Business groups say FTC's noncompete ban is too broad

A Federal Trade Commission hearing on the agency’s proposed ban on noncompete agreements revealed a sharp divide between businesses worried that without the clauses executives could take their secrets to competitors and employees who say allowing them stifles innovation and allows employers to exploit them.

The pushback from business groups, in particular, suggests the FTC may have to settle on a more surgical approach that addresses hardships that noncompete clauses impose on lower-wage workers who many observers believe should not be bound by them in the first place.

“There are too many variables for a blanket ban to make sense,” Emily Glendenning, vice president and associate general counsel and chief privacy officer at BAE Systems, told the commission. “Noncompetes serve an important purpose that states have recognized” for decades.

But Kevin Borowske, who formerly worked as a caretaker of a condominium for FirstService Residential, said that after he was fired for unionizing efforts, he was reminded that he was subject to a noncompete that would not permit him to do similar work in Minnesota for one year.

“It’s another way corporations are rigging the system so workers cannot seek out better pay and conditions,” he told the commission.

The FTC said noncompetes limit competition in the market and limit workers’ ability to practice their trade. One in five workers — or 30 million people — are bound by noncompete agreements. They’re viewed by some employers as an effective way to safeguard intellectual property, particularly as it relates to departing executives. Employers may sue workers for breach of contract for violating these agreements.

The FTC said research suggests that the agreements also reduce wages across the labor force. One study, “The Labor Market Effects of Legal Restrictions on Worker Mobility,” estimates that a nationwide ban on noncompete clauses would increase average earnings by 3.3% to 13.9%.

On Thursday, FTC Chair Lina Khan said a ban could increase employee earnings by $250 million to $296 billion per year. She also said that two in five people would be more likely to search for a new job if employers were prohibited from using noncompete clauses.

The hearing gave a flavor for just how common noncompete clauses have become, especially in the logistics industry. Steve Cox, president of Chattanooga, Tennessee-based Steam Logistics, said many of his competitors force employees fresh out of college to sign such agreements and “most have no idea what they’re really signing.”

His firm has hired at least 100 people bound by noncompetes, saying the “court of public opinion has spoken really loudly” about the undesirable aspect of the agreements, which he said often keeps employees stuck at an employer. And even when laid off, they have to “sit things out” in a given market for a period of time, he said.

“Companies are really not forced to improve the experience for their workers,” Cox said. “We just believe the only thing a noncompete agreement does is restrict the movement of the workforce unnecessarily.”

Johnna Torsone, former chief human resource officer at Pitney Bowes, urged the FTC to issue a final rule that recognizes the distinction between lower-level and executive-level employees.

Torsone, speaking for the HR Policy Association, said noncompete agreements, when used responsibly, can protect a company’s intellectual property and trade secrets by allowing for a reasonable “cooling off” period. “They shouldn’t be carried over immediately to a competitor,” she said.

Glendenning said that while “commonsense” solutions to noncompetes may indeed be necessary for lower-wage jobs, it is unrealistic to expect that upper-level employees who would go to work for competitors would quickly forget what they learned from their previous employers. “You wouldn’t expect your chief scientist at the new company to rerun all of the failed experiments,” she said.

Intellectual property “is something a company needs to protect just as it protects its physical assets,” Glendenning added.

But Sameer Baig, a physician with Cancer Specialists of North Florida, told the commission, “I wholeheartedly disagree with noncompetes at any level,” including executives, saying there are other ways to safeguard intellectual property, such as nondisclosure agreements.

Baig said noncompetes are now “ubiquitous” in medicine and solely serve the interests of Wall Street health care corporations while harming doctors and patients in markets where they operate.

He said they create “toxic and exploitive working conditions” for doctors, who cannot leave a job for another in their community without sitting out for a specified period of time.

A lot of doctors manage too many patients and hospitals don’t want to hire additional personnel, he said.

“It really creates a safety concern not only for patients but also for the well-being of doctors,” Baig said, recalling the suicide of a fellow doctor. “I have no doubt it was the working conditions she was in.”

Ross Baird, CEO of the investment firm Blueprint Local, said he’s concerned that noncompetes restrict the ability of startup companies to access talent.

In places such as Silicon Valley, there’s a long history of people leaving successful companies to start new ones, and “I think it’s no coincidence” that states such as California and Washington have not enforced noncompetes because they realize the value of this labor flow.

But a number of large business groups at the hearing expressed their opposition to the FTC’s proposed noncompete ban. The U.S. Chamber of Commerce is “strongly opposed to this rulemaking,” said Sean Heather, senior vice president of international regulatory affairs. He said the FTC lacks the authority in the matter. “The question is does a blanket ban make any sense? Blanket bans rarely do.”

Heather asked that the public comment period, currently set to expire March 20, be extended.

Also asking for an extension was LeeAnn Goheen, senior director of government affairs at the National Association of Truck Stop Owners. In addition, she expressed concern about the retroactive nature of the proposal. ”All of these [noncompete] contracts would have to be reopened and reexamined,” she said.

That concern was echoed by Ed Egee, vice president of government relations for the National Retail Federation, which opposes a ban on noncompetes. He told the commission that about 40 states have chosen to allow noncompete contracts, and federal and state laws have long recognized their value.

The FTC’s proposal generally would not prohibit other types of restrictive employer agreements, such as nondisclosure agreements or client/customer nonsolicitation agreements. These typically do not prevent workers from accepting jobs with companies or operating their own businesses after leaving their jobs.

The proposal would require employers rescinding noncompetes to provide notices to the workers. It also would include a limited exception for noncompete agreements between the buyer and seller of a business, however, when the restricted party is an owner, member or partner holding at least a 25% ownership interest in a business entity.

The commission also sought public comment on whether noncompete clauses between employers and senior executives should be subject to a different standard than those governing lower-level employees.

Some companies require upper-level executives going to work for a competitor to pay back vested or unvested equity. It’s unclear whether a clawback would be prohibited under the proposed rules.

Related: Coming soon: A nationwide ban on non-compete agreements?

With a ban looming, companies may want to audit and possibly modify their agreements to minimize against potential regulatory scrutiny. Some attorneys suggest that having legitimate reasons such as protecting trade secrets could bolster a defense.

Some suggest that because the FTC seems to be particularly focused on remedies for lower-wage workers covered by a noncompetes, companies might reevaluate whether they should be subject to such agreements.