The Society for Human Resource Management (SHRM), with nearly 340,000 members in 180 countries (of which I am one), filed an amicus brief last week in a lawsuit pending in Texas in which it supported efforts to block the Federal Trade Commission's final non-compete Rule. The FTC seeks to impose a comprehensive ban on new non-competes with all workers, including senior executives.
Although SHRM does not oppose the use of "reasonable, narrowly tailored non-compete agreements," it is concerned a "blanket ban" will "stifle innovation, limit training opportunities and harm business and workers alike." Consequently, SHRM has asked the court to grant the plaintiff's motion for an injunction and offers four supporting arguments.
First, SHRM argues that its members will otherwise suffer irreparable harm, specifically, "an economic burden in the form of additional administrative and organizational costs to change, adapt, and enforce company policies and agreements that remain unsettled and may be moot in time."
SHRM questions what might happen if the FTC Rule stands but a court later invalidates it:
- Is an employer required to provide new consideration to resume the old arrangement?
- Is the non-compete duration tolled in the interim?
- Is a worker liable for breach in the interim?
- Will workers' wages be suppressed overall, or will hiring be stunted due to uncertainty and the additional economic burden on employers?
These open questions could lead employers to reduce hiring and investments in innovations and training.
Second, SHRM claims that the FTC rule will harm workers and diminish training and investment in human capital. In support, it cites several studies showing that workers who sign non-competes as a condition of initial employment generally receive higher wages and more training. Meanwhile, their companies invest more in capital equipment and R&D. Therefore, SHRM argues, "it is reasonable to expect that after an employer invests in its workers, those workers will not immediately join a competitor who may freely acquire and exploit those investments made by the previous employer."
Third, the FTC has failed to adequately justify its "near-total ban" on non-competes. Indeed, SHRM notes that the FTC "disregards" studies showing the benefits of non-competes "through specious, unsupported reasoning to reach its pre-determined conclusion that the benefits of training and human capital investment do not justify any potential harms from noncompetes."
Fourth, the FTC failed to consider less onerous alternatives. For example, rather than ban nearly all non-competes, the FTC could have:
- imposed minimum compensation thresholds to enforce them,
- limited non-competes to highly compensated individuals or others with access to competitively sensitive information,
- prohibited non-competes in specific industries, or
- focused on geography and duration.
SHRM notes that Congress' consideration of and failure to enact legislation concerning non-competes make clear that it did not delegate that authority to the FTC.
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