Blog: FTC Action on Non-Compete Agreements is Unnecessary

Last year brought with it numerous efforts to limit, restrict, or outright ban the use of non-compete agreements. Those efforts occurred at both the state and federal level. But 2019 also brought with it a renewed and focused effort at the federal level for change in the non-compete arena.
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Phillip C. Korovesis
Phillip C. Korovesis // Courtesy photo

Last year brought with it numerous efforts to limit, restrict, or outright ban the use of non-compete agreements. Those efforts occurred at both the state and federal level. But 2019 also brought with it a renewed and focused effort at the federal level for change in the non-compete arena.

In July 2019, as part of that effort, Michigan Attorney General, Dana Nessel signed on to a letter, along with 18 other state attorneys general, to the Federal Trade Commission (FTC) in an effort to get the FTC to act on non-competes. Attorney General Nessel signed on again to that effort in a Nov. 15, 2019 follow-up letter asking the FTC to restrict or ban non-compete agreements.

The state attorneys general urged the FTC to take rule-making action to rein in non-compete agreements because the FTC “offers the quickest, most comprehensive regulatory path to protecting all workers from these exploitive contracts,” apparently ignoring any benefits such agreements might provide.  The signers of that letter believe that this path was a better path forward even though they continued to support state and federal legislative reforms on non-competes.

These recent actions portend of a continued effort to limit or outright ban the use of non-compete agreements. Indeed, the FTC, in an apparent attempt to at least consider some of the concerns raised by the attorneys general held an “FTC Workshop on Non-Competes” on Jan. 9. It has been reported that the FTC is considering rules related to the use of non-compete agreements for certain workers.

In large part, the effort to rein in non-competes stems from recent history that reported incidents of companies like Jimmy John’s and Amazon requiring lower level employees to sign non-compete agreements. In both of those instances, Jimmy John’s and Amazon backed off of requiring those agreements. It is a good thing that they did.

In all likelihood, a judge would not have enforced such a restrictive agreement against a Jimmy John’s sandwich maker or deliverer or a seasonal Amazon warehouse employee. That is true because there are already legal requirements in place to protect from enforcement of improper non-compete agreements. As such, regulation by the FTC at the federal level is entirely unnecessary.

Michigan and other states already have the tools in place to limit inappropriate or overreaching non-compete agreements. Courts are always cautious when considering enforcement of non-compete agreements. It has been my experience that in those cases where those types of agreements can be viewed as “exploitive contracts,” judges also see them that way.

These types of agreements become “exploitive” only where they subject the wrong level of employees to restrictions, are poorly drafted to protect legitimate interests, or both. The judges that consider these agreements and the lawyers that argue for the respective sides are limited by what the law allows. That law requires that the agreements are only enforced where they protect legitimate business interests and are reasonable in scope and duration, among other things.

Those legal tools, indeed, those restrictions on restrictive agreements, provide enough protection for those workers that may be threatened by non-compete agreements. When properly drafted and signed by appropriate level employees, they provide protection for those employers who legitimately seek to protect business interests that are indeed protectable. A federal endeavor on reigning in non-competes is, therefore, an unnecessary exercise and simply not justified.

Regardless of your view on non-compete agreements, whether you see properly drafted and applied non-compete agreements as effective tools in protecting a company’s business, its intellectual property and the jobs of its employees, or that non-compete agreements unfairly limit certain employees from finding new work and are threats to employee mobility, it appears that there may be some federal-level attention to non-compete agreements in 2020. In the end, this year might be a pivotal one in the development of the legal framework and foundation for the use and enforcement of non-compete agreements.

Phillip C. Korovesis is a litigator and trial lawyer at Detroit-based Butzel Long and serves as chair of the firm’s Trade Secret and Non-Compete Specialty Team.

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