FTC Bans/Voids Non-Compete Clauses

[Marcelason78]

…….Also interesting that @ChrisMWilliams comments on his podcast were supportive of staff in sports media, even though he is a sports media owner.

CW is an owner?

 

[HFCS]

Every place I’ve worked at since college has had some sort of vesting schedule for ESOP or even 401k contributions. Not ideal, but that’s one way to discourage people leaving that isn’t as heavy handed as a noncompete. And ultimately people can still move on if they’re not happy/good fit or they get an opportunity they can’t refuse.

Ultimately the cost of onboarding and training employees has to be baked in somewhere into your business model.

We already have the unique on earth system of chaining people to their job through healthcare. It discourages both switching companies and starting one’s own business.

It’s kind of insane to have non compete in addition to that.

 

[IcSyU]

I never understood how they would enforce that. A client is free to go to whoever they want for their accounting services.

Well, I'll be finding out if they enforce mine. I have had a couple clients say they were going with me so they know I took them but others I've said you have absolutely zero obligation to let them know where you went.

I would think it would be an ethics issue for me to disclose I retained those clients to my previous employer but I am most certainly not a lawyer.

 

[ghyland7]

That's really interesting to hear. My experience is limited to engineering/construction. Non-competes are generally two years after you leave and they disallow work for any direct competitors. There is usually not a limit on the distance/mileage since many of these firms cover partial or entire segments of the country.

What I've seen from an enforcement standpoint is they only pursue legal action if you are soliciting clients or trying to poach people. But I've never actually heard of anyone getting to court. Usually it's a sternly worded letter warning of legal action if you keep up whatever it is that you're doing that they don't like. It's not the legal consequences that scare people, its the cost of defending yourself against a $100M+ company with a team of lawyers and deep pockets.

But to prove actual damages in our industry would be very difficult, from what I understand, unless you steal a client or share trade secrets (which would be covered by an NDA anyway). As long as you don't do that, then the threat of legal action is pretty low (again, speaking only for my industry).

Certainly- our first step is ALWAYS a demand letter, and we rarely get into full-blown litigation.

The reality is, litigation is long and expensive, and often by the time a case would be heard, the noncompete would have expired anyway.. that’s why initial hearings on injunctions are so incredibly important in noncompete enforcement actions.

With regard to damages- contracts often will include some sort of liquidated damages provision related to the noncompete/nonsolicitation.

The noncompete is enforceable, but you are absolutely correct in thinking that enforcing it is very tricky. They absolutely can and have been enforced, but yeah.

Long story short, make sure to hire a lawyer! we are necessary in order to navigate the complicated system that we created!

 

[throwittoblythe]

Certainly- our first step is ALWAYS a demand letter, and we rarely get into full-blown litigation.

The reality is, litigation is long and expensive, and often by the time a case would be heard, the noncompete would have expired anyway.. that’s why initial hearings on injunctions are so incredibly important in noncompete enforcement actions.

With regard to damages- contracts often will include some sort of liquidated damages provision related to the noncompete/nonsolicitation.

The noncompete is enforceable, but you are absolutely correct in thinking that enforcing it is very tricky. They absolutely can and have been enforced, but yeah.

Long story short, make sure to hire a lawyer! we are necessary in order to navigate the complicated system that we created!

Thanks for the info. This stuff is fascinating to a non-lawyer!

Regarding the bolded: in the few non-competes I've signed, there were no liquidated damages provision, from what I recall. There was certainly no clause like "you owe us $X,XXX if you are found to be in violation." At most, perhaps that was some verbiage about attorney fees or cost of litigation.

Truth be told, I was young/ignorant enough that I just signed them understanding that if I left, I wasn't allowed to go to a direct competitor. But I can't say I recall the "what happens if" section of the agreements.

The few people I know who have got cross with an ex-employer just got a cease and desist type letter saying "you are in violation of your non-compete because of x,y,z. cease activities immediately or we will follow with legal action."

 

[Cyclonepride]

I have a lot of plumbing clients and not one has ever had a noncompete for their employees. I think they just expect high turnover as an inherent part of the industry.

I think that would be really hard to enforce if they tried, because that is literally their skill. Salespeople can go sell something else, managers can go manage a different type of group. A plumber is a plumber, and can't just suddenly become an electrician.

