On Jan. 5, the Federal Trade Commission announced a proposed rule that would ban virtually all non-compete clauses, with extremely limited exceptions. The move created an uproar in legal and business communities, especially since this issue was historically left to states.
Much has been written about substantive concerns with the proposed rule. For example, its breadth is striking—many were surprised that there are no exceptions for even C-suite executives or employees receiving incentive grants worth hundreds of thousands of dollars or more.
Likewise, the proposed rule could invalidate other restrictive covenants—including non-disclosure agreements—if they meet the FTC’s vague description of a “de facto non-compete.” The proposed rule’s retroactive effect and requirement that employers rescind existing covenants is shocking and would wreak havoc if implemented.
Aside from the substantive concerns, the proposed rule faces significant legal challenges. Particularly in the wake of the Supreme Court’s decision in West Virginia v. EPA last summer, it seems likely, if not inevitable, that the nation’s highest court will be scrutinizing the FTC’s authority to weigh in on an area that has historically been left to the states.
Setting aside whether the FTC can regulate in this area, should it? The agency has identified many purported abuses of non-competes, but even accepting the FTC’s alleged concerns as true—and many believe they are overblown—state legislatures have been tackling such issues for decades. In some states, it’s been happening for centuries.
The last 15 years have seen an explosion of state bills addressing restrictive covenants. Many have been signed into law, with more being debated in statehouses every day. At least 25 non-compete bills are being debated in over a dozen states this legislative season. These bills frequently include provisions aimed at curbing the potential for abuse that the FTC claims to be worried about.
One of the FTC’s alleged concerns is over use of non-competes for “low wage workers.” But even ignoring the handful of states that prohibit non-competes entirely—California, North Dakota, Oklahoma, and at least informally, Nebraska—11 states or more and Washington, D.C., have wage thresholds for individuals who can be bound by non-competes. Four or more additional states are debating low-wage bans.
Several of those jurisdictions have wage thresholds that exceed the $100,000 mark. In Oregon, employees must earn at least $100,533 annually to be subject to a non-compete; in Colorado, non-competes are prohibited for employees making less than $112,500.
In Washington state, employees must earn at least $116,593 to be bound; and in Washington, D.C., an employee making less than $150,000 can’t be bound by a non-compete. Two other states—Nevada and Illinois—have wage restrictions for non-competes and wage thresholds for customer non-solicitation provisions.
Many of these laws include wage thresholds that automatically increase on a periodic basis, whether annually or at some other pre-set interval, without further legislative action required.
Where the median annual income of American workers is approximately $55,000 annually, many of these thresholds limit enforcement of non-competes to those who out-earn the average American by a wide margin. Unfortunately, the FTC’s proposed rule takes a sledgehammer to a thumbtack, prohibiting non-competes even for CEOs making millions.
Another frequently mentioned concern with non-competes is the fear that an employee could be ambushed by an unexpected non-compete on their first day, leaving the employee with no choice but to sign.
In response, several states have strict rules requiring the employee to be given advance notice of the requirement to sign a non-compete. For example, Oregon, Massachusetts, and Illinois all require approximately two weeks’ lead time or more for an employee to consider a non-compete. Several other jurisdictions also have statutory notice requirements.
Similarly, some states, including Massachusetts and Illinois, have required that employers provide explicit notice that employees have the right to review the agreement with counsel of their choice before signing.
Finally, some jurisdictions impose stiff penalties for failure to abide by a state’s laws, incentivizing employers to carefully draft their agreements. A few years ago, Washington state’s legislature passed a law addressing some of the topics listed above, including a wage threshold and advance notice.
It also includes a provision authorizing statutory penalties plus recovery of an individual’s attorneys’ fees if the covenant is modified in any way—even if the employer ultimately prevails in enforcing a slightly modified non-compete.
As these laws show, the FTC highlighted alleged abuses that can be addressed by state legislators or Congress. Although none have passed to date, several bills have been introduced in the Senate and House of Representatives.
This isn’t a situation where states are powerless to act and the FTC is the only authority equipped to enact change. Instead, elected representatives are the proper parties to debate and/or implement new restrictions.
Commissioner Christine Wilson, the lone FTC dissenter, called the commissioners “unelected technocrats” who substitute their judgment on an issue that has, for “several hundred years,” been left to the states.
Commissioners in the majority would be wise to heed Wilson’s warning and let the people’s representatives handle these issues as they have for centuries.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
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Dawn Mertineit is a partner at Seyfarth who focuses on trade secrets, computer fraud, and noncompetes.