The tyranny of "non-compete" clauses is ending, maybe?

[Maxmars]

The idea that a non-compete clause is for the protection of the company always seemed improperly imposed to me.  

I can understand it from the point of view of the executive body, policy-makers, and strategic trade-secret holders... they should be honor-bound to not interfere with a business they are departing by exploiting their inside knowledge.  But it seemed wrong to me to apply it to anyone under that highest executive level.  Yet it often is...  there are some 30 million citizens in this country that are basically tethered to their employers by a non-compete clause... they cannot leave their job without leaving their employability behind...

(By the way, a noncompete clause is not the same as a non-disclosure clause...)

From Ars Technica: FTC bans noncompete clauses, declares vast majority unenforceable
Subtitled: Chamber of Commerce vows to sue FTC, will try to block ban on noncompetes.
 

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The Federal Trade Commission (FTC) today announced that it has issued a final rule banning noncompete clauses. The rule will render the vast majority of current noncompete clauses unenforceable, according to the agency.

"In the final rule, the Commission has determined that it is an unfair method of competition and therefore a violation of Section 5 of the FTC Act, for employers to enter into noncompetes with workers and to enforce certain noncompetes," the FTC said.

The US Chamber of Commerce said it will sue the FTC in an effort to block the rule, claiming the ban is "a blatant power grab that will undermine American businesses' ability to remain competitive."

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Don't get me wrong, I'm sure the Chamber of Commerce can make a go of the legal challenge.  But it seems like outside of the executive level they seem ludicrous and imposing.
 

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"Noncompete clauses keep wages low, suppress new ideas, and rob the American economy of dynamism, including from the more than 8,500 new startups that would be created a year once noncompetes are banned," FTC Chair Lina Khan said. "The FTC's final rule to ban noncompetes will ensure Americans have the freedom to pursue a new job, start a new business, or bring a new idea to market."

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The Chamber will contest these statements, and the FTC will have to revel it's reasoning to a court... should be fun... fetch the popcorn.

[Maxmars]

Apparently, a tax services firm called Ryan, LLC sued the FTC to block the new rule. They were joined by the US Chamber of Commerce, two Texas business groups, and a CEO lobbyist association.

They brought the case to a Texas Federal Judge who has stated that the Federal Trade Commission lacks the legal standing to issue such a rule.

From ArsTechnica: Judge says FTC lacks authority to issue rule banning noncompete agreements
 

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A US judge ruled against the Federal Trade Commission in a challenge to its rule banning noncompete agreements, saying the FTC lacks "substantive" rulemaking authority.

The preliminary ruling only blocks enforcement of the noncompete ban against the plaintiff and other groups that intervened in the case, but it signals that the judge believes the FTC cannot enforce the rule.

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The plaintiffs managed to get a judge to concede that the FTC can't enforce such a ban of non-compete clauses because while it has a mandate to curtail and address bad business practices it isn't able to 'enforce' the rule.

Of course this will be rendered into a narrative as a judge usurping the 'domain' of a Federal regulator.  Lobbyists will ensure that is featured in their marketing of this dispute.
 

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[Judge] Brown acknowledged that "the FTC has some authority to promulgate rules to preclude unfair methods of competition." But "the text, structure, and history of the FTC Act reveal that the FTC lacks substantive rulemaking authority with respect to unfair methods of competition under Section 6(g)," she wrote.

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Anything to keep the lasso around the necks of anyone who dares shun an employer...  

Of course the injunction against the FTC rule only applies to those who are bringing suit... "the scope of the injunctive relief herein to named Plaintiff Ryan, LLC and Plaintiff-Intervenors Chamber of Commerce of the United States of America; Business Roundtable; Texas Association of Business; and Longview Chamber of Commerce."

You have to wonder just how 'important' it is to stop employees from being able to leave an employer and work in the same field... as opposed to a "modern version of commerce slavery."

[FlyingClayDisk]

One of the areas I see these clauses used quite frequently is in government work, so I have kind of mixed emotions about this.  I'll try to explain.  ...

What will happen is one government contractor will have a person working for them and over time they develop a needed skill set.  Then another contractor will try to lure that person away offering better pay.  If it ended right there, I'd say 'yay for the employee', but it doesn't end there.  The government entity is often paying several times the person's wage for the employee to begin with.  In the industry this is known as the "multiplier" (I will skip all the details behind what makes up a multiplier for now).  When the employee leaves one employer for another, assuming both companies have similar structure and thus similar multipliers, then (in theory) it should force the new company's multiplier downward (paying the higher wage means less of a cut for them).  Unfortunately though, it doesn't work that way in practice.  When the employee transitions, the new employer just tacks on their regular multiplier.  The government now has no choice but to pay the higher rate if they want that person.

