Non-Competes: Should the FTC Regulate Every Relationship You Have?

Non-compete contracts, in my opinion are grossly overused. They’re a bane to business lawyers which I attribute directly to easy access to “form” documents (I could rant …) on the internet. They are one of those “often quoted, seldom read” documents I see working with my business clients. They should instead be rarely used. Used for key employees only. And used only for the purpose of stopping true “competition” (that’s why they’re called “non-compete”). Generally they’re a waste of time and money for business owners to worry about.

Stopping a hairdresser from moving salons; an oil change mechanic from moving from a dealership to an oil change business; really is not stopping “competition”. Rather it’s restraining working class employees from earning a living. Courts have stopped enforcing these lower end non-compete agreements, and I find that a good thing. They are really not preventing “competition” but just making business owners feel like they’re doing something substantive.

The FTC has proposed to regulate non-competes at all levels of employment.

Now, the FTC has proposed not only banning non-competes nationwide, but making that ban universal to all employment relationships. Worse, they’re proposing that it be retroactive. This will create multiple problems, the least of which is continued creeping government involvement in private relationships.

Here is the proposed rule: https://www.ftc.gov/legal-library/browse/federal-register-notices/non-compete-clause-rulemaking

non-compete

What if an employer paid an employee a $25,000 bonus to sign a non-compete? With that non-compete being retroactively voided, will the employee have to give back the $25,000? Seems only fair, because the employer is no longer getting what it paid for.

More to the point, what about the higher end non-compete agreements, where they actually do stop an employee from competing with a former employer. This may stifle innovation in that an employer may be reluctant to invest $50k, $100k, or more in training an employee or letting the employee develop specialized, industry specific skills, only to have that employee take those skills to earn money for a different business.

An expert in designing rocket engines, working at Company A which has spent several tens of millions of dollars setting up labs, hiring experts, training people, all based on the know-how of the expert. Company A gets a government contract almost solely because of this employee working there developing rocket engines. Should he be allowed to quit at the peak of his career and take all that knowledge acquired through Company A spending all that money, over tp Company B so that Company B gets the big government contract without spending all that money on development?

An airplane pilot that spends years training on a new model airplane, hundreds of thousands of dollars to so paid for via Airline 1, leaves and takes that skill to work for Airline 2 which lacks pilots with those skills.

A Ferrari salesman of 20 years who easily sells five cars a month versus other employees who sell maybe ten a year, because he’s spent those years, at the employer’s expense, advertising, building relationships with rich people. It seems reasonable that the employer would not want this salesman going to work selling Bugattis for an actual competitor across the street.

My two-cents

No, this proposed regulation is bad. It’s too much interference. The courts have developed a body of jurisprudence as to when these too-common contracts are unenforceable. The test is whether the departing employee is truly “competing” with the former employer, looking at the skills involved, the activities to be restricted, the geographic restrictions, and other factors. Let’s leave the courts alone to do their jobs.