Cernak: Blanket ban on non-compete clauses a big mistake | Opinion
Non-compete clauses in employment contracts have been judged on a case-by-case basis for centuries. States have developed different ways of handling them. Now, the Federal Trade Commission proposes to replace this approach and rewrite millions of agreements with a complete ban.
Non-competes prevent workers from leaving an employer to work for other employers, typically competitors. The clauses usually are limited in time and geography. So, for example, a worker is prohibited from working for a competitor in Michigan until six months after leaving the first employer. Through these clauses, employers hope to better protect their secrets and avoid training a worker for a competitor.
For hundreds of years such clauses have been covered by common law or state and federal antitrust and trade secret legislation. Most of those laws balance the employee’s ability to work with the employer’s desire to protect its secrets and recoup its investment in the worker.
Under this case-by-case approach, such restrictions are more likely to be upheld if limited in time and geography, and if the employee working for a competitor really will harm the employer.
Take two examples. First, the head of purchasing at a major automaker — who has spent 20 years intimately learning the company’s processes and knows its future product plans — agrees to not work for another automaker for six months after leaving in exchange for a bump in salary. Second, a fast-food worker who has spent her summer learning how to make sandwiches and bus tables agrees to not work for any other fast-food company in Michigan for one year after leaving.
Today, under most laws, a court could consider the obvious differences between those two examples. Does the automaker’s bargain to more effectively protect its secrets outweigh the limits on the executive’s employment? Does protection of the fast-food company’s table-cleaning secrets really require forcing a move to Toledo to get a job?
But under a rule proposed by the FTC on Jan. 5, all such non-compete clauses would be illegal. Employers and workers would no longer be allowed to enter such agreements, and any prior agreements — even if freely entered and bargained for — could not be enforced. Conflicting laws would be preempted.
As I argued in an opinion piece published on these pages last year, it is not clear that the FTC has the authority to make such rules. Also, the process it followed might have been flawed. Even putting those concerns aside, the FTC should withdraw this proposed rule.
Would the automaker in my example invest as much in its workers if it thought they could quickly switch to a competitor? Would it be forced to use less efficient ways to protect its secrets?
While the non-compete clause in my fast-food example seems inappropriate, the FTC could join the many state and local enforcers who have challenged similar clauses instead of issuing a blanket rule. Even by its own estimates, the FTC’s proposed rule is likely to raise wages more for the exec than the fast-food worker.
The retroactive enforcement means that the FTC would be changing the terms of tens of millions of contracts across the country. In another “Washington knows best” moment, it would preempt laws in almost all 50 states. After hundreds of years of case-by-case evaluations, a handful of bureaucrats in Washington think they have discovered the magical blanket rule that has eluded everyone for centuries.
Before March 10, you can visit Regulations.gov to join the thousands of others who have commented on this proposed rule.
Steven Cernak is a longtime antitrust practitioner and adjunct professor. He is a partner in the Detroit office of antitrust boutique law firm Bona Law PC.