This week the Federal Trade Commission issued its Non-Compete Clause Final Rule. You can read the FTC’s announcement and final rule here. Challenges to the Final Rule in the form of lawsuits are threatened. Before paying us lawyers to challenge the Final Rule, the first step the potential challenger/plaintiff takes is to decide their ethical posture. Same for business leaders deciding how to discuss or respond to the Final Rule. This first step starts with some variation of the question, “What kind of business association or business leader do I want to be?”
We are republishing this Better Capitalism post, first published in January 2023 during the Final Rule open comment period, to help the reader answer that question for himself or herself.
Unchecked, we humans are endlessly creative in the ways we control and abuse each other. Let’s take two quick examples: the pillory and non-compete clauses.
The pillory doesn’t usually come up as a meeting room conversation, so we get you may not know what it is and deserve a description. Perhaps you’ve seen the pillory in some movie. This little gem for punishment and public humiliation of anyone sentenced to serve time in it usually consists of a pole that supports two boards stacked on top of each other. Each board is carved with holes along the mating edges sized just right to fit and hold a person’s neck and wrists. With the neck and wrists inserted and the boards mated and locked, like in the image below, the hapless person is trapped until they are released by their captives.
Image Credit: Robert Chambers now Public Domain
Interestingly, not only were pillories used for actual punishment, when empty they served as symbols of power for local authorities as well as a general reminder and deterrent against behaviors those authorities wanted to control. You might think the pillory was limited to medieval European lore, but pillories were around even in the United States as recently as 1905, when Delaware was the last state to abolish them.
Follow us for a quick exercise in empathy and imagine yourself locked in a pillory. Even for just a couple of hours, which was a common length of sentence although records indicate people were locked in pillories long enough to die. Imagine you are standing, hunched over with your neck extended and your wrists raised to be horizontal with your neck. In fact, instead of imagining, stop reading and assume that pose. How long can you hold that position before your legs shake and lower back hurts? Two minutes? Five minutes? Don’t force and hurt yourself but get a sense of what it feels like to be trapped like that, and then be grateful the pillory has been outlawed in most countries.
Now that you have a sense of what it feels like to be physically controlled and trapped by a pillory, let’s talk about its legal equivalent.
Non-compete clauses are no stranger to meeting room conversation, so you likely know what they are. Indeed, given that an estimated 30 million American workers are subject to non-compete clauses, the odds are strong you’ve signed one as a condition of employment in the past or you’re currently subject to one. I know that early in my career I signed employment documents with non-compete clauses as a condition of being hired without understanding what I was signing. Not understanding was my fault, I get it, but why even have the clause there for me to have to discover and figure out?
So, at least at a high level, what’s a non-compete clause or agreement (“non-competes”)? A reasonable definition is that it’s “a contractual term between an employer and a worker that typically blocks the worker from working for a competing employer, or starting a competing business, within a certain geographic area and period of time after the worker’s employment ends. Non-compete clauses limit competition by their express terms.” (Traditionally, non-competes were used only in the context of employer/employee relationships but more recently have been broadened to apply to other worker contexts.)
Image Credit: Cytonn Photography on Unsplash
Why are some estimated 30 million American workers subject to non-competes, including lower-wage laborers in industries like fast food and construction? Great question. A robust exploration of non-competes are beyond the scope of this post but can be found here. The core concerns usually stated by employers center around assuring that an employee doesn’t leave for a competitor with the employer’s confidential information or trade secrets or that an employee doesn’t get a free ride (e.g., the employer pays for the employee’s specialized training or even college program and then the employee leaves before the employer can recoup its investment in the employee). As Professor Herbert Hovenkamp of the Wharton School observes, these are legitimate employer concerns and are easily addressed by agreements other than non-competes. Otherwise, non-competes appear to serve the same control and authority functions as the pillory.
The State of California, for example, which as an economic entity is the 5th largest GDP in the world (ahead of India and poised to surpass Germany) has been hostile to non-compete since about 1872. Although non-competes may be enforceable under very limited circumstances and typically to ultra-high earners represented by lawyers before they sign, for all practical purposes non-competes are banned in California. Some commentators and historians even credit this hostility to non-competes as instrumental to the economic rise and success of Silicon Valley.
We who are concerned about free markets or individual freedoms or workers’ rights or accessing good talent have a common enemy in non-competes. We should take an active and united interest and a hand in seeing non-competes greatly limited if not entirely eliminated. We at Better Capitalism easily see the allegorical parallels between the pillory and non-competes (without taking the metaphor to hyperbole, of course), and the need to reel in the abusive use of non-competes. So, what’s a nation to do?
Fortunately, our nation appears to have an awakening Federal Trade Commission (FTC) that on January 5, 2023, proposed a new rule that would ban nearly all employee non-competes as unfair competition. The FTC isn’t proposing a complete ban on non-competes but is proposing a reasonable adjustment to abusive uses and, frankly, the time is long past for these proposed adjustments. Circling back to the opening sentence of this blog, the proposed rule is a reasonable check on the human tendency to want to control and abuse each other. The Vorys law firm provides an easy reading and balanced summary of the key provisions of the proposed rule changes here, and the full proposed rule is accessible from the FTC here.
As with all federal rule making, the public is invited to provide comments about the proposed rule, and the comment period is open for 60 days (March 6, 2023, unless it’s extended). We encourage you and everyone you know to read at least the overview if not the entire rule change and provide your comments in support of the proposed rule change. Nothing is perfect but some solutions, such as the proposed rule, are better than others, such as the status quo.
The proposed rule change is expected to receive strong opposition and attack by business leaders and their lobbyists, who in the past have worn blinders and taken pillory approaches to the labor market. But, perhaps, even they have since had a change of heart and ethic that allows them to see the reasonableness of the proposed rule change and support it, knowing there are other ways to protect their legitimate business interests. Meanwhile, with your support, the proposed rule change is a small but doable and effective step toward a better capitalism for all of us.
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