News February 17, 2023
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.
“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.
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 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.
What’s the Current Legal Landscape on Noncompetes?
There’s not a universal federal standard on noncompetes. Things vary from state to state, but most impose what authorities generally term as reasonable restrictions on noncompetes, such as limiting scope, duration and the type of restrictions allowed. “This leaves most noncompete agreements subject to courts’ interpretation” on whether or not they can be enforced, LeBlanc notes. Put in laymen’s terms, what might fly in one state with noncompetes might not in another.
With limited exceptions, California, North Dakota and Oklahoma do not allow noncompete clauses within their borders.
Certain states have taken a harder line on noncompetes. California, North Dakota and Oklahoma have ruled that noncompetes are void, with limited exceptions. Others, including Washington, Colorado, Illinois, Arizona and Nevada have instituted restrictive covenants that say noncompetes can’t be applied based on factors like a worker’s earnings, notice and more. For instance, such covenants might prevent a company from subjecting a lower-wage-earning worker to a noncompete.
The variability of noncompete rules from state to state is another complicated dynamic that’s come to the fore in the new age of widespread remote work.
Say an employer in New Jersey hires a remote worker in California. Can the New Jersey firm have the worker sign a noncompete without violating the law? It could try, but enforcement will be difficult to impossible.
“Courts are generally going to defer to the laws of the state where the worker lives,” LeBlanc says, meaning the New Jersey company would be hard-pressed to enforce the noncompete on the Golden State worker. Even if the company got a Garden State judge to rule in its favor, practical enforcement would be an issue: Who in California is going to actually go after the worker when its state law prohibits noncompetes?
Why Are Some Promo Pros Opposed to the Ban?
It’s probably not surprising that promo employers are more likely to favor noncompetes than workers, though certainly not all owners use or like the clauses.
Generally speaking, supporters in promotional products view noncompete clauses as essential to protecting their businesses – including investment in employees and clients. They say the contract clauses help shield business owners from unscrupulous workers who would take what they learn at the employer’s firms and then leverage it to propel their own success elsewhere, either as a new independent company or at an existing competitor’s business – all at the expense of the employer.
Tim Holliday, co-owner of Florida-based distributor Children’s World Uniform Supply (asi/161711), believes some companies try to be too restrictive in the terms of their noncompetes. Still, he feels that noncompetes with what he characterizes as fair-minded parameters should be allowed.
“Noncompetes are good for employers, so they don’t spend all of the money training an employee, who then opens up their own shop down the street and tries to take all of their former employer’s customers,” Holliday says. “It’s fair to ask for a noncompete for a reasonable time, say two to three years, with a reasonable distance, say 100 or so miles.”
.@USChamber's @SuzanneUSCC explains why the fight over the FTC's proposed ban on noncompetes is much bigger than noncompetes
— Neil Bradley (@NeilBradleyDC) January 23, 2023
If, w/o Congressional authorization, the FTC can regulate this, there is no business practice they cant regulatehttps://t.co/ES1ordY8Mr via @WSJopinion
Wayne Barclay is dead set against the FTC’s ban. The owner of Doral, FL-based distributorship Blue Digital (asi/141702) thinks the prohibition, if enacted, will “hurt so many small businesses that can’t afford to have their customers that they have paid for leave with the sales rep. This ban will erode our right to protect ourselves. If the ban goes into effect, how are we going to protect against former employees taking our customers when they move on?”
Some promo firms say they’ve been burned by former employees.
“We have had people in the past leave our company and try to compete with us, so we learned the hard way that you want to negate that as best you can,” says Rick Puglisi of Buffalo, NY-based supplier LogoLinens (asi/67841). As such, the supplier uses what Puglisi describes as an agreement with nondisclosure and noncompete language to protect itself.
Vizual Express (asi/581528), an Ohio-based distributorship/signs business, implements noncompetes as a bulwark against being exploited too, company leaders say. “We’re in favor of using them to avoid the taking of knowledge and technology to our competitors,” says the firm’s Curt Fassler. “We have experienced people taking knowledge that we gained and using it to become a partner in another business. Not fair! No ban on noncompetes in our opinion.”