 

[throwittoblythe]

I think that would be really hard to enforce if they tried, because that is literally their skill. Salespeople can go sell something else, managers can go manage a different type of group. A plumber is a plumber, and can't just suddenly become an electrician.

I think this is at the heart of the FTCs action, though. This exact type of thing has been happening to people.

Imagine you're a machinist who works at a manufacturing facility making $75k/year. A condition of employment is signing a non-compete that prevents you from work at any factory within 100 miles of your current employer.

If you quit and go work next door anyway, it doesn't matter that the NC is unenforceable. The employee would have to spend tens of thousands in legal fees even if they ultimately win in court. So its a scare tactic to force compliance. The employee may be in the right, but the cost to prove that is insurmountable.

But also imagine how that NC keeps you from changing jobs at all. If you want a new job, under the NC, you're forced to incur the cost of moving your family, as well, if you want a new employer.

 

[CascadeClone]

I think this is at the heart of the FTCs action, though. This exact type of thing has been happening to people.

Imagine you're a machinist who works at a manufacturing facility making $75k/year. A condition of employment is signing a non-compete that prevents you from work at any factory within 100 miles of your current employer.

If you quit and go work next door anyway, it doesn't matter that the NC is unenforceable. The employee would have to spend tens of thousands in legal fees even if they ultimately win in court. So its a scare tactic to force compliance. The employee may be in the right, but the cost to prove that is insurmountable.

But also imagine how that NC keeps you from changing jobs at all. If you want a new job, under the NC, you're forced to incur the cost of moving your family, as well, if you want a new employer.

And that's ridiculous, and that kind of abuse is why they're getting tanked. Using it just as a scare tactic to reduce employee turnover... that's total trash from trash companies and management.

I have seen a decent amount of companies up close over the years. Its shocking how differently they approach employees. My ex worked at a place that literally thought employees would steal merchandise and never trusted them at all, paid them poorly, and just generally treated them like thieves in every way.

I've seen other places that honestly try to do right by their employees, and reward them for good work. Give them opportunities, treat them like people.

But most of what I have seen can be described as benign neglect. They want to treat employees decently, but don't really know how, don't spend enough time and energy on it, and as a result it's just kind of meh with a side order of dumb.

Life is short. Some places treat you decent and others don't. If you are working at a crap place, get out. You may think the money is too good to leave, but I bet you can do just as well somewhere that treats you better.

 

[HFCS]

Well, I'll be finding out if they enforce mine. I have had a couple clients say they were going with me so they know I took them but others I've said you have absolutely zero obligation to let them know where you went.

I would think it would be an ethics issue for me to disclose I retained those clients to my previous employer but I am most certainly not a lawyer.

Did you take the goldfish and Dorothy Boyd?

 

[abd4cy]

I am a Director of Sales for my company and from a sales stand point I don't get worried about my staff going elsewhere and taking business with them. I have seen this from all sides in my industry. I personally believe in the B2B world customers are inherently lazy because its not their money. Depending on the company it can be difficult to onboard a new vendor and the customers don't want the hassle when they can shoot off a quick email and buy what they need from their current vendor. It takes much longer to get them to change than people realize. Will they take meetings with their old rep at their new company, absolutely, but that the smallest part of the battle. When we have brought reps on from other companies they believe it will be an immediate windfall of their customers coming with them, but they quickly find out it takes years in some cases. Most of the time the non-compete has passed before they get the contacts to transition. Same with reps that have left our company to go to competitors, a lot of times we can build new relationships faster than they can get them to change. We also do a good job of making sure our customers have multiple people at our organization that they have relationships with. This is intentional so if someone does leave the relationship exists elsewhere which gives the new rep time to build the new one.

B2C is very different, and I could see this being a larger issue there (insurance, healthcare, etc) as people are spending their own hard earned money, and if they like someone they will follow, and there is no vendor process.

 

[kirk89gt]

There ARE some instances where non competes are legit. Someone mentioned tradesmen - you spend 2 years training them, they get experience, and then they can totally undercut you and start their own biz. That's a real issue for small biz, its not just Conglomo-Corp hosing the little guy. Ironically, I bet vast majority of NCs are done by big corps, and not small biz.

