US companies mount resistance to proposed ban on non-compete clauses

David Wagner had a rough start to the year. The medical equipment technician says he was fired on his first day back from the holidays. Under his non-compete agreement, 12 months would have to go by before he could work in his field again.

Time is precious for near-sexagenarian Wagner, who is concerned companies may prefer younger candidates. “They’re looking at a guy at 59 [saying]: ‘Oh, this guy, we don’t want to hire him because he’s gonna retire soon,’” he said.

The US Federal Trade Commission now aims to ban all such non-compete clauses in a move that has inflamed industry groups. Since releasing its proposal last month, the regulator has received thousands of comments, with critics arguing the measure is too drastic and will increase business costs while putting trade secrets in jeopardy.

Non-compete agreements have become more pervasive in the US economy, experts say, amid little oversight and a drop in unionisation. Bosses can now obtain pre-packaged non-compete agreements online. Approximately one in five American workers, or 30mn individuals, are now bound by non-competes, according to the FTC.

These agreements bar workers from joining a competitor for a set period of time, within a geographical area, or both. They are often associated with high-wage executives with access to trade secrets that companies fear may leak upon their departure.

But experts argue they have become widespread among low-wage workers who often have no access to sensitive information. These workers are also more likely to be locked into jobs because they lack the means to negotiate with employers, they are unable to move house, or they can’t afford to wait before starting a new job.

The FTC argues non-competes harm competition in labour markets, discouraging businesses from competing for staff with attractive pay. The ban would increase wages by nearly $300bn per year, according to commission estimates.

Non-competes also hurt business innovation, the regulator said, by stopping the flow of ideas and the creation of competitive start-ups.

“These restrictions can undermine core economic liberties, burdening Americans’ ability to freely switch jobs,” said Lina Khan, FTC chair, after announcing the plan. “[T]he aggregate economic impact of non-compete clauses goes beyond any individual worker.”

The proposal, which will face a second vote before final implementation, would address a practice that has “taken on a life of [its] own”, said Nancy Rose, professor at MIT.

Historical data on US non-competes remains limited, but research by the universities of Maryland and Michigan based on a national survey found they applied to 13 per cent of respondents whose annual earnings were below $40,000. The proportion for all participants was 18 per cent. About a third of employees were presented with non-competes only after accepting job offers.

The legal case that shined a light on this trend involved US sandwich chain Jimmy John’s, which prohibited sandwich makers from joining similar businesses within two miles of its stores for two years. The chain agreed to stop using non-competes in a 2016 settlement.

The FTC last month filed lawsuits to block for the first time non-competes it considered illegal under legislation prohibiting “unfair methods of competition”. It targeted a security guards company and two glass container manufacturers that imposed such agreements on thousands of low-wage workers.

Wagner, who says he earned approximately $73,000 annually in his technician job, joined a class-action lawsuit against his former employer Henry Schein, a medical equipment group, in the state of Washington, where employees earning less than $100,000 cannot be bound by non-competes. Henry Schein said it would respond to allegations in court and that it was committed to “the highest standards of integrity and excellence”.

Republican FTC commissioner Christine Wilson, the sole vote against the proposal — the agency’s first competition rulemaking since the 1970s — described it as “a radical departure from hundreds of years of legal precedent” that would trigger a “raft of unintended consequences”.

She also questioned the FTC’s authority, citing last year’s landmark US Supreme Court decision in West Virginia vs EPA that cast doubt on regulators’ rulemaking powers.

According to Rose, a “novel exercise of the agency’s statutory authority” such as the non-compete proposal would trigger litigation that will probably reach the high court.

Suzanne Clark, chief executive of the US Chamber of Commerce, has said the group would challenge the FTC’s authority if the rule went ahead. Edwin Egee, a vice-president at the National Retail Federation, said the proposal was “legally questionable”. Beth Milito of the National Federation of Independent Business argued it was “not at all clear that Congress intended the FTC to have this authority”.

But not all business organisations are opposed. John Arensmeyer, chief executive of Small Business Majority, said the advocacy group was “very pleased” with the proposal as non-competes “are detrimental to entrepreneurship”. He added that while there was “no question” that workers should “abide by confidentiality rules”, they should also “be able to start a company or join another company that competes”.

Elizabeth Wilkins, director of the FTC’s policy planning office, said the agency felt “confident in [its] statutory authority” which should be exercised “where, as here, there is such substantial marketwide harm”.

Evan Starr, associate professor at the University of Maryland, argued that companies have means to protect information, such as non-disclosure agreements and trade secrets law, that are not as blunt as non-competes.

But Russell Beck, founding partner at Beck Reed Riden, argued that scrapping non-competes “would eliminate one of the two critical tools in protecting trade secrets”, with NDAs being the less effective alternative as “oftentimes companies will never find out” about a leak “until it’s too late”.

Eliminating non-competes would lead to a jump in complex trade secret claims, increasing costs and legal uncertainty for businesses, Beck added.

The proposal’s supporters, however, argue companies can thrive without non-competes, citing as an example Silicon Valley in California, which along with North Dakota and Oklahoma, are the three states where this practice is unenforceable for nearly all workers.

The rule would also be a national standard clarifying what Timothy Emery, partner at employment law firm Emery Reddy, called a state by state “hodgepodge of widely varying laws”.

Emery argued that the proposal may be a “boon” for low-wage workers and could discourage companies from suing employees.

But “a rule without financial penalties is toothless”, he said. “Employers are going to continue drafting overly broad non-competition agreements . . . and see what the court does at some point in the future.”

According to the FTC, “other types of employment restrictions could be subject to the rule if they are so broad in scope that they function as non-competes”.

Beck said this broad interpretation leaves “companies in a complete quandary”.

The FTC’s proposal focuses on workers’ mobility post-employment. But some also face restrictions on the job.

Destinee Moliga, a 30-year-old cook, said she was barred from having a second job despite meeting the requirement of earning less than twice the minimum wage under Washington state law.

She has joined a class action against her former employer Reef Kitchens, which manages ghost kitchens that prepare food for delivery services. The company said it cannot comment on active litigation or legal matters.

Exploring other jobs may have helped Moliga at the peak of Covid-19, when she says she worked up to 16-hour days and was always on call. “I was miserable the entire time,” she said. “I felt stuck there.”

Moliga added that short-staffed kitchens meant she worked 90 consecutive days and had to move her daughter into her mother’s home for childcare. To minimise Covid-19 risks, “I just got to see her from the balcony every once in a while,” missing “milestones” including the first time her daughter rode a bike, she said.

Moliga has found a better paying job where she is neither on call nor bound by a non-compete. “My life has done a complete 180,” she said. “I feel like I’ve got a lot of it back”.