Tell us what you think about #noncompetes, share your experience officially here: https://t.co/zgELu2CGGQ
— FTC (@FTC) February 10, 2023
More: https://t.co/sc9BRzJq4E pic.twitter.com/vPLM6qRSQC
Della Voris, owner/president of Proforma Vision Marketing (asi/491499), says she once had a top sales rep leave, steal art files and, in the words of Voris, “poison top clients against us.” The rep did business with the companies that Voris’ firm helped her land, even using files that were created while the rep was with Voris. A court battle ensued and the rep ultimately had to pay a financial settlement, Voris says. Even so, the situation left Voris with no chance of reclaiming the former clients.
Given the experience, Voris – like more than a few others in promo – is skeptical that even noncompetes offer much practical cover for employers. “I am for protection of assets, documents, files, and any other proprietary and confidential information, but I believe a noncompete is not worth the paper it is written on,” she says.
Why Do Some Promo Pros Favor Banning Noncompetes?
Many industry professionals – including some employers – believe noncompetes have no place in a free market, as they cause undue harm to workers, preventing them from advancing their careers and in extreme cases depriving them of a livelihood.
“Noncompetes for employees are ridiculous,” says Russell Baingo, president of distributorship P’zazzz Industries Inc. (asi/155184). “Some companies use this tool unfairly when letting someone go. This poor employee, who worked in the industry and this is his life, now can’t work in the industry any longer. That’s unfair.”
As the owner of California-based distributorship Conextions (asi/166554), Nancy Whitley can’t legally use noncompetes in her state. Even if she could, however, she would not. “I think trying to stop someone from making a living is just a hateful thing to do,” Whitley says.
Dianna Bartholomew has been in the promo business for over 30 years. She started as an independent contractor rep and built a big book of business. She worked for others at one point, but ultimately started her own distributorship – Tennessee-based Splash it Promos (asi/466966). She does not ask sales reps to sign noncompetes.
“I think trying to stop someone from making a living is just a hateful thing to do.” Nancy Whitley, Conextions
“I just feel it’s the fair thing to do and it keeps everyone feeling safe and loyal to their current company,” says Bartholomew. “In fact, I encourage my reps to be successful and maybe do exactly what I did and start their own business. My reps know they can leave with their accounts anytime, but they remain loyal.”
As the owner of Maryland-based custom engraver/personalized gifts business An Etch Above, Kim Lyons says she understands the purpose of noncompete agreements. Still, as a former employee who was forced to sign one, she’s in complete opposition to them. That’s due, in part, to the fact that she endured a difficult experience after agreeing to a noncompete.
Lyons shares that she was working in a business development position for a direct mail/catalog company. After the business’ capital holding company filed for bankruptcy, Lyons, who’d signed a noncompete, began looking for work. However, she says she soon received a legal notice that she would be held to the noncompete.
For decades, I’ve fought for the notion that if your employer wants to keep you, they need to make it worth your while with good pay and benefits.
— President Biden (@POTUS) January 5, 2023
Consistent with my Executive Order, today's FTC announcement to limit non-compete agreements is a huge win for workers. https://t.co/xs94XDaqKq
Other legal and business wranglings played out, including that three new groups formed from the original company and one of them bought the noncompete agreements Lyons and other employees had signed to prevent those former workers from taking jobs with one of the other groups or another competitor, Lyons says. The upshot was that Lyons was out of work for eight months.
“The only way I was able to get a release was to go to work for one of my former clients and then beg the ‘new’ company that held my noncompete agreement to release me from it with a promise to then use them for my new job’s direct mail services,” Lyons says. “What a mess this turned out to be. To restrict people the ability to work in a field or regional area if they leave a company is unfair and shouldn’t be allowed. I know personally I will never sign another noncompete agreement.”
