Are Non-Competes Legal? (Updated 4-23-2024)

***Updated 4-23-2024 to talk about the FTC's Decision. Scroll to the bottom.***

Imagine giving the best of your years to a cleaning company. You've been loyal. You helped them grow. You were a team player. And you are thankful for the opportunities they gave you over the years. But with anything in life, there are seasons and you want to embark on the journey of entrepreneurship and you start your own cleaning business and you resign from your old company.

You start your new venture up and you're targeting a different niche than your old employer. You're going after different clientele. You show great discernment and steer clear of who your old employer might want to do business with. You're certainly not competing in any way.

But two or three months after you announce your new business to the world, your old employer sends a cease and desist letter saying you agreed at the start of your employment that you cannot start any cleaning company for a period of 5 years after the end of your employment with them within a 100 mile radius from their office and they're threatening to sue you if you continue. You dig up your old employment contract and in fact, you had signed it when you first started with them.

Is this fair? "Fair" is subjective, I know, but let's look at it from the employer's angle first. They are afraid of losing business to you. They view you as competition. They see you as a threat to their business. But in your view, you just want to strike it on your own. You want to serve a different market segment. You want to be your own boss. Who is right? Who is wrong?

Well, in January of 2023 the Federal Trade Commission (FTC) proposed a new rule simply called the "Non-Compete Clause Rule" that would ban some types of restrictive non-compete clauses found in employment agreements that limit employment of skilled workers with other employers and that limits competition if that worker were to go out on his/her own. Moreover, non-solicit agreements, which prohibit the solicitation of an employee by one of your customers, or vice-versa, would be prohibited under this rule. And certain provisions of NDAs, or non-disclosure agreements, would be prohibited if that NDA prohibits the employee from disclosing information that is necessary for his/her trade (e.g. I train an employee on a specific non-patented process and I have him sign a NDA agreeing not to disclose that process, like a particular cleaning process). 

According to the FTC's research, non-competes have a negative impact on our labor markets by limiting job opportunities, earnings potential, job creation, and more. It also impacts product and service markets. If you're stifling potential labor, then the market is impacted as well. This can impact innovation, pricing, and in our example above, the ability to engage in free enterprise. 

In fact, many states already outlaw these practices. California, Minnesota, North Dakota, Oklahoma, and Colorado have fully banned non-competes. Other states including Massachusetts, Illinois, Maine, Nevada, Oregon, Washington, Wisconsin, and even in my Virginia, have partially banned these practices. In Virginia, we cannot have any covenant that prohibits any employee from working elsewhere, including directly for our clients and our competitors. 

As of this blog post, the FTC was to end discussion on this proposed rule in March of 2023. There was a resounding request for public comment on this rule and the Commission initially delayed any vote until September 2023, and has since delayed it again as of the end of 2023. This rule has far reaching impacts on both employers and employees. This will be reviewed again in April of 2024.

Outside of the FTC vote, this could be set up in a showdown with the courts. Many feel, as I do, that this should be left for Congress to vote on. I personally support this rule, but it shouldn't be left for the Executive Branch to decide. 

We'll see what happens. 

***Updated 4-23-2024***

The FTC ruled on April 23 in a 3-2 decision that non-competes for most workers (some exception to executives over $150K/yr in wages as well as to non-profits) are not legal. As I indicated in the original draft of this post, I support the elimination of non-competes, but I feel that this shouldn't be left to the executive branch and the FTC. The two dissenting commissioners feel the same way. I have no doubt this will get set up in the courts and will have repercussions against the FTC and other executive agencies going forward should this ruling be legally challenged.