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How should companies protect trade secrets? In the United States and elsewhere, companies have long used non-compete clauses in employment contracts, which prevent employees from moving to rivals in a particular region or starting a new business for a period of time. But over time, those clauses have spread from high-powered professionals to millions of low-wage employees, from fast food workers to waiters to security personnel. The Federal Trade Commission voted this week in favor ban them. His decision is long overdue.
It is estimated that nearly one in five American workers is subject to a non-compete clause. This often exploits the most vulnerable workers, who may become trapped in low-paying jobs or forced to move to even lower-paying industries or relocate to avoid financial penalties and legal action. Many people don’t even realize they are subject to that limitation until they try to change jobs and then lack the means to challenge it.
Lina Khan FTC president, said non-compete clauses “keep wages low, suppress new ideas, and steal from the American government.” economy of dynamism.” Its five commissioners voted 3-2 to approve a proposed final rule prohibiting such provisions. Senior executives, defined as people who earn more than $151,164 and are in a “policy-making position,” will continue to be subject to non-compete clauses in agreements already signed. But ruler, which will take effect in 120 days, would prohibit new non-competes for all workers.
However, legal challenges appear to lengthen the timeline. Workers and labor rights activists have backed the ban, but business lobby groups, led by the U.S. Chamber of Commerce, are rushing to block it in court.
Supporters of non-compete clauses, including plaintiffs in a lawsuit filed in federal court in Texas, argue that they are essential to protecting intellectual property, workforce investments and customer relationships. Critics also contend that Khan’s FTC is straying far beyond its legal antitrust and consumer protection mandates. Even the two dissenting commissioners said they believed the rule was “illegal” and “will not survive a legal challenge.”
However, setting so-called “non-compete” clauses appears to be within the purview of a regulator whose job is in part to ensure fair competition. There are good reasons for the rule to remain in force.
There may be some justification for imposing restrictions on senior executives in certain sectors, including strategic industries. But including such clauses in contracts as a matter of course disproportionately harms the disadvantaged, who do not negotiate their agreements in exchange for compensation, but are usually presented with them on the first day. Non-compete terms can last two years and result in tens of thousands of dollars in financial penalties for even a hospital or warehouse worker, which is why many are forced to remain in environments that may even be discriminatory or hostile.
When it comes to retaining senior executives and business-critical employees, there are other ways to structure contracts and compensation packages to encourage retention, including longer notice periods and non-solicitation clauses. There are also alternative means of protecting trade secrets and privileged information, including through intellectual property laws and confidentiality agreements, although the latter may be problematic in other contexts.
California made non-compete contracts unenforceable in the late 19th century and also has one of the most dynamic economies in the world. However, the confusing state-by-state application of the law is itself an argument in favor of a nationwide approach. While dozens of states have some limitations, only four have banned such clauses entirely.
Academic researchers have long noted the impact of non-compete contracts on wages and have pushed for reforms as a way to boost wages, innovation and new business formation. Eliminating them should not be seen as excessive regulation, but rather as a liberalization of labor practices.