Opinions mixed on FTC ban of noncompetes

Brendan Cossette: Employers and employees should be able to contract freely with one another.

Dan Watson: Eliminating noncompetes will force employers to find other ways to retain workers.

C.W. Elliott: Noncompetes proved essential in company acquisitions.

Valeria Boss: A focus on culture makes noncompetes unnecessary.

Corey Kilburn: Other restrictive covenants can protect companies' rights.

• 
• 
• 
• 
• 

The Federal Trade Commission on April 23 announced a rule to ban noncompetes nationwide.

The rule is scheduled to become effective in 120 days.

An FTC news release announcing the ruling defined noncompetes as contractual conditions that prevent workers from taking a new job or starting a new business. The statement characterized noncompetes as a widespread and often exploitative practice, with an estimated 30 million workers, or one in five Americans, subject to a noncompete.

Existing noncompetes will no longer be enforceable after the rule’s effective date, according to the FTC announcement, except in the case of senior executives, representing less than 1% of workers.

The 3-2 decision by FTC members was made along party lines, with its three Democratic members voting in support of the rule and two Republicans voting against it. The day after the decision, the U.S. Chamber of Commerce filed a lawsuit challenging the rule. The Missouri Chamber of Commerce and Industry is also opposed.

According to the FTC’s announcement, banning noncompetes will lead to more innovation, with an average of 17,000-29,000 more patents per year, as well as a 2.7% increase in startups annually.

“Noncompete clauses keep wages low, suppress new ideas and rob the American economy of dynamism, including from the more than 8,500 new startups that would be created a year once noncompetes are banned,” said Lina M. Khan, FTC chair, in the release. “The FTC’s rule to ban noncompetes will ensure Americans have the freedom to pursue a new job, start a new business or bring a new idea to market.”

Brendan Cossette, chief operating officer of the Missouri Chamber of Commerce and Industry, said until the ruling, each state had its own rules and case law around noncompetes, and this is one of the first federal forays into the arena.

Because it is a federal issue, the U.S. chamber has filed the lawsuit, Cossette said, but noted the Missouri chamber sees the rule as overreach.

“In general, we support noncompetes and the government not, for lack of a better term, messing with the ability of employers and employees to contract freely about the scope of their employment,” Cossette said.

Noncompetes can serve to protect trade secrets or customer contact, and by law they must be reasonable as to scope and length of time, he said.

He added that longstanding case law in Missouri holds that any geographical restriction must be reasonable.

“If you’re in Springfield, and you have a very specific sales base and customer group that is tied to southwest Missouri, it’s not reasonable to say that you can’t go work for somebody in Michigan who would have nothing to do with anybody in southwest Missouri,” he said.

Likewise, a noncompete with a duration of over a year would come under scrutiny in the Show Me State.

“You can’t say in perpetuity you can’t work in this industry again,” he said.

Mixed reception
Noncompetes can apply to workers from myriad industries, ranging from manufacturing plants to medical practices to restaurants.

Dan Watson, chair of the Springfield Tech Council and infrastructure and security manager at CNH Reman LLC, said noncompetes have been fairly widespread in the tech industry, particularly for managed service providers.

Watson himself was impacted by a noncompete contract clause when he left a consulting job. Immediately afterward, he took a teaching job at Drury University.

“I had to get out of consulting altogether,” he said. “I loved it, but I didn’t love where I was working anymore.”

Watson said eliminating noncompetes is great for competition but bad for employers who can’t retain their workers any other way.

C.W. Elliott, owner of the vocational training platform VocQuest, thinks noncompetes are an important tool for protecting a company’s assets.

Elliott previously owned Jonesen, a company that offered web development and secure managed web hosting. To grow the business, Elliott said he and his partners completed 14 acquisitions in a little over six years.

“Noncompetes helped protect the assets we’d acquire when purchasing a book of business,” he said. “Being able to negotiate that with the seller and manage that risk was very important.”

Elliott said he’s a big believer in the free market and the ability for people to enter into and structure contracts at will.

“I’m definitely a capitalist,” he said. “If someone wants to enter into a contract with a noncompete, that’s their prerogative. If a business wants to enforce it, that should be up to them.”

Like Elliott, Cossette noted a noncompete could be advantageous to either party – employer or employee. A prospective employee presented with a noncompete clause should negotiate it, he said.

“My suggestion is to say, ‘What am I getting in return?’” he said, throwing out an additional two-weeks’ vacation or another $10,000 as possibilities. “That’s how contracts are meant to work.”

Culture over contracts
Valeria Boss, owner of A Valeria Boss Salon, which has 55 chairs in its downtown Springfield hair salon, said she has never used noncompetes, though they are common in her industry. She noted she has stylists who have been on board for nearly two decades and others she hires right out of school.

“Our whole goal is to keep our people,” she said. “How they become most successful is to work up through our system. My focus has been on culture since day one.”

She said if someone wants to pursue a new opportunity or a different path, she wants them to do that.

“If someone doesn’t want to be in my salon, I don’t want them there,” she said. “We want them to find their own happy, and we know that we’ll be OK.”

To Boss, noncompetes feel a little cruel.

“I don’t think it’s fair to limit where a stylist can work after having worked for you,” she said. “Not every stylist in the world is your right fit, and finding your right fit is something I fully believe in.”

Reaching for that fit is a concept that works for hairstyles and for occupations, she said.

“I’ve never understood someone saying you can’t work within a 10-mile radius of my salon for two years,” she said. “It’s taken us years to build our culture. We’re not going anywhere.”

Other instruments
Corey Kilburn, founding attorney with RoundTable Legal LLC, which works in creative protection and intellectual property litigation, said noncompetes are part of a range of agreements that are considered restrictive covenants. Similar agreements cover trade secrets, confidentiality, nonsolicitation and employment exclusivity.

Enforceability of all of those agreements are determined on a state-by-state basis and measured by scope of time and geographical limitations, he said.

He noted California has already banned noncompetes.

“That doesn’t mean companies don’t try to push those through and try to have them anyway,” he said.

If a federal ban is enacted, Kilburn predicts some employers will try to write them into contracts anyway while counting on employees not to know they are unenforceable.

He added that a lot of states will likely look to California as a template for what to do if noncompetes disappear, as companies will always have a desire to keep private information or customer lists away from competitors. He predicted other restrictive covenants will take the place of noncompetes.

“There will be an increase hopefully on the value side, with companies valuing employees with increased salaries or benefits to keep them there,” he said.

Artists and entertainers often classify as independent contractors, and they fall outside the scope of noncompetes, he said. Noncompetes remain big with production companies and media outlets, however.

“I think it’s very industry specific, as far as whether you consider them a good or bad thing,” he said. “In the grand scheme of things, I look at this as an opportunity to make any of those clauses that are part of an employment agreement more detailed and specific.”

It also lets companies find other ways to hold on to employees, outside of the realm of contract law.

“It’s an opportunity to look at those employees on a more individual basis and to provide more opportunities for them to stay with a job through loyalty aspects and incentives,” he said.