SIA asked legal experts Lisa Ann Cooney and George Reardon to weigh in on the impact of the Federal Trade Commission’s proposed rule banning noncompete agreements. Lisa Ann Cooney is senior VP, general counsel and corporate secretary at Day & Zimmerman, which includes Yoh Staffing Services and DZConneX. George Reardon is an attorney with longtime experience in the staffing industry.
What will be the impact of the noncompete rule?
Reardon: The proposed FTC Rule banning noncompetes could seriously damage staffing firms.
“Geographic” noncompetes temporarily banning competition in a territory after a person’s employment (or independent contractor relationship) terminates are practically essential for enforcing the customer nonsolicitation clauses that the proposed rule admits are fair and enforceable.
Because the FTC probably knows that the proposed rule would be an unconstitutional preemption of the sovereign states’ police power, the rule’s 216-page proposal document “protests too much” by citing voluminous speculative academic research that promises marginal, almost negligible, economic benefits from the proposed ban. The rule also claims suspiciously that it could find no credible data to support opposition to the proposal, and it praises at length the alternative existing measures that it claims employers can use to adequately protect their interests.
Cooney: (I will use the male pronoun to include all genders, i.e., his/her/their.) Setting aside all legal arguments about the FTC’s proposed rule, the rule is simply unfair from a business standpoint because it is perfectly appropriate to have a noncompete agreement in place that (1) balances a departing employee’s right to earn a living by going to another job, with (2) the employer’s right to hold on to its good will with its clients.
The idea behind a noncompete is that an employee was introduced to a client through his employer and during employment, he was paid to build goodwill on behalf of the employer. If that employee leaves the employer to go to another company; so be it, he is earning a living. That said, it is only fair that there be a “freeze” in place (for a reasonable amount of time, usually one year) so that the original employer has time to introduce a new employee to its client, and so that the new employee can continue the client relationship, and ultimately so that the employer can keep its goodwill.
The rule would apply to existing noncompete clauses.
Reardon: Beyond merely banning noncompete contract provisions or making them unenforceable, the rule would also force employers, at great expense, to expressly rescind all outstanding noncompete clauses, refrain from discussing or hinting at noncompete obligations with workers, and dilute their non-banned contractual restrictions to avoid their being deemed de facto noncompetes by the government (a slippery slope to banning all restrictions.)
The proposal betrays several background agenda items, including a direct attack on staffing, when it laments the “increased reliance by employers on various forms of outsourcing.” It also strives to increase the “knowledge flow” between competing employers, which would erode employers’ private property rights in their trade secrets and confidential information. And a large section of the proposal touts the racial and gender “equity” that it predicts would result from the ban.
The final Rule is likely to be overturned by the courts, but by then, employers may have been forced to expressly rescind their noncompetes and would not easily be able to get them back.
Nonsolicitation clauses vs. noncompetes.
Cooney: You may say to me “Lisa, you are really defending nonsolicitation clauses, not noncompetes,” but I say to you that nonsolicits are not worth much, as a practical matter. Think about it: Are you really going to bother your clients and ask them to testify that an ex-employee has solicited them? Of course not. In comparison, if you have a noncompete in place that prevents a former employee from competing against you in any way vis-à-vis your clients, it won’t matter who solicited whom — your former employees will be prevented from doing business with your client during the freeze.
Read Craig Johnson’s article on the proopsed ban in this Staffing Industry Review article.