The FTC and Non-Competition Agreements

Earlier this month, the Federal Trade Commission proposed a rule that would ban the use of non-competition clauses for employees, on the grounds that such clauses constitute an unfair method of competition, in violation of section 5 of the Federal Trade Commission Act. FTC Press Release

Non-competition agreements, also known as non-compete clauses, are agreements in which an individual agrees not to work for a competitor for a certain period of time after leaving a job. The enforceability of non-competition agreements varies by state in the United States. Some states, such as California, generally do not enforce non-competition agreements because they are viewed as unreasonable restraints on trade. Cal. Att’y General Other states such as Maryland will enforce “reasonable” non-competition clauses depending on the geographic extent and duration of such clauses. Holloway v. Faw, Casson & Co., 319 Md. 324 (1990).  The ostensible purpose in enforcing such clauses has been to protect an interest in the goodwill of the employer that might be invaded by a departing employee that turns to a competitor with a book of clients obtained through work at the former employer. Fowler v. Printers II, 89 Md. App. 448 (1991). The proposed FTC rule acknowledges that this sort of promise to not solicit customers, however, is not a violation of section 5 of the FTCA. Instead, the FTC rule seems to be aimed at making unenforceable those clauses that prevent a worker from seeking employment at a different business or starting their own, competitive business with a former employer. § 910.1(b)(1).

The FTC’s comments estimate that approximately thirty million workers or about twenty percent of the nation’s workforce is subject to a non-competition clause. Studies cited by the FTC support its conclusion that preventing the enforcement of non-competition clauses may increase wages for workers. For example, the FTC discusses research by Matthew S. Johnson, et al., that concludes that an increase in enforcement of non-competition clauses tends to reduce workers’ earnings and exacerbates gaps in wages based on gender and race. (Johnson, 2021)

In particular, the study authors discuss that wages decline by 3.5% when comparing worker wages in a state that is less likely to enforce a non-compete clause with one that is very likely to. The authors also estimate that if all non-compete clauses were unenforceable nationally, average earnings among all workers would rise between 3.3% and 13.9% (Johnson, 2021, pps 18-19).

Undoubtedly, the FTC rule will be subject to court challenges as to its enforceability under FTCA in the coming months. Concerned about a non-competition clause in an agreement? Reach out to schedule a review of your agreement.

Published by

faithatlaw

Maryland technology attorney and college professor.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.