Opinions continue to pile up on the FTC’s recent and aggressive proposal to ban the use of non-competes for all workers in almost any circumstance. Although many are predicting the rule will eventually be struck down by the courts on the basis of the “major questions” doctrine, which requires clear statutory authority for agency rules like this, there is no guarantee it will happen soon, if at all. Therefore, the Center and Association will be submitting detailed comments advocating, among other things, that the rule include a carve-out for executives.
After a more thorough review of the proposed rule and its implications, a few additional items have risen to the fore:
- “De facto” Non-Competes. The proposed rule could be interpreted as defining many NDAs as de facto non-competes based on a “functional test.” For example, if an NDA is drafted to prevent the executive from using confidential or competitive information or experience when doing the exact same role at a director competitor, this may make the executive less attractive to the competitor. Should this be considered a de factor non-compete? The same could even be said of employee and customer non-solicits in certain industries.
- Conflicts With SEC. The cavalier treatment of the competitive harm caused by allowing executives to directly compete immediately post-termination seems to conflict with the SEC’s recent focus on the value of human capital to an organization. If human capital should be treated like other assets, companies should be allowed to protect their investments. Additionally, the SEC’s recent insider trading rules stipulate that a “cooling-off period” is necessary even when executives are bound by law not to use insider information when trading stocks. A properly drafted non-compete agreement is, in essence, a cooling-off period used for the very same reasons.
- Ramifications for Talent and Compensation Strategy. As the Center explained to Agenda in a recent article, companies and their boards are grappling with the talent and compensation ramifications of a total ban on non-competes. What does investment in an executive look like if that executive may be tapped at any time to do the exact same role at a competitor? How might companies think differently about severance agreements if there is no ability to include restricted covenants in return?
HR Policy Association and the Center are convening a joint member working group to inform our comments to the Commission on the proposed rule. If you are interested in participating, please let us know!