Ask AI to generate a short history of the FTC\u2019s action against noncompetes, and it might look something like this:<\/p>\n
FTC: We\u2019re <\/em>banning employee noncompetes<\/em><\/a>. <\/em><\/p>\n Business lobbies: This ban is bad for business! We have to stop this. <\/em><\/p>\n Federal courts: We\u2019re <\/em>stopping this ban<\/em><\/a>. <\/em><\/p>\n Voters: This inflation sucks. We\u2019re voting for a new administration!\u00a0<\/em><\/p>\n FTC: The issue is moot. We\u2019re not banning noncompetes anymore.<\/em><\/p>\n Business lobbies: Yay! <\/em>\u00a0<\/em><\/p>\n FTC: Don\u2019t get too excited. We\u2019re still going after businesses that use noncompetes unfairly. See our <\/em>press release<\/em><\/a> about employee noncompetes in the pest control industry. <\/em><\/p>\n Business lobbies: This is bad for business! We have to stop this. <\/em><\/p>\n As AI is wont to do, this short history captures the gist of it, but it gets the details dead wrong.<\/p>\n First, as I explained when the FTC first proposed the \u201cnoncompete ban,\u201d the FTC never banned employee noncompetes. That was the headline, of course, but that takeaway was largely inaccurate.<\/p>\n The FTC rule only banned one narrow kind of noncompete, the kind that says \u201cEmployee may not be employed by a Competitor in the Restricted Area during the Restricted Period.\u201d<\/p>\n Let\u2019s call that an \u201cindustry-wide exclusion.\u201d Most states already banned\u2014or at least significantly restricted\u2014that kind of noncompete.<\/p>\n In Texas, where my firm has defended dozens of noncompete and trade secret lawsuits, the general rule is that a noncompete cannot completely prohibit a former employee from competing in the former employer\u2019s industry. See, e.g.<\/em>, John R. Ray & Sons, Inc. v. Stroman<\/em>, 923 S.W.2d 80, 85 (Tex. App.\u2014Houston [14th Dist.] 1996, writ denied) (\u201cThe Texas Supreme Court has held that an industry-wide exclusion is unreasonable\u201d).<\/p>\n Judges and opposing counsel sometimes don\u2019t want to believe me when I cite this general rule, but trust me, we have decades of case law on it.[1]<\/a><\/p>\n That\u2019s the first reason it was wrong to call the FTC rule a \u201cnoncompete ban.\u201d The thing that it supposedly banned was already prohibited.<\/p>\n The second reason is that the FTC rule still allowed other kinds of post-employment restrictions:<\/p>\n All of these restrictions limit competition in some way, especially the last one. A \u201cno-business\u201d restriction is clearly a form of \u201cnoncompete,\u201d and the FTC rule would have continued to allow it (generally).<\/p>\n Now you can see why the FTC rule was not really a ban of employee noncompetes.<\/p>\n But business lobbies still cried foul, and sued. They won in federal court, effectively killing the FTC rule. See Ryan, LLC v. FTC<\/em>, 746 F. Supp. 3d 369 (N.D. Tex. 2024).<\/p>\n I predicted this when the FTC proposed the rule. I had a feeling the conservative majority on the Supreme Court would not look kindly on the Biden administration sweeping aside state noncompete law with the stroke of an administrative pen.<\/p>\n It never got that far, of course. After a federal district court invalidated the FTC rule, there was a change in administrations (you might have heard about this in the news), and the new administration dropped the rule. The FTC dismissed its appeal<\/a>.<\/p>\n Plot twist: It turns out that hostility to the overuse of employee noncompetes cuts across partisan lines. The new Trump-friendly FTC announced it would continue to scrutinize employee noncompetes on a case-by-case basis.<\/p>\n If there\u2019s one thing liberals and MAGA agree on, it\u2019s the attitude \u201cyou\u2019re not the boss of me.\u201d<\/p>\n Candidly, I was skeptical about whether this promise to scrutinize noncompetes would have any teeth. But the FTC followed through with several high-profile actions, including ordering<\/a> one of the largest pest-control companies in the country to stop enforcing noncompetes against its employees.