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Proposed Ban on Noncompete Clauses Divides the Industry

Here’s everything you need to know about the Federal Trade Commission’s proposed prohibition on noncompete clauses and how promo pros are reacting.

A proposed rule by the Federal Trade Commission that would ban most noncompete clauses is causing a clash of opinions in the promotional products industry.

Whether pro ban or in favor of noncompetes, industry pros on both sides of the issue have good arguments to make – and, in cases, nightmare stories to share about why they feel the way they do.

non compete contract

“The feds need to stay out of it,” says Steven L. Rhodes Sr., managing member of Yuma, AZ-based distributorship BGD Custom Creations (asi/138995). “It’s none of the government’s business. If as an employer I need to protect proprietary information and/or procedures and client lists, then it’s my right to do so. An employee agrees with the agreement once employment is accepted. I have, as an employee, been subject to noncompetes. I totally understood my employers right to protect his techniques, procedures and customer accounts.”

Howard Ross, who owns distributorship The 5W, feels differently.

“Overall, I think noncompete agreements should be banned,” says Ross. “No company should have the right to prevent an individual from making a living. In sales, the salesperson typically goes out and gets the business. If a company can’t hire a good salesperson to replace someone that leaves, that’s the company’s problem, not the individual.”

In this report, ASI Media delves into everything you need to know about the noncompete ban proposed by the FTC and how the industry is reacting.

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What is the FTC Proposing?

A noncompete clause essentially prohibits one party (a worker) from taking another job or starting a business in a similar profession and/or region that competes against another party (the employer).

As currently written, the FTC rule would prohibit employers from inserting noncompete clauses in contracts with essentially all workers – and from in any way representing that a worker is subject to a noncompete.

linked in poll

An ASI poll on LinkedIn showed that industry pros were heavily in favor of banning noncompetes. It’s not necessarily a surprise. There are more employees than employers, and most workers are loath to enter into noncompetes. Still, as ASI Media learned in communication with dozens of promo pros, there are owners against noncompetes as well.

Under the rule, “workers” are employees, including senior-level executives, as well as independent contractors, consultants, interns and volunteers. Certain legal analysts say that the rule could apply even to partnership and membership agreements among individuals, meaning standard noncompetition clauses within LLC and partnership agreements could be affected.

Furthermore, if the prohibition goes on the books, employers would have to rescind noncompete clauses with current and former workers within 180 days of the rule taking effect. After rescinding, employers would have another 45 days to inform workers/former workers, through a specific communication to each, that the clause has been rescinded.

“It is difficult to underestimate the wide-ranging effect this proposed rule would have on standard executive and other forms of employment agreements,” says M. Scott LeBlanc, an employment law attorney with the firm Husch Blackwell. “Thousands, if not millions, of noncompete agreements in existence today will simply cease to have any legal effect under the FTC’s proposal.”

Why is the FTC Pursuing a Ban on Noncompetes?

FTC commissioners recently issued a preliminary finding that noncompetes constitute an unfair method of discouraging competition that violates Section 5 of the Federal Trade Commission Act. In a divided vote, the commissioners then decided to propose the rule on noncompete bans.

The trade regulators estimate that by halting the practice of noncompetes, wages will rise by $300 billion annually across the United States’ economy. Career opportunities would expand for about 30 million Americans, or 18% of the U.S. workforce, who are currently estimated to be covered by noncompetes, the FTC says.

infographic

Infographic courtesy of the FTC.

“The freedom to change jobs is core to economic liberty and to a competitive, thriving economy,” says FTC Chair Lina M. Khan. “Noncompetes 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.”

Are There Exceptions to the Proposed Rule?

Noncompetes would still be allowed in the sales of businesses, but with limited application to individuals who owned at least 25% of the company. Also, LeBlanc and other attorneys note that the FTC’s Section 5 jurisdiction does not apply to banks, federal credit unions, air carriers, common carriers, meatpackers and poultry dealers, meaning the noncompete ban would probably be unenforceable among such entities. Nonprofits could be exempt too, according to certain legal experts.

Notably, the rule doesn’t ban nondisclosure clauses, but does make it clear that nondisclosures worded in a way that act as de facto noncompetes would be prohibited and unenforceable.

When Might the Ban Go Into Effect?

Short answer: No time soon – if at all.

There’s a lot in play. The FTC is currently accepting public comment on the proposed ban through March 20. Anyone – including promo pros – can weigh in. Once the comment period ends, the FTC is mandated to review all the feedback. LeBlanc says an avalanche of comments is likely – potentially a million-plus. “It will take months for the FTC to go through the process of reviewing everything,” he notes.

Based on the review, the FTC could amend what it’s proposing to be stricter or less restrictive – or not change anything all. Once that effort concludes, the federal agency would then publish what’s known as a final rule. The regulations would be enforceable 180 days after the final rule is published. “The review process will probably take the balance of 2023, so we probably won’t see a final rule until the end of this year or next year,” LeBlanc says.

2024
is likely the earliest the noncompete ban would take effect, though whether it ever will is in question.

Even after a final rule is published, legal challenges are almost certain. Opponents are likely to request an injunction that would prevent the rule from being implemented until the case(s) is decided. There’s a fair chance at least one federal judge out there will grant such an injunction. That puts the potential effective date of the rule out even further – later in 2024 or beyond, depending on how the court case goes. Another variable: 2024 is a presidential election year and it’s possible that a new regime, if elected, could quash or not pursue the FTC’s proposed noncompete rule, if it’s not already in place.

Worth noting: The dissenting FTC commissioner has indicated several grounds upon which the rule could be challenged in court, including that the commission lacks the legal authority to engage in “unfair methods of competition” rulemaking and that the FTC’s action is an unpermitted delegation of legislative authority.