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FTC's proposed ban on noncompete agreements could have biggest impact on tech industry

Ryan Morrissey is a serial founder of software companies, having already launched three separate startups. Yet when he sold one of those companies, he had to sign an agreement to not start any more for a while. In the end, after he left 8×8 Inc. EGHT, +4.47%, the company that acquired his startup, he had

ftc's-proposed-ban-on-noncompete-agreements-could-have-biggest-impact-on-tech-industry

Ryan Morrissey is a serial founder of software companies, having already launched three separate startups. Yet when he sold one of those companies, he had to sign an agreement to not start any more for a while.

In the end, after he left 8×8 Inc. EGHT, +4.47%, the company that acquired his startup, he had to wait at least 18 months before he could start another company even after modifications to the agreement.

“I think you should be able to go wherever you want,” Morrissey said, although he did express concerns about possible trade-secrets risks and companies poaching entire teams of workers. But he said as an entrepreneur, “the only thing I can do is hire people who are ethical.”

“It’s akin to robbing a gas station,” he said, explaining that a “no-rob agreement” isn’t going to stop that type of unethical conduct.

Morrissey’s experience illustrates the impetus for the Federal Trade Commission’s proposed rules banning noncompete clauses, which the agency published this week. The rules would prohibit companies from asking workers to sign noncompete clauses, which among other things limit or delay workers from starting competing businesses or jumping to rival companies.

“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,” FTC Chair Lina Khan said in a news release Thursday, in which the agency said the ban could boost wages and expand opportunities for 30 million Americans.

Don’t miss: Your boss will no longer be able to make you sign noncompete agreements — if federal regulators have their way

The proposed ban would apply across all industries and income levels, but could have the biggest impact on the tech industry. Such agreements are widely used by tech companies that say they need them to protect trade secrets and intellectual property, and they sometimes go further: Some of the largest tech companies in the world — including Apple Inc. AAPL, +3.68%, Google GOOGL, +1.32% GOOG, +1.60% and Intel Corp. INTC, +4.25% — have settled antitrust charges and a class-action lawsuit accusing them of collaborating to not poach each other’s employees.

Noncompete agreements are supposed to be unenforceable in California, where those Silicon Valley companies are based, but tech workers say they have still had to agree to noncompete agreements. Companies say they are necessary to protect their trade secrets.

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“Noncompete clauses are one way of protecting innovation returns,” said Aurelien Portuese, co-director of the Schumpeter Project on Competition Policy at the Information Technology & Innovation Foundation, a Washington, D.C.-based think tank whose funders include giant tech companies such as Amazon.com Inc. AMZN, +3.56%, Apple, Google and Facebook. META, +2.43% He called the FTC proposal “problematic legally and economically speaking.”

Sandeep Vaheesan, legal director of the Open Markets Institute, a left-leaning think tank in Washington, D.C., disagrees. In 2019, Open Markets helped lead an effort — along with labor unions and other groups — to urge the FTC to propose the rules to ban noncompetes.

“A lot of innovation depends on openness,” Vaheesan said. “Locking up [too much] information prevents that.”

Not all tech industry workers start companies and sell them, like Morrissey. Noncompete clauses can limit employees’ ability to make a living in an industry in which they have expertise, as leaving one company under a noncompete could keep them out of that industry for a prescribed period.

“Even highly educated employees making six figures have little or no ability to negotiate or resist these contracts,” Vaheesan said.

The public has 60 days from publication of the proposed rule-making, which was Thursday, to submit comments to the FTC about the proposal. The agency already has more than 300 public comments on the issue, from when it held a workshop in 2019 to consider proposing the rules.

Plenty of comments slam noncompetes as harmful to individual workers and to American competitiveness — including an anonymously submitted comment that mentions a fundamental part of Silicon Valley tech history: the birth of what would become one of the world’s top chip makers because some engineers left one company to form other companies, including Fairchild Semiconductor, and later Intel.

“Famously, Intel wouldn’t have happened if Shockley Semiconductor had a noncompete,” the commenter wrote. (Shockley eventually went defunct, which some might say is an argument for noncompetes.)

For more: How eight Fairchild employees created Silicon Valley

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Portuese of the ITIF, who opposes the proposed rules, also said the FTC overreaches by pre-empting states’ jurisdictions on the matter.

But proponents of the ban include 20 state attorneys general, who said in a 2020 letter submitted to the FTC that harms of noncompete agreements “do not stop at state lines” because labor markets can have overlapping borders. Plus the AGs and others say companies that wish to protect their trade secrets have plenty of other legal tools at their disposal, including trade-secrets laws.

The FTC, which currently has four commissioners, voted 3 to 1 to release the proposed rules. In her dissent, Commissioner Christine Wilson called the proposed rules “a radical departure from hundreds of years of legal precedent” and said noncompetes “merit fact-specific inquiry” and “constitute an inappropriate subject for rule-making.”

The agency will review public comments and possibly make changes before finalizing the rules, which would take effect 180 days after they are published. Both proponents and opponents of the proposed ban expect legal challenges, so it could take years for any changes to be implemented.

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