Like it or not, the Federal Trade Commission’s ban on non-competition agreements could force a change in mindset inside the companies that use them — ultimately improving their ability to hire and retain talented employees.
That’s one take from critics of non-compete deals after the FTC announced a new rule Tuesday that prohibits companies from using the clauses in new employment contracts, and invalidates many existing agreements.
Companies will need to keep employees “by giving them the best jobs, and helping them realize their personal aspirations, as well as helping the company realize its aspirations,” said Brian Hall, a longtime tech marketing exec in Seattle. “That’s an alignment of interests that has proven to be quite successful at a lot of places.”
Hall has first-hand experience with the issue. He was sued by Amazon in 2020 after taking a job with Google Cloud in alleged violation of the non-compete clause in his Amazon employment agreement.
It was one of numerous examples of Amazon and others suing departing employees, although it was unusual in that Hall is not an engineer — standing out at the time as an example of selective enforcement of non-compete clauses.
Non-compete clauses were long ago rendered virtually unenforceable in California, but they have persisted in various forms at some companies in Washington state even as they have fallen out of favor in recent years.
Microsoft, which brought attention to the issue when it sued AI pioneer Kai-Fu Lee after he left for Google in 2005, more recently has pulled back on its use of non-compete agreements.
The Redmond company said in 2022 that it would no longer include non-competes in its U.S. employment agreements, and would remove the clauses from existing agreements, with the exception of senior leaders.
Washington state set limits on non-compete agreements in 2019, capping them at 18 months and allowing them only for employees earning more than $100,000 a year and independent contractors who made $250,000 annually.
Amazon has filed numerous non-compete lawsuits against departing employees over the years, although it appears to have become less litigious on this issue more recently. The company in 2015 removed non-compete clauses from warehouse worker employment contracts. Amazon declined to comment on the FTC’s new rule.
Rule excludes existing non-competes for senior execs
The final rule, issued Tuesday, declared it an unfair method of competition to enter into, enforce, or attempt to enforce non-compete clauses. This applies to new contracts, after the rule’s effective date. Existing non-compete agreements with most workers will also become unenforceable after the rule takes effect.
One exception: Existing non-competes with senior executives are allowed to remain in effect. “Senior executive” is defined as those earning more than $151,164 who are in a “policy-making position,” according to the final rule. The FTC estimates that this represents a small fraction of workers, less than 1 percent.
“A high percentage of the labor market at publicly traded tech companies make more than the stated range here in Seattle.”
Albert Squiers, Fuel Talent
This is one aspect of the decision that caught the attention of the Albert Squiers, managing director of the technology practice at Fuel Talent in Seattle.
“A high percentage of the labor market at publicly traded tech companies make more than the stated range here in Seattle,” he pointed out. As a result, he said, the definition of “policy-making position” will be a crucial issue.
The FTC’s final rule defines “policy-making position,” in part, as “a business entity’s president, chief executive officer or the equivalent, any other officer of a business entity who has policy-making authority, or any other natural person who has policy-making authority for the business entity similar to an officer with policy-making authority.”
Squiers said, “I’m very curious to see what the courts will have to say about this as it’s a fairly broad framework.”
To that end, the U.S. Chamber of Commerce has vowed to challenge the FTC decision in court.
“The Federal Trade Commission’s decision to ban employer noncompete agreements across the economy is not only unlawful but also a blatant power grab that will undermine American businesses’ ability to remain competitive,” the U.S. Chamber said in a statement, adding that the FTC ruling “sets a dangerous precedent for government micromanagement of business.”
In the meantime, the FTC’s final rule does not mandate that employers formally rescind existing noncompete agreements, as was initially proposed in the draft rule, but instead requires companies to provide notice to employees that the noncompete agreement won’t be enforced against them in the future.
“Will that create a rush of innovation and new companies, or will it simply create a heavy burden of emails and HR questions for employers?” asked Squiers, of Fuel Talent. “How will this impact company culture?”
In a statement accompanying the new rule, FTC Chair Lina Khan said more than 8,500 new startups would be created annually once noncompetes are banned. She added, “The FTC’s final rule to ban noncompetes will ensure Americans have the freedom to pursue a new job, start a new business, or bring a new idea to market.”
In his experience of more than 15 years working with startups, Squiers said he hasn’t found non-competes to be a significant hurdle for employees and executives who want to leave to start their own companies.
“The largest factor is the often times significant financial risk the potential founder will incur, followed by the difficulty in securing investments/funding, and a distant third being non-competes,” he said.
But in the long run, Squiers said he believes the FTC’s ban on non-competes “will drive confidence in exploring other options without the worry of expensive legal implications especially as the market has started to rebound.”
Non-competes, NDAs, and intellectual property
The FTC’s rule could have additional implications for legislation and litigation over the protection of intellectual property, said Michael Schutzler, the CEO of the Washington Technology Industry Association.
IP protection is often a key consideration for companies when employees with inside knowledge leave for new jobs.
“We have always agreed that most non-competes do more harm than good,” Schutzler said. “We’ve also spoken and written at length about how IP laws are insufficient for certain roles and situations.”
He added, “I would be willing to speculate that if non-compete laws are fully banned in the US, then we can expect to see far more IP litigation and far more lobbying for stronger IP protections.”
Hall, who ultimately reached a confidential settlement in Amazon’s suit, said this week that he believes non-disclosure agreements, or NDAs, are a more direct and effective means of protecting corporate interests — preventing a departing employee from divulging confidential information without impacting their ability to take another job.
As someone who grew up in Seattle, Hall is rooting for the tech community here, and said he believes the FTC’s rule will be a positive step for the region’s innovation economy.
“It will basically get Washington state to be more modern relative to the place that has the most vibrant market, which is California right now,” he said. “I think we’ve got a ton on California. And I’d love to see us be the No. 1 place for technology and software development, including AI.”
