By Michelle M. Gervais, partner at Blank Rome
Politics aside, according to President Biden, the banishing of non-compete agreements is rooted in the argument that “…Capitalism without competition isn’t capitalism; it’s exploitation.”[1] In that vein, last month, the Federal Trade Commission imposed a new rule, banning virtually all non-compete agreements across the country. According to the International Monetary Fund, in a true capitalist society, “Capitalism” is founded on the pillars of private property; self-interest, through which people act in pursuit of their own good, without regard for sociopolitical pressure; competition through business’ freedom to enter and exit markets; a market mechanism that determines prices in a decentralized manner through interactions between buyers and sellers; freedom to choose with respect to consumption, production and investment; and limited role of government to protect the rights of private citizens and maintain an orderly environment facilitating proper functioning of the markets.[2]
We see true Capitalism every day, whether it be in the form of the latest NCAA rules or college NIL deals. In a world where the 50 States are left to govern their residents’ ability to contract away their rights, on a daily basis, and where the U.S. Supreme Court opined that it be left to the States to decide on what pregnant women can do with their bodies, experts believe the FTC’s ban will not likely survive its pending court challenges brought by the U.S. Chamber of Commerce and tax service firm Ryan LLC, in Texas Federal Court, accusing the FTC of overreaching.
From a true legal perspective, why shouldn’t non-compete agreements be left to State regulation? Non-compete clauses bar workers from moving to a competitor or starting their own rival business for a fixed period of time and for a fixed geographic area. About 30 million U.S. workers (or approximately 20 to 45 percent of private sector employees) are bound by non-competes.[3]
The Pros: First, non-compete agreements protect the employer’s trade secrets like the customer list or the “secret sauce.” We’ve all seen Bush’s Baked Beans Secret Family Recipe commercial. This is an important protection. Of course, one that will remain protected in most states (including Florida) by trade secret statutes. Second, curbing inflation.[4] According to The Associated Press, although non-compete agreements may be reaching to hourly employees making minimum wage, they are still “most common among high-paid workers.”[5] And, as stated by Forbes, those workers will get the bulk of the collective $296 billion annual raise the FTC projects employees would get from banning non-competes. Finally, experts state “When ‘appropriately used, noncompete agreements are an important tool in fostering innovation and preserving competition,’ according to Sean Heather at the U.S. Chamber of Commerce, ‘because they protect (among other things) an employer’s special investment in, training of, and disclosure of sensitive business information to its employees.’”[6]
The Cons: First, restricted job mobility—according to President Biden, non-compete agreements have trickled down to construction workers, hotel workers and disproportionately to women and women of color and their ability to take a better job.[7] Second, depressed wages…Senator Elizabeth Warren (D-Mass.) said ‘noncompete clauses give companies unfair power over workers, enabling them to cut wages and benefits…’”[8] Finally, experts believe non-compete agreements quash innovation because “They stop employees from launching their own startups…”[9]
Whether you agree or disagree with the above, if you are an employee bound by a non-compete agreement, I wouldn’t be raising the champagne glass just yet.
Michelle Gervais is a partner at Blank Rome and serves as the firm’s Sports Industry Group Co-Chair and Founder. She advises high-profile athletes, celebrities and executives, as well as businesses in the sports, entertainment and finance industries, in disputes that involve the intersection of business and family law matters. Gervais can be reached at [email protected].
[1] Remarks by President Biden at Signing of An Executive Order Promoting Competition in the American Economy; July 9, 2021.
[2] Jahan, Sarwat and Mahmud, Ahmed Saber; “What is Capitalism? Free markets may not be perfect, but they are probably the best way to organize and economy.” F&D Finance & Development; International Monetary Fund; June 2015, Vol. 52, No.2.
[3] Weber, Peter; “The pros and cons of noncompete agreements” The Week; January 6, 2023.
[4] Id.
[5] Olson, Alexandra and Michelle Chapman; “FTC proposes rule that would ban employee noncompete clauses;” The Associated Press; January 6, 2023.
[6] Weber, Peter; “The pros and cons of noncompete agreements” The Week; January 6, 2023, and Sean Heather; “The FTC’s Noncompete Rulemaking is Blatantly Unlawful”; U.S. Chamber of Commerce; January 5, 2023.
[7] Remarks by President Biden at Signing of An Executive Order Promoting Competition in the American Economy; July 9, 2021.
[8] Weber, Peter; “The pros and cons of noncompete agreements” The Week; January 6, 2023, and Elizabeth Warren; X (fka Twitter);January 5, 2023.
[9] Weber, Peter; “The pros and cons of noncompete agreements” The Week; January 6, 2023