Published on: October 8, 2021
Authors: Ani Huang
The Center On Executive Compensation (“Center”) is pleased to submit comments to the Federal Trade Commission (“FTC”) providing its perspective and opposing a blanket restriction on the use of non-compete clauses in employment agreements, especially at senior executive levels. The Center and our Subscriber companies believe that non-compete clauses, when used responsibly, can help companies protect vital investments in their employees, while ensuring the security of research and development, trade secrets, and institutional knowledge.
The Center is a research and advocacy organization that seeks to provide a principles-based approach to executive compensation policy from the perspective of the senior human resource officers of leading companies. The Center is a division of HR Policy Association, which represents the chief human resource officers of over 375 large companies, and the Center’s more than 140 subscribing companies are HR Policy members who represent a broad cross-section of industries.
The Center last submitted comments on the use of non-compete agreements following the workshop held by the FTC on January 9, 2020, which provided valuable insight into the impact of non-compete agreements on labor mobility. Following President Biden’s Executive Order on Promoting Competion in the American Economy, we believe the current discussion on the topic has not addressed the use of non-compete agreements for senior executives or employees with access to sensitive technical knowledge.
We have regularly discussed this issue with our Subscribers. While the views of each company differ based on their individual workforce needs and composition, we have broadly heard that non-compete agreements for certain employees, such as senior officers, are a necessary tool for the protection of commercial information. A blanket, one size-fits-all regulation prohibiting non-compete agreements across the board, even for senior officers and employees with access to trade secrets and intellectual property, would have a detrimental effect on their ability to implement leadership structures, invest in new technologies or product lines, and retain key employees.
Currently, it is estimated that 18-28 percent of US employees are covered by non-compete agreements (though other estimates have ranged higher). These agreements are more common for senior leadership roles and/or in technical fields involving sensitive, confidential information such as product cost and pricing. At the FTC workshop mentioned previously, Evan Starr, Assistant Professor of Management and Organization at University of Maryland, stated that between 70-80 percent of employees in senior level positions have signed a non-compete agreement. Recent studies have estimated that nearly two-thirds of public company CEOs have entered into non-compete agreements. Employees that have access to trade secrets are 25% more likely to be covered by a non-compete.
We would like to focus our comments on two questions which are germane for the current discussion following the executive order.
- What are the business justifications for non-compete clauses?
Non-compete agreements are most often included at professional levels where previous experience, training, or education would prepare the employee to negotiate various provisions of an employment offer (at the senior-most levels, this negotiation may be conducted with the benefit of counsel). The employee has the opportunity to negotiate consideration in exchange for the agreement not to compete – a reduction in market transferability in exchange for additional compensation.
Companies need to protect their customer and vendor relationships, their brand’s reputation or goodwill, strategic plans for future growth, product price and cost sensitivity, and trade secrets inherent in their research and development programs. Further, using a non-compete agreement can help ensure qualification for trade secret protection.
Businesses look to develop strategies that are successful in the marketplace because they offer a product or service unique from competitors. Senior level executives have intimate knowledge of the company’s short- and long-term strategy. Non-compete provisions protect a company from an executive leaving and taking these trade secrets, intellectual property, proprietary or confidential information, or strategic plans to a direct competitor. Executives are offered consideration to sign these agreements and the term of the non-compete agreement provides a reasonable period for the executive to not work directly for a competitor. Therefore, these agreements create opportunity for mutual benefit between the interests of the company and its senior level employees.
- Following President Biden’s Executive Order, should the FTC consider limitation on their use?
We believe an FTC rule regarding non-compete agreements is unnecessary and any review of non-compete agreements should not cover the use non-solicit, non-disclosure, or forfeiture agreements. Such agreements do not prevent employees from taking new jobs, rather they seek to protect existing employees and trade secrets, or (in the case of forfeiture) provide an incentive to avoid direct competition with the departed firm.
Non-compete agreements must be reasonable in scope and duration to be enforceable. Several instances of companies using these agreements for inappropriately broad segments of their employee population, including hourly employees, have received attention from both the press and state regulatory authorities. Those cases have resulted in positive changes of behavior. If the FTC were to consider rules on non-compete agreements, the Center would encourage the FTC to draw a clear distinction on the use of such agreements at the senior level and for specific employee classes with access to sensitive technical knowledge or customer/account information. The Center was pleased to see the presenters at the FTC’s February 2020 workshop note this distinction and should the FTC need additional information on this topic, the Center staff would be happy to provide it.
The Center appreciates this opportunity to provide feedback on the FTC’s ongoing effort to address the multifaceted issues regarding labor mobility. If you have any questions about the Center’s comments, please do not hesitate to contact us at www.execcomp.org.
Center On Executive Compensation
Vice President, Compensation and Research
Center On Executive Compensation