If this scenario only happened once, or twice, it would be one thing, but what you have in reality is people who play this "job shopping' game constantly.  The non-compete clauses prevent this.  Most government contractors have unwritten rules internally to screen for these types of employees and refuse to hire them (not out of ethics mind you, but to prevent pissing off the client), but the trouble is, these people aren't easy to spot.  Many of them work behind 1099's and minority subcontractors, so it's not a simple matter of just looking at who they worked for last (that might not reveal anything). 

Federal acts like Davis-Bacon regulate wages for trades personnel, but there isn't any such act for professional personnel so the sky is the limit.

Similar things also happen for actual government employees.  They'll work for a government for all their training, and then leave and go to work for a contractor at 4x-5x their original salary.  And the kicker is, the employee is maybe only making 120% of their original salary while the contractor pockets the extra 280% to 380%.  1099's can leverage some of this back, but never more than about 40%. 

Us taxpayers wind up paying for ALL of these gymnastics because the government doesn't have any money of its own.

It's a complicated and frustrating game.  Unfortunately, I work in this world and it can be really frustrating.

In any case, as you note, these non-compete clauses are generally unenforceable.  This doesn't stop them from being used though, even if only as a scare tactic.

[Maxmars]

((IN RED))

One of the areas I see these clauses used quite frequently is in government work, so I have kind of mixed emotions about this.  I'll try to explain.  ...

What will happen is one government contractor will have a person working for them and over time they develop a needed skill set.  Then another contractor will try to lure that person away offering better pay. 

"Luring the person away from their current employment..."  Or alternatively, the employee is not satisfied with their employment situation.  In either of those two possibilities, the employee (and their freedom to decide) is the crux of the agreement.  Once the relationship is severed, the employee and employer are two separate entities, unbound from each other... employers want that bond continued.  They offer as justification the potential for their own economic harm.  They want legal remedy to prevent, and or punish should harm come.  They want "insurance."

The price of that insurance is a document that stands as a threat.  Particularly, a threat against the employee.  That threat is made under a presumption of potential malfeasance.  Malfeasance which clearly does not exist at the time of signing (which is interesting, and almost similar to a non-disclosure agreement.) But this threat eclipses the employees' market viability, any future endeavors, and even employability - unilaterally based upon the employers' legal constructs.  A very powerful legal construct, considering their is no reciprocation of commitment or any notional value to the employee.

The economics of the situation is entirely incidental.  Practices in government employment as "contracts" are completely a construct of the regulators and their 'interests' within government negotiations.  Competition for employment is lauded when it means better profitability, but anathema when it cuts into profits... unless the employee represents some unspoken political connection, or utterly unique skill.  The travesty of mechanical 'multipliers' are an effect of - not a reason for - the commercial reality.

Insofar as chronic "job hopping," I can see very few people outside of niche employment who can do so.  Non-disclosure can be seen as warranted in those cases, but pretending that all cases offer that risk seems disingenuously cynical.. as if every employee naturally was just itching for a chance to bail for more benefits or money.  Rather than foster an 'attractive' employment situation, they put up an economic barbed-wire fence hamstringing employment mobility... because they don't want to compete at the cost of profits.  The 1099 construct was imposed to benefit employers, not employees.  The idea was to facilitate employment without investment.  To limit to the cost of employment, not to raise wages.

I disagree that the idea is to "spot" job hoppers, instead it is to "spot" bad employers who risk employment 'value' for profit.  Or employers who leverage post employment restrictions against employee satisfaction.  This is more germane to leadership in tech jobs of course, where soft skills determine value.  The risk was always there, and damages from employee abuse are seldom specified, only much decried.  That it is a difficult situation is hardly justification for purposefully crippling the future of anyone who dares work for you.

Federal acts like Davis-Bacon regulate wages for trades personnel, but there isn't any such act for professional personnel so the sky is the limit.

Perhaps, legislation is in order for that 'professional' level employee... but I doubt the industries most affected will never support them.  They thrive with the 'unrestricted freedom' to impose rules on employees as they see fit.  An entire industry of lobbyists and HR people are vested in the status quo forever.

