What Every Career Owner Needs To Know About Noncompete Agreements

On Wednesday, January 4, the US Federal Trade Commission announced it was taking legal action against three companies and two individuals. The purpose was to force those parties to drop noncompete agreements affecting thousands of workers, in order to promote “greater economic opportunity and competition.” The next day, January 5, the FTC followed up by issuing a Notice of Proposed Rulemaking (NPRM) stating “noncompetes” were “an unfair method of competition in violation of Section 5 of the Federal Trade Commission Act.” Lina M. Khan, the FTC’s Chair, asserted “The freedom to change jobs is core to economic liberty and to a competitive, thriving economy.” Regardless of the economic outcomes, the freedom or lack of freedom to change jobs is fundamental to your career future!

A number of US states, most notably California, already bar noncompetes. However, in most states they remain legal. Moreover, a fight over the FTC’s action may be brewing. Two more of the FTC’s current commissioners, along with a former commissioner, support Kahn, but the fourth member is opposed. Also, the U.S. Chamber of Commerce has questioned the FTC’s authority, threatening a lawsuit if the FTC’s proposal is accepted. I reached out to a recognized expert, Orly Lobel of the University of San Diego, author of Talent Wants To Be Free and more recently The Equality Machine, for her advice to career owners.

Michael B Arthur: Why should career owners care about noncompetes?

Orly Lobel: When I wrote Talent Wants to Be Free ten years ago. I showed that people not bound to their workplaces through noncompetes feel more in control over their own talent—and over how to apply it where it’s most valuable. Research shows employers can retain talent through the carrots of rewards rather than the sticks of confinement. In California, where noncompetes are barred, companies have successfully pivoted toward performance-based incentives, stock options and intangible rewards for their employees.

Arthur: I understand trade secrets will be excluded. Will that be sufficient to satisfy skeptical employers?

Lobel: Trade secrets are protected through the Federal Trade Secrets Act of 2016. However, companies have been trying to subvert the Act through Non-Disclosure Agreements. For example, companies have tried to use NDAs to protect salary information and customer lists. These do not meet the standard for trade secrets, but restricting their visibility can prevent new companies from joining the market. Unfortunately, employees may not know this, or may not feel empowered to speak out. In states where NDAs are enforced less strictly, employees also feel more confident to participate in truthful online reviews of their workplaces, like on Glassdoor. This kind of information about work environments is key when people make dynamic choices about their careers.

Arthur: I read that one in three people joined a new employer without knowing there was a non-compete agreement to be signed later. What are your thoughts on that?

Lobel: Employees often sign agreements that would never be enforceable if litigated. Employees may not know their rights, or feel they have little negotiation power. The situation is similar to those “clickwrap” agreements customers sign to get on with their lives rather than read the small print. Employers do that with noncompetes all the time. Also, there’s a “chilling effect” because people don’t want to test an agreement. So they’re likely to only go to another deep-pocketed employer that promises to defend them. Small, potentially innovative, competitors get excluded from the talent market. The greatest loss caused by noncompetes is entrepreneurial ventures.

Arthur: So how can we get beyond the image of deep-pocketed organizations keeping the playing field to themselves?

Lobel: The educational and enforcement components of the FTC proposal will be very important. I would want the rule to require the employer to explain that the employee is free to move. This could work like the Trade Secrets Act of 2016, which states employees can report to a government agency and enjoy immunity from prosecution for doing that—and requires employers to explain that in the employment contract. Also, the way to get around the deep pocket thing is to go after employers that have gone too far. So the announcement that the FTC has chosen to sue three employers and two of their managers is important. The FTC needs to do that kind of policing, to use its own deep pockets to establish precedents.

Arthur: Is there anything else that concerns you?

Lobel: There’s one more thing that’s important for individuals and for employment practice at large. Noncompetes have a disproportionally harmful effect on people who have been undervalued, or who seek a harassment-free workplace. There is greater harm for people who find themselves in an unpleasant place to work and simultaneously feel trapped. Throwing out noncompetes can level up the playing field for these people.

Arthur: Thank you very much for your insights.

For readers’ further information, the FTC’s NPRM invites the public to submit comments and provides an email address and phone number to do so. The public comments period will open soon and run for 60 days. The FTC may make changes in a final rule, based on comments received and the FTC’s further analysis. of this issue.

Orly Lobel’s Talent Wants to Be Free, published in 2013, remains both highly readable and relevant, while her latest book The Equality Machine explains how AI can be applied to deliver wider career opportunities to a diverse workforce. Lobel has worked with President Obama’s policy team as well as with the FTC on these matters.

Regarding further information on how to deal with a noncompete that applies to your own career, a Harvard Law School publication Negotiating a Non-Compete Agreement with Employers may be helpful. Another potentially useful source is the National Employment Law Project FAQ On Non-compete Agreements, which includes a list of relevant research articles. Further information about the situation in your own state can usually be found by searching on “noncompete law in [Your State].”