<\/p>\n This has probably set off alarms in the old country club wing of the Republican Party. The \u201cpro-business\u201d faction (basically, the Bush family) still likes noncompetes. They would prefer to keep giving Big Business free rein to make employees sign whatever documents are put in front of them.<\/p>\n This gets to the next thing that is wrong about the AI-generated narrative we started with. Enforcement of employee noncompetes is not the \u201cpro-business\u201d position. I can understand why the legacy big business PACs think it is, but they\u2019re wrong.<\/p>\n If there\u2019s one thing I\u2019ve learned from over a decade specializing in noncompete litigation, it\u2019s that employee noncompetes are bad for business. Now, they might be good for lazy <\/em>businesses that want to coast on their established relationships, but they\u2019re bad for business generally.<\/p>\n That\u2019s because enforcement of employee noncompetes effectively imposes a hiring tax on business. Any time a company wants to recruit talent from a competitor, they have to worry about a noncompete lawsuit. Usually, they\u2019re still going to hire who they want, but they\u2019re going to pay some litigation expense for the privilege.<\/p>\n Business would be better off if everyone was on a level playing field, with no employee noncompetes allowed. They could all freely hire and fire, and isn\u2019t that the real \u201cpro-business\u201d position?<\/p>\n Defenders of the status quo will say the economic sky will fall if employee noncompetes are actually banned. Companies will have little incentive to invest in their people if the employees can so easily leave to join a competitor.<\/p>\n Really? California generally doesn\u2019t allow employee noncompetes. Last time I checked, it had the world\u2019s fifth-largest economy, and some of the most profitable companies in the world.<\/p>\n If that example is too woke for you, consider deep-red Oklahoma. They generally prohibit employee noncompetes too, and their oil and gas wells keep pumping away, bringing millions into the state.<\/p>\n Ok, but what are businesses supposed to do now? Say what you will about the star-crossed FTC rule, at least it had the benefit of offering some certainty. Now, how are businesses supposed to know if the FTC will deem their noncompetes unfair and anticompetitive?<\/p>\n Fortunately, I have the solution. I recommended it way back when the FTC announced its proposed rule: Just don\u2019t require your employees to sign noncompetes.<\/p>\n Trust me, you would be better off focusing on keeping your above-average performers happy. If they\u2019re happy, they won\u2019t jump ship to a competitor. And if your below-average performers leave, is that such a tragedy?<\/p>\n Still, I\u2019m enough of a realist to know that most businesses won\u2019t take this advice. So, if you must have your employees sign noncompetes, then I suggest this. Limit the use of noncompetes to the kinds of employees noncompetes make sense for: high-level executives and sales people with key customer relationships.<\/p>\n And make the scope of those noncompetes narrow. Because guess what, state law already requires that.<\/p>\n What do I mean by narrow? The short version: Limit the activity restricted to doing business with customers the employee dealt with at the company, keep the time period short (two years max, one year is better), and limit the geographic area to the territory where the employee\u2019s customers were located.<\/p>\n As for lower-level employees, you don\u2019t need them to sign noncompetes. You don\u2019t want to be the next Jimmy John\u2019s<\/a> in the press.<\/p>\n If you keep your noncompetes narrow and limit them to people they make sense for, it\u2019s unlikely the FTC will come knocking on your door.<\/p>\n And if the FTC \u201cban\u201d of employee noncompetes is resurrected after the next presidential election? You\u2019re already in compliance.<\/p>\n ________<\/p>\n Zach Wolfe is the founder of Zach Wolfe Law Firm<\/a>, based in Houston. They defend noncompete and trade secret lawsuits across the great state of Texas. These are, like, just his opinions, man.<\/p>\n\n
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