For many businesses, they use non-compete agreements as part of their contracts. After all, for decades now, they have been seen as essential by many businesses. A significant development that will impact these agreements was recently dropped by the Federal Trade Commission.
The FTC issued a final rule prohibiting noncompete clauses nationwide. They argue that this landmark decision will enhance competition, safeguard workers’ rights to switch jobs, stimulate innovation and encourage new business development. What it will mean for many business owners though is that we will need to rethink how we protect enterprises and enterprise secrets.
Noncompete clauses
Noncompete clauses have long been a contentious issue in employment law. They impose contractual conditions that restrict workers from accepting a new job or starting a new business to protect the businesses that employed them, trained them and skilled them up.
The argument for the new rule
The FTC’s decision allows employees to seek new employment, establish new businesses or introduce new concepts to the market. The FTC projects that the ban on noncompetes will result in a 2.7% annual increase in new business formation, equating to over 8,500 additional businesses each year.
The rule is also expected to boost workers’ earnings by an average of $524 per year and reduce healthcare costs by up to $194 billion over the next decade. Furthermore, it is anticipated to spur innovation, leading to an estimated 17,000 to 29,000 additional patents annually for the next decade.
The problem
As many businesses owners likely see it, these increases are likely at the cost of the businesses that these employees left. The new businesses these employees start are with the skills and trade secrets they learned at their former employers, and the “new concepts” could simply be repackaged ideas of their former employers too. This is the very reason why businesses began utilizing noncompetes in the first place.
How can businesses still protect themselves?
The Commission identified several alternatives to noncompetes that still allow firms to protect their investments without enforcing a noncompete. These include trade secret laws and non-disclosure agreements. These are already in place for over 95% of workers with a noncompete, and they can be just as effective.
Conclusion
The final FTC rule will take effect 120 days after publication in the Federal Register. Once the rule is in effect, suspected violations can be reported to the FTC. Though, businesses should likely start phasing out and replacing noncompetes now.