In my recent blog post about the FTC's proposed ban of non-compete clauses, I pointed out that with the guidance of skilled lawyers, well-intentioned companies should still be able to protect their interests without non-competes. Since then, several parties – including former U.S. Secretary of Labor Eugene Scalia – have suggested that the FTC lacks the authority to adopt the proposed rule.
So what if the critics are correct? Regardless of whether the proposed rule goes into effect – or even if it goes into effect only to later be found invalid by the courts – I predict that the mere proposition of the rule will drive changes in the practice of law surrounding non-competes. These changes to the federal legal landscape are concurrent with actions at the state legislative level, as states attempt to address non-compete concerns in various ways, such as Virginia's recent decision to outlaw non-competes for low-wage workers.
Sans state legislative initiatives or federal agency rulemaking, the enforceability of a particular non-compete has historically been determined in the courts on an individual basis. Companies file lawsuits to bar former employees from working for a competitor. Former employees file lawsuits for assurance that they may lawfully work for a competitor. Courts then scrutinize the non-compete agreement in question and rule on its viability, applying a legal standard that calls for balancing competing interests – including societal interests. With each case, the law incrementally shifts. Throughout the more than 20 years that I've been representing clients in disputes like these, I've seen a perceptible shift in the courts away from enforcing broad non-competes. But again, the change is incremental.
Taking all of this into account, I believe even if the FTC's efforts to enforce a ban fail, the efforts themselves will drive changes to the law on non-competes developed through the courts. The legal standard I mentioned varies from state to state, but generally looks something like Virginia's, where the courts consideration is whether the non-compete "is narrowly drawn to protect the employer's legitimate business interests, is not unduly burdensome on the employee's ability to earn a living, and is not against public policy."
The FTC's findings in support of its proposed rule include that non-competes suppress wages and that employees often lack bargaining power in negotiations with employers over the terms of their employment. Moreover, a federal agency has now found that most non-competes are against public policy. These findings will directly and indirectly inform courts as they apply the legal standard – rule or no rule. And the law will continue to shift, case-by-case through the courts, as state legislatures and federal agencies contemplate broader and swifter changes.
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