Another distributor ASI Media heard from says he had an especially harrowing ordeal due to a noncompete.
After being terminated by an industry company, he says he sought to start his own distributorship, limiting his prospecting to areas outside the region covered by the noncompete. Nonetheless, he says, the former employer took legal action and even contacted a Top 40 supplier threatening to sue if the supplier fulfilled orders for the terminated distributor who’d started his own firm.
ICYMI: FTC cracks down on companies that impose harmful noncompete restrictions on thousands of workers.
— FTC (@FTC) January 5, 2023
Agency action eliminates noncompetes covering thousands of workers, promoting greater economic opportunity and competition: https://t.co/hmYkV47Qno
According to the distributor, claims against him by the employer included that he had a home office in the protected area – even though he wasn’t prospecting for business in the region. The employer also wanted him to have no social media presence and not work with suppliers that had fulfilled orders for the employer, the distributor shares.
It was all “an attempt by my former employer to bleed me dry with legal fees and send a message to his employees,” the distributor asserts. “The first six months of my business were spent protecting my right as a business to even exist and the money I used for that came directly from retirement funds.”
Ultimately, he says, a judge ruled that while the former employer’s territorial claims were valid, the employer had overreached broadly. The now independent distributor survived – barely. It took him a bit to get sales churning and turn profitable, but after several years in business things are looking good. In 2022 he cleared more than $2 million in revenue.
“It was a horrid experience,” the distributor says of the noncompete fiasco. “I find noncompetes to be abhorrent.”
Is There a Middle Ground?
Certain promo professionals think contractual alternatives to noncompetes can be established that are fair to workers and to employers.
Some, for instance, suggest that customer information be identified as the intellectual property of a business; employees would recognize this and agree to not use/take customer information outside of the business in an agreement. Employees could still, however, find new employment where and with whom they wish and call on prospects that aren’t their former employer’s clients.
Top 40 distributor Stran & Company (asi/337725) doesn’t ask employees to sign a noncompete. Rather, the Massachusetts-headquartered firm implements non-solicitation agreements that protect specific customers that Stran has invested in over the years. The agreements often apply to customers considered “programmatic” – ones in which Stran has a contractual obligation, manages inventory, and uses Stran technology and/or warehousing.
“I’m not a believer in limiting people from working within our industry, even at competitors, as long as they aren’t soliciting customers where they used Stran’s resources, people and offerings to win that business in the first place.” Andy Shape, Stran & Co.
“These accounts often have teams of people that are involved in servicing the customer, so protecting that investment we’ve made is important for our business and the people who work for us that depend on those accounts for their livelihood,” says Stran President/CEO Andy Shape, a member of Counselor’s Power 50 list of promo’s most influential people. “If one person can simply learn all of those account details and try to bring that business elsewhere for their own personal benefit, but at the expense of our company and our employees, that doesn’t seem fair.”
Under the non-solicitation agreements, Stran workers can freely find work elsewhere in the industry, including at competitors, but can’t call on those big Stran clients covered by the contract clause.
“I’m not a believer in limiting people from working within our industry, even at competitors, as long as they are not soliciting customers where they used Stran’s resources, people and offerings to win that business in the first place,” says Shape. “There’s plenty of business out there, so go find your own!”
Birmingham, AL-based distributorship Imageworks (asi/230173) has stopped using noncompete agreements but kept in place non-solicitation provisions. “This specifically does not prevent competing,” says President Rick Roth. “However, the clients and employees that are at Imageworks can’t be solicited. My salespeople have found this to be fair.”
Nondisclosure agreements can also offer business owners protection without hindering the careers of workers, some promo professionals feel. These contracts/contract clauses involve one or more parties agreeing not to disclose or act on certain information considered confidential. Still, some attorneys and industry business leaders say these agreements skew too heavily in favor of workers, leaving employers exposed. “In theory, nondisclosures can be effective,” says LeBlanc, “but they’re more difficult to enforce and use in an effective way.”