Non-compete clauses have a long and established history in employment contracts. Is it time to do away with a practice that seems so unfair on its face?

Non-competes between employers and workers come from English common law, says attorney Robert Milligan, who co-chairs the Trade Secrets, Computer Fraud and Non-Competes Practice Group of Seyfarth Shaw LLP. In the U.S., where they’ve been in regular use since the nation’s birth, they’re permitted today in some form in 47 states, and banned outright only in California, North Dakota and Oklahoma. 

Now comes the Federal Trade Commission to propose a nationwide ban on non-competes. “The freedom to change jobs is core to economic liberty and to a competitive, thriving economy,” said FTC Chair Lina M. Khan upon announcement of the commission’s proposed rule. “Non-competes block workers from freely switching jobs, depriving them of higher wages and better working conditions, and depriving businesses of a talent pool that they need to build and expand. By ending this practice, the FTC’s proposed rule would promote greater dynamism, innovation, and healthy competition.”

Sounds reasonable enough — why should an employer be allowed to restrict a former employee’s right to take another job? Yet non-competes have been a common instrument in cases where the employer fears the potential loss of customers or trade secrets at the hands of a departing worker or former business owner. 

FTC’s proposed rule would apply to “independent contractors and anyone who works for an employer, whether paid or unpaid,” the commission said. “It would also require employers to rescind existing non-competes and actively inform workers that they are no longer in effect.”

The rule would not apply to other types of employment restrictions, such as non-disclosure agreements, unless they were written so broadly as to constitute a non-compete in all but name.

There’s disagreement, however, over whether FTC has the authority to ban non-competes. Milligan says there are “good arguments that it doesn’t.” He cites a U.S. Supreme Court ruling from last year that the Environmental Protection Agency lacked the authority to regulate carbon emissions across states, and that such action can come only from Congress. “There are definitely some solid constitutional challenges [to the proposed rule],” he says.

Milligan acknowledges the “populist notion” that non-competes are unfair, “but as in anything in life, the details really matter.” Questions remain as to where non-competes should or should not be utilized. In cases where a business is being sold, shouldn’t the buyer be protected against the former owner immediately soliciting its customers, or walking away with sensitive trade secrets such as product ingredients?

In recent years, Milligan says, several states have moved to rein in non-competes, such as by banning them for low-wage workers or building in certain formulas tied to levels of compensation and prior notice.

The retroactive nature of the proposed rule is especially controversial. “Suppose I did a business deal two years ago, and the non-compete is no longer going to be valid,” Milligan says. “That was the main reason I paid $2 million [for the business] instead of $1 million. If I knew that the guy I bought the business from can go out the next day and compete against me, I don’t think I would have given him $2 million.

“Why is the FTC trying to unwind business deals?” Milligan asks. “What country do we live in?”

Even if non-competes are restricted in some manner, there needs to be considerations for employers, says Kathleen Quinn Votaw, chief executive officer of the recruitment agency TalenTrust. “What’s really important is that companies need to protect their [intellectual property],” she says. “The point is, how do we meet in the middle?”

Votaw says it’s too extreme to dictate that an individuals can’t work in the same industry as that of a former employer. “I think we’ve gone overboard. We’ve over-engineered the employer-employee relationship.”

A better way to go, Votaw suggests, might be the use of non-solicitation agreements, which prevent exiting workers from stealing the customers or other employees of their former employers. “If an employer sticks to non-solicitation [agreements] for clients and colleagues, is it on solid ground?” she asks. “I think it’s fair and reasonable protection.” But that line can be equally blurry — when is it a case of stealing, and when is it simply about competing fairly in the same industry?

Non-disclosure agreements, which protect the transfer of valuable trade secrets, are also a more reasonable approach to balancing the interests of employers and employees, Votaw believes. Few would think it permissible, for example, for a Coca-Cola Co. executive to take the secret recipe for Coke to a new job at PepsiCo.

The comment period for FTC’s proposed rule has been extended to April 19. If the rule becomes law as it stands, businesses likely wouldn’t have to start complying with it until the fall, and legal challenges could prolong it further.

Expect strong opposition from the private sector, with an uncertain outcome in the U.S. Supreme Court, where the dispute is sure to land. “This proposed rule is quite myopic,” says Milligan. “I can envision a world where some kind of a ban [on non-competes] is acceptable, but this goes way too far. And I don’t know whether the FTC is the agency that should be doing this.”