business. They can provide a powerful means of protecting trade secrets and other business interests.

I regularly advise businesses to implement well-crafted non-compete agreements and sound policies for enforcing them. If an employer and an employee wish to freely enter into an agreement to protect legitimate business interests by imposing reasonable limitations when the employee departs, more power to them.

The Abuse of Non-Competes

But non-competes are widely—and badly—abused.

For example, companies sometimes require non-competes when they have no legitimate interests to protect. A notorious example was Jimmy John’s use of non-competes with sandwich shop workers. Were the proportions of meat, cheese, and lettuce a precious trade secret—or did the company just want to keep its workers from quitting? Jimmy John’s rightly abandoned its policy under pressure from state attorneys general.

Many companies also impose non-competes that are grossly overbroad. In every jurisdiction that allows them, non-competes must be reasonably limited in time, territory, and scope of work. And yet in my practice, I routinely see non-compete clauses with few if any meaningful limitations. Sure, these are unenforceable as written, but employees do not know what the enforceable limits are—and it may take costly litigation to find out.

Then there are the non-competes foisted on low-wage workers. These workers often have little bargaining power and no real access to legal counsel. And while there are exceptions, low-wage workers usually are not entrusted with high-value trade secrets and the like.

The unfortunate reality is that non-competes have become an instrument by which certain employers bully employees into staying, harass them when they leave, and exert anticompetitive pressure on companies that dare to hire them.

Government Action on Non-Competes

So, maybe businesses had it coming. At least some of them did.

The abuses are real and they need to be addressed. But is a federal crackdown the solution? Non-compete abuse is already being addressed by the states. In recent years, multiple jurisdictions—including Illinois, Massachusetts, Oregon, and Virginia, to name a few—have enacted substantial changes to their non-compete laws. Other states also have bills on the table. In nearly each case, the changes add greater protections for workers.

It remains to be seen what the FTC will do. It should be noted that the President’s executive order does not impose any new rules by itself. Instead, it directs the FTC to exercise its rule-making authority to “curtail” the unfair use of non-compete agreements. A sweeping ban on employee non-competes—like they have in California and two other states—seems unlikely, in my view. At least I hope so. Properly drafted non-competes are an efficient, proven way to protect trade secrets and other assets. A ban would throw out the baby with the bathwater. Fortunately, the executive order itself contains hints that a sweeping ban is not intended.

But make no mistake, the FTC will likely be proactive. The FTC can be expected to scrutinize the uses and abuses of non-competes and put new pro-worker policies into place.

Update Your Non-Competes

Time will tell what the future holds for non-competes. With the federal regulatory train coming up around the bend, now is the time for businesses to review and update their non-competes. Implementing smart agreements and policies now can help ensure that these tools serve their purpose in the face of increasing 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.