Similar things also happen for actual government employees.  They'll work for a government for all their training, and then leave and go to work for a contractor at 4x-5x their original salary.  And the kicker is, the employee is maybe only making 120% of their original salary while the contractor pockets the extra 280% to 380%.  1099's can leverage some of this back, but never more than about 40%.

It's always about profit.  Disclosure would remedy that in negotiations, but it rarely happens... at least I've never seen data to that effect.  

Us taxpayers wind up paying for ALL of these gymnastics because the government doesn't have any money of its own.

Agreed.  Because that is "the government teat"... the very reason political appointments are soooo valuable to the appointee and his or her 'sponsors.'  Contracts became the latest venue for unaccountable abuse and siphoning of public dollars... with a politician smile and a businessman wink.

It's a complicated and frustrating game.  Unfortunately, I work in this world and it can be really frustrating.

I get it.  You work with what you've got.  But the non-complete clause isn't a 'form' of practice, it's a 'practice' of form.  It needs review, from soup to nuts... unfortunately lobbyist dollars (their freedom of speech) have more value than the lowly employee... who ends up forever beholden to employers that couldn't compete for the need for an employee and don't care about loyalty and retention beyond how much they profit in the deal.  The employee (an actual 'producer') is reduced by accounting as a 'burden' on the business...  how ironic is that?

In any case, as you note, these non-compete clauses are generally unenforceable.  This doesn't stop them from being used though, even if only as a scare tactic.

Actually the FTC was of the opinion that non-compete clauses are unenforceable; my contention is that they are like handing a weapon to employer while placing the employee in the role of supplicant, or subject, of their edicts.

I don't believe that such agreements are totally out of place in reality (they may be necessary in some cases... like for known "job hoppers.") I just think that the 'reality' must be defined outside of what the employee has to lose, or how the employee is eclipsed or diminished in potential.  What exactly is the business end of this agreement... a job?  It's no wonder they hit this obstacle... some businessfolks thought they could simply 'have their way" and no one would ever dare question it?

There is a larger issue here... that issue has to be defined to include the employee outcomes... not solely profitability nightmares for businesses.

(Too many words?   )

[FlyingClayDisk]

Actually, I am on the 'employer' side of the fence, not the employee.

Sorry we don't agree, but I guess we (respectfully) don't.

I work in aviation and aviation engineering (flight dynamics and electronics) as well as defense.  While your arguments may seem pure at face value, you do realize both you and I PAY for all of this, right?

So, while it might be some competitive thing for employees, in some perceived supply and demand market, the market is such that it prevents this simple economic process.

If you work in classified systems, it's not easy to qualify and certify others in these systems.  Especially systems which require higher clearances.

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[MykeNukem]

Actually, I am on the 'employer' side of the fence, not the employee.

Sorry we don't agree, but I guess we (respectfully) don't.

I work in aviation and aviation engineering (flight dynamics and electronics) as well as defense.  While your arguments may seem pure at face value, you do realize both you and I PAY for all of this, right?

So, while it might be some competitive thing for employees, in some perceived supply and demand market, the market is such that it prevents this simple economic process.

If you work in classified systems, it's not easy to qualify and certify others in these systems.  Especially systems which require higher clearances.

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An NDA would cover all of that, no?

[Maxmars]

An NDA would cover all of that, no?

Not really.  Some of the more cutting edge and military job position demand something more.  It is one of those exceptions that I can understand exist.

While FCD and I don't agree on the minutiae we do agree that the cost is to the tax-payer, and that alone makes it something we need to resolve definitively. 

I expect that employers, especially those deal in defense and super high tech, require more robust protections against losing their hold on what they provide.  Theoretically, NDA's only protect intellectual property (for the most part.)  In some cases there is more to protect than that, presumably.

[FlyingClayDisk]

An NDA would cover all of that, no?

Agree with Max, not really.

The reason is, there isn't really a competitive edge being divulged in the described process.  The end goal is often the same, the name on the paycheck doesn't change this goal.  The relationship between the ultimate employer (the government) and the 'employee' (who just happens to work for a contractor) doesn't change.  NDA's usually cover one of two things (or both), the disclosure of competitive information to a competitor, and/or the disclosure of classified information to those not authorized to see it.  Neither one of these scenarios apply in the situation I've described above.  In the case of violation of the latter an actual criminal act has occurred, punishable by prison and even death in some cases. 

