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Proposed Ban on Noncompetes Generates Concerns

3 min read

A labor law attorney’s advice to companies concerned about the Federal Trade Commission’s proposed rule that would block employers from asking workers to sign noncompete agreements? Don’t panic.

“There are a lot of questions,” said H. Wayne Young, a partner with the Little Rock firm Friday Eldredge & Clark and part of its Labor & Employment Law Practice Group. “I feel like it goes too far and is using a sledgehammer to kill a fly.”

This month, the FTC announced the proposed ban on noncompetes, which it says is an exploitative practice that stifles wages and prevents entrepreneurs from starting new companies. The FTC estimates that by ending noncompetes, wages would rise by nearly $300 billion annually and career opportunities would expand “for about 30 million Americans,” according to a Jan. 5 FTC news release.

“By ending this practice, the FTC’s proposed rule would promote greater dynamism, innovation, and healthy competition,” FTC Chair Lina Khan said.

Young said that the proposed rule would ban not only all noncompetes in the future, but it would ban all existing noncompetes. “And we feel that that’s too harsh of a result,” he said.

Legal experts also aren’t sure the law will go into effect as written.

The U.S. Chamber of Commerce called the rule “blatantly unlawful.”

But one law professor said banning noncompete agreements shouldn’t be a problem for businesses.

“The truth is that for a lot of businesses they don’t really need the noncompetes,” said David Abrams of the University of Pennsylvania’s Carey Law School. “I don’t think there’s a great rationale for it from a legal or economic perspective.”

A noncompete agreement “means you can’t go work for a competitor for some period of time, so that limits your other job options,” Abrams said.

Reasons for a company to use a noncompete agreement would include the company having very specific training or trade secrets that are specific to it and “you’re worried that you spent a lot of time and money getting your employees up to speed on it, or giving them access to sensitive information, and they could go turn around and work for a competitor,” he said. “But that’s a small number of cases.”

Businesses that would qualify for putting noncompetes in place have to have “really valuable intellectual property that could walk out the door in someone’s head,” Abrams said.

In other cases, the companies could lean on nondisclosure agreements and use trade secrecy laws to protect themselves.

Arkansas Businesses

Many Arkansas businesses use noncompetes “for valid reasons,” Young said.

Arkansas has a statute that limits the circumstances under which noncompetes can be enforced and requires a “time and scope,” he said.

Employers must show that the noncompete is narrowly drafted to accomplish its legitimate purpose, which is to protect companies’ confidential information or their intellectual property, he said. Or it could be used to hold onto a salesperson who has a customer base.

“So we feel like that statute adequately protects and balances the rights of the employer versus the rights of the employee and free trade and commerce,” Young said.

The comment period on the proposed rule is open through March 10. After that, legal challenges are expected, which would stay the rule while it travels through the courts. If it survives the legal challenges, it would take another 180 days before it went into effect.

In the meantime, Young said, he recommends that companies routinely evaluate the noncompetes with their employees to ensure they’re in compliance with state law and their business purposes. 

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