The Proposed Rule Would Supersede State Law
The mission of the FTC (“Federal Trade Commission”) is “protecting workers and competition by preventing anticompetitive, deceptive, and unfair business practices.” This left-leaning libertarian thinks the FTC does a lot of good, but this time the agency has overstepped its bounds. The FTC has issued a proposed rule that would ban non-competition agreements. The ban would supersede the various state laws that allow non-competes.
Does Your Company Need a Non-Compete?
Let’s suppose you are an employer. And let’s use a real example from your author’s litigious past. With the details blurred because of the attorney-client privilege.
Your company is in the business of selling tires. You carry several brands – for both consumer and business use – and you have developed a customer list. You hired a sales person whose job it is to go see customers, schmooze with them and get them to buy your company’s tires. Your company pays your employee on a commission basis.
The Grass is Greener
After a few years of work for your company, the employee wakes up one morning thinking, “Why don’t I start my own tire company? Then, I wouldn’t just be paid a commission. I would be paid more because I would own the company!”
With this thought in mind, your employee quits, starts his own company and starts selling to all your customers. He uses the customer list he developed for your company plus his relationships with the customers to sell them tires. You, of course, are outraged, because, your company spent a lot of time and money building the customer list. What can you do?
There’s not a lot that you can do at this point because you did not have a non-competition agreement with the employee. If you did have a non-compete, you could keep your former employee from competing with you for a certain period of time and within a certain geographic area. The courts require that the length of time and the geographic area be reasonable. In other words, no longer or larger than is necessary to protect your company.
What’s Reasonable?
Now we’re getting to the nitty-gritty. In our example, your company sells tires only in Mississippi, Alabama and Georgia. So if you include the whole South in the non-competition agreement, it is overly broad. You don’t, for example, sell tires in North or South Carolina, Florida or Texas, so you don’t need protection there.
And as for time? How long do you need to protect your customer list? Your customers change from time to time, and so do the people in charge of buying tires for their customers. The length of time is supposed to be only long enough to protect the company. In your author’s experience, six months to two years is the sweet spot for most cases. Note 1: Your mileage may vary. Note 2: This is not legal advice.
To be sure, employers can and do abuse non-competition agreements. Think of another real-life example where a hair stylist is prohibited from styling hair within the entire state where the company works. For two years! What possible kinds of confidential information or trade secrets could the stylist possibly have? In these cases, the stylist can’t afford to go to court to challenge the non-compete agreement and lives in fear of violating it. That isn’t fair.
What has the FTC Done?
The FTC proposes to ban non-competes outright, with a minor exception involving selling your business. Why? The FTC says non-competition agreements are not fair to workers. If workers had the right to jump from one job to another, they would make more money. That’s undoubtedly true, but it can really, really hurt the businesses they used to work for. In a more modern context, what if developers could take the confidential information they learned while working at one company, then apply it immediately to the work they do for another one?
A Matter of State Law
Non-compeition agreements are a matter of state law. Most often, if the length of time or size of the geographic area is unreasonable, the courts will cut them down. This is called the “blue pencil rule.” But in some states, the court’s only option is to enforce the non-competition agreement “as is,” or to invalidate it in its entirety. The FTC’s approach would result in no litigation over non-competition agreements because there wouldn’t be any. What would replace non-competes? Lawsuits for misappropriating trade secrets? What a mess!
What’s Next for Non-Competes?
As I mentioned, the FTC’s proposed rule is a breathtaking overreach, not just in banning non-competes but by imposing this rule on the states. But that might not happen. There is a 180-day comment period before the FTC can act to formalize the rule. I understand that the comments are coming in hot, heavy and often. Stay tuned.