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FTC proposes rule to ban noncompetes in effort to promote worker freedom – article by Chris Gair

By Chris Gair

Chris Gair is a founding partner of Gair Eberhard Nelson Dedinas Ltd., a boutique litigation firm focusing on complex commercial litigation and white-collar defense. He is a former assistant U.S. attorney for the Northern District of Illinois and clerked for the late Justice Seymour Simon of the Illinois Supreme Court.

The Federal Trade Commission last week proposed a blockbuster rule that, if adopted, would ban all noncompetition agreements in employment contracts, working one of the most fundamental shifts in employer-employee relationships in decades.

The rule would supersede all inconsistent state laws. The proposal would continue to allow, however, noncompete agreements entered into as part of the sale of a business.

The FTC adopted the rule by a 3-1 vote, saying that banning noncompetes in employment agreements could raise workers’ earnings by nearly $300 billion per year.

In a press release announcing the proposed rulemaking, FTC Chair Lina M. Khan said: “The freedom to change jobs is core to economic liberty and to a competitive, thriving economy. Noncompetes block workers from freely switching jobs, depriving them of higher wages and better working conditions, and depriving businesses of a talent pool that they need to build and expand. By ending this practice, the FTC’s proposed rule would promote greater dynamism, innovation, and healthy competition.”

Currently, noncompetition agreements are permitted throughout the United States and typically restrict workers from changing jobs or starting new companies of their own during a period of months or years after they leave an employer. Such restrictions are justified by employers as protecting their investments in training and developing workers as well as their confidential information, including intellectual property, business methods and client relationships.

Some states, including Illinois, have recently chipped away at efforts to restrict efforts to impose noncompetes on low-level employees like delivery drivers, but such restrictions are typical and enforceable in a wide variety of industries, so long as they are supported by a legitimate business purpose, supported by consideration, and reasonably limited in time and geographic scope.

Noncompete agreements are the norm in businesses ranging from high-tech fields, like algorithmic trading, to ordinary commercial sales, and a ban would likely create far greater movement of employees among companies and efforts by employees to strike out on their own with know-how gained from their former employers.

The new rule would also bring a fundamental shift to the legal profession in Illinois and elsewhere. Disputes over noncompetes are a diet staple for many litigators, spawning countless lawsuits. Many lawyers find themselves on both sides of these disputes because today’s former employee trying to skirt a restriction often becomes tomorrow’s entrepreneur trying to impose one on his or her employees.

The debate over the validity and wisdom of noncompetition agreements is literally centuries old, and the pendulum has swung back and forth over that time.

As Justice Arba N. Waterman of the Illinois Appellate Court explained more than 130 years ago: “It is impossible to reconcile the numerous cases upon the subject of contracts and combinations in restraint of trade. Beginning with the cause reported in Year Book 2d, Henry V, in which the irascible Judge Hall, three quarters of a century before the discovery of America, upon an attempt to enforce an obligation entered into in consideration that the defendant did not use his dyer’s craft within the city for a certain time, to wit, for half a year, thundered out in bad French: ‘A ma intent vous purres avoir demurre sur luy que obligation est void eo que le condition est encounter common ley, et per Dieu, si le plaintiff fut icy, il irra al prison tang il ul fait fine al Roy.’ (In my opinion you might have demurred upon him, that the obligation is void inasmuch as the condition is against the common law; and by G– if the plaintiff were here he should go to prison till he paid a fine to the king.)

“Down to the present time, the fluctuating opinions, based as they have been upon considerations of public policy, have shifted now in this direction, and then in that, as cases decided upon what is thought to be for the best of the whole community, ever have and ever must, vary in accordance with the changing ideas of wherein the public welfare rests.” More v. Bennett, 41 Ill. App. 164, 169–70 (Ill. App. 1891).

Those ever-changing ideas of public welfare have shifted in recent years, at least in many jurisdictions, in favor of freedom of employees. The recent impetus toward employee freedom can be traced to then Illinois Attorney General Lisa Madigan’s lawsuit against Jimmy John’s. People v. Jimmy John’s Franchise LLC, Circuit Court of Cook County, Illinois, No. 2016-CH-07746.

There, the company prohibited employees during their employment and for two years afterward from working at any other business that sells “submarine, hero-type, deli-style, pita, and/or wrapped or rolled sandwiches within 2 miles of any Jimmy John’s shop in the United States.” The restriction obviously had no legitimate purpose and served only to restrict movement of workers, and the company settled the litigation.

Thereafter, the Illinois legislature passed the Illinois Freedom to Work Act, which became effective on New Year’s Day last year. That statute bans imposing any noncompete agreement on employees earning less than $75,000 per year and prohibiting nonsolicitation agreements on employees earning less than $45,000 per year.

The FTC’s action last week would abandon this incremental approach and represent a seismic change in the employment landscape. But it marks only the beginning of the rulemaking process, and the proposal is likely to generate a landslide of lobbying and negative comments from business groups. Less clear is what interest groups on the workers’ side will rise to support the proposal. While the FTC proposal is a bold one, no one should trying holding their breath until it is adopted.

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