In my business, you train sales people, they make personal relationships with customers, and if they jump you can lose a big customer. Heck, they can even jump in advance of a big deal, and take it with them to jump start their own company. We worry about it a lot, but we pay good commissions so money isn't a driver. But if one of them wanted to start his own company, we are training & supporting our competition. We don't do NC's and have never thought about it. Though others in our industry absolutely do them (never heard of one enforced though).

All that said, I'd guess at least 80% of existing NCs are not legit. 100% agree with you that the worst companies do these the most - Honeywell is notorious for hitting almost everyone with them, AND trying to enforce them! My experience is that most companies that have them, its more of a "well its the thought that counts" to scare people - they would never actually go to court to enforce.

200% agree with you about culture and opportunities etc being the real key. People leaving is much less about money than it is bad managers, no real advancement chances, crappy environment. To the extent that this sharpens management minds about doing better by their employees to keep them on board, that's a good thing. I won't hold my breath though.


Second topic - what about with company buy outs? When you sell a small biz, they often put a noncompete on the former owner so he doesn't just hire key people away and start over. Is that still ok?

Seriously legit question. In your business, do you have nondisclosure agreements, confidential, or proprietary policies that team members must abide by, especially for sales? I would consider a customer list / history to be confidential, proprietary information. Now the burden of proof can be a high bar if somebody leaves and the next thing you know, one of your customers starts doing business with them through a different company

 

[cowgirl836]

I am a Director of Sales for my company and from a sales stand point I don't get worried about my staff going elsewhere and taking business with them. I have seen this from all sides in my industry. I personally believe in the B2B world customers are inherently lazy because its not their money. Depending on the company it can be difficult to onboard a new vendor and the customers don't want the hassle when they can shoot off a quick email and buy what they need from their current vendor. It takes much longer to get them to change than people realize. Will they take meetings with their old rep at their new company, absolutely, but that the smallest part of the battle. When we have brought reps on from other companies they believe it will be an immediate windfall of their customers coming with them, but they quickly find out it takes years in some cases. Most of the time the non-compete has passed before they get the contacts to transition. Same with reps that have left our company to go to competitors, a lot of times we can build new relationships faster than they can get them to change. We also do a good job of making sure our customers have multiple people at our organization that they have relationships with. This is intentional so if someone does leave the relationship exists elsewhere which gives the new rep time to build the new one.

B2C is very different, and I could see this being a larger issue there (insurance, healthcare, etc) as people are spending their own hard earned money, and if they like someone they will follow, and there is no vendor process.

So true on the rep relationship. So many times that would happen in my industry because the salesperson was the only one giving the account attention and it was an easy vendor to swap. Need to have multiple relationships.

 

[CascadeClone]

Seriously legit question. In your business, do you have nondisclosure agreements, confidential, or proprietary policies that team members must abide by, especially for sales? I would consider a customer list / history to be confidential, proprietary information. Now the burden of proof can be a high bar if somebody leaves and the next thing you know, one of your customers starts doing business with them through a different company

No, we dont have anything like that. I dont think theres a single signed employment doc anywhere. Its a 20 person LLC, and most employees have been there 10+ years. We do pay well and generally treat people very well. Our company Pres actually cares about people- and I just cant get him to stop lol.

We could do NDAs i suppose but we would never enforce it. Both due to legal costs and how long everyone has known each other. Prob best use would be to send to a future employer and hope to scare them. Someone did that to us once, but we knew the employer as a hothead, and it was from out of state and we basically called his bluff.

 

[intrepid27]

I’ve worked a few places that had them but really only one that enforced it.

The legal folks can correct me: but I’ve viewed them as more of a threat than actually enforceable from the start. The company would have to prove damages from the employee going to a competitor which is hard to do unless the employee is giving away trade secrets.

However, these companies have teams of lawyers and get the employee to fold just by overwhelming them with lawyer fees. Even though the company can’t win in court, they can beat you by never even getting there.

The last place I worked (construction) would warn you if you left for a competitor. They would leave you alone unless they saw your new company bidding against them on a project. Then you could expect to hear from the lawyers right away.

This is spot on IMO.

 

[Acylum]