So, a couple examples here to differentiate where an NDA applies and where one wouldn't:

1. A company like Lockheed-Martin wins a government contract to develop "Weapons System A".  The mechanics of how system "A" works are a proprietary trade secret to Lockheed-Martin and the basis on which they won the contract.  In this case if John Doe were to defect to Northrup-Grumman and take with him information about the mechanics of how system "A" functions such that Northrup-Grumman could now perform the same task as Lockheed-Martin, then this absolutely WOULD be a violation of an NDA.

2. On the other hand, (and as is more often the case) if Lockheed-Martin hires a subcontractor, Bill's Staff Augmentation Service, to employ John Doe, and at the same time Lockheed-Martin also has a contract with Joe's Staff Augmentation Service, and John Doe switches from Bill's staff to Joe's staff (again, both under Lockheed-Martin on the same contract) then there is no harm and no foul so an NDA violation would NOT be applicable.  This is what frequently happens.  Lockheed-Martin has no choice but to pass the added cost of John Doe's switch on to their employer, the federal government. 

Now, the above are is just some hypothetical and simplified examples.  The irony in example #2 above is, if Bill's Staff Augmentation Service would have just asked Lockheed-Martin to increase the rate for John Doe, this request would be denied by both Lockheed-Martin AND the federal government, but if John Doe just switches from Bill's staff to Joe's staff, then neither Lockheed-Martin nor the federal government can do anything about it...if they need John Doe's services.  John Doe often knows this (usually pretty well too, after they've been in the game for a while).

There are 10,000 other permutations of these same types of scenarios, and these are just a couple simplified examples, but I think you get the idea.  And, I could probably write an entire book on why Lockheed-Martin uses subcontractors to hire John Doe in the first place over hiring him themselves, but that would be a whole other post (and a very long one at that).

Just kind of a side note - When I first started out in engineering (while still in college), I was a pretty highly qualified Draftsman and team lead.  There were NDA's sixty-five ways from Sunday on some of the stuff we worked on.  This wasn't even defense work, but rather power generation and chemical plants.  It was very common for certain companies to employ huge teams of draftsmen to work things like plant shutdowns.  That's all they did, supply drafting resources to the big engineering firms like Bechtel and others.  We would often move from plant/process to plant/process.  I stayed with the same company, but many didn't, yet when the big crunches came I was often shoulder to shoulder with the same people.  They just worked for a different staff augmentation company.  Same project, same objective, same personnel, different mix of companies.

[Maxmars]

Just following up on other courts bringing themselves to offer indemnification to "local" (within their jurisdiction) businesses.

From ipWatchdog: Texas Court Bars FTC’s Non-Compete Ban Nationwide
 

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“The Court concludes the FTC has some authority to promulgate rules to preclude unfair methods of competition…. However, after reviewing the text, structure, and history of the Act, the Court concludes the FTC lacks the authority to create substantive rules through this method.”

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This considered ruling does not invalidate nor change the FTC's position on compelled agreement to "non-compete" clauses... except in the jurisdiction of the Texas court; essentially making Texas a "safe-haven" from the regulation (presumably, until appealed.)

The FTC was never given a comprehensive means to "enforce" such a policy decision, and it was a foregone conclusion that this would require more adjudication.  Based upon that existing limitation, Texas can "nullify" the policy within it's jurisdiction (again, presumably until this is resolved further.)

The objection has zero to do with the policy, and only it's "enforceability" nationwide.  We should not think that Texas can make "federal" law.  But I understand that the industry who have benefited from the practice will not simply allow the practice to end without a fight.
 

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Josh Robbins of Pacific Legal Foundation, who represented ATS Tree Services, said they are pleased by Tuesday’s decision, adding: “This is a great first step and we expect litigation over the ban to continue.”

The FTC has said in public statements to the press that it is seriously considering an appeal.

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It's important to recognize that the "legal" outcome here is not about the new restrictive "non-compete clause" policy, but the toothless nature of the FTC's ability to enforce it.  A distinction that should prove that this is lawyer wrangling... not the idea of refusing the threat of punishment to employees who want to continue work in related fields after they have left the employment situation...

(Also recognize that this limitation is really about who is exempted... there are exemptions for "senior" executives, and "national security" aspects of the policy.... contrary to those who would like to characterize it as a "universal" ban.  But where this "ban" most comes into play is when the "little employee" has their career paths utterly truncated because of the theoretical paranoia of their employers.)