This past week, the Federal Trade Commission (FTC) “proposed a new rule that would prohibit employers from imposing noncompete agreements on their workers, a practice it called exploitative and widespread, affecting some 30 million American workers.” While this proposed rule is not official yet, the potential eradication of noncompete agreements creates room for widespread economic growth. Particularly, “the FTC estimates that a ban on noncompete agreements could increase wages by nearly $300 billion a year by allowing workers to pursue better opportunities.”
So, what is a noncompete agreement and why does this decision matter? In short, businesses utilize noncompete agreements “to maintain their competitive edge.” While it is understandable that companies would want to protect their business interests, these legal agreements can significantly limit the employability of an individual once they leave a company.
There are two basic areas of law that use noncompete agreements.
A noncompete clause in a purchase agreement
The first area is not currently a concern to the FTC and deals with the purchasing of a business. If you are purchasing a business it is critical to have the seller agree not to compete against you. If the clause is not in the purchase agreement, there is nothing to prevent the seller from taking your money and opening a business that directly competes with you. Generally, parties to a business purchase agreement have equal bargaining power, and the noncompete clause is bargained by the purchaser. Government entities have seldom interfered with the terms and conditions of a noncompete clause in a purchase agreement.
Employment noncompete agreements
Employers usually have the upper hand on what is contained in an employment noncompete agreement. For this reason, the FTC and other government entities are getting involved in contract language. Some states like California have passed legislation barring employee noncompete agreements. The point to be made is that companies should not make a former employee unemployable, yet a noncompete can keep a person out of their chosen career for a year or more.
The law recognizes a company’s right to protect its business interests, such as safeguarding its “trade secrets” in employment agreements. When drafting contracts, it is vital to focus on protecting the company's customer list and employees. We suggest to our clients insert a “non-solicitation clause” in an employment agreement. A non-solicitation agreement limits a former employee from contacting the business’s customers and employees. This leaves the employee free to obtain a job within the industry, even with a competitor, while protecting legitimate business interests. This type of contract should be enforceable in most jurisdictions.
The best way to protect a company’s business interests with key employees is to strike a balance between what a court would call a legitimate business purpose without making a former employee unemployable. If you would like help in striking the balance needed to have an enforceable agreement, please contact me.