Non-Competes Banned

Today, the Federal Trade Commission issued a final rule to promote competition by banning noncompetes nationwide, protecting the fundamental freedom of workers to change jobs, increasing innovation, and fostering new business formation.

“Noncompete clauses keep wages low, suppress new ideas, and rob the American economy of dynamism, including from the more than 8,500 new startups that would be created a year once noncompetes are banned,” said FTC Chair Lina M. Khan. “The FTC’s final rule to ban noncompetes will ensure Americans have the freedom to pursue a new job, start a new business, or bring a new idea to market.”



Thoughts?

 

Fuck big corporations that set these in place. Only the second time I've agreed with Lina Kahn's decision.

 

If this holds, it will have a negative impact on M&A, especially in the MM and LMM. Often times when you acquire those smaller companies, the senior-level people are the Company. If those people can cash out and subsequently leave to start a competitor, what is an acquiror really buying? Will be interesting to see how this plays out. Theoretically, if this ruling holds acquiring multiples should come down because there is inherently more risk in every acquisition in the smaller end of the market. 

 
Most Helpful

Agreed, it may lower volume of LMM / MM deals. But at the individual employee level, I do think people should have unlimited control over their career.

Very curious how this will affect industries like healthcare. Providers having non-competes are a huge issue in that industry. This may lower their salary in the long run as there will be more providers able to change jobs. Huge turnover at large healthcare hospitals / practices may happen and rapidly raise costs as a result.

 

Talking to my doctor friends, apparently this ruling may not extend to non-profits which most hospitals fall under.  I'm sure there will be litigation around this

 

It probably wouldn't take that much legal maneuvering to simply design a new contract that doesn't violate the non-compete ban, but still legally obligates executives and other valuable persons to stay with the company for X number of years for the precise reason you mentioned.  That plus some significant financial incentive to stay would likely eliminate most of that risk.  Not to mention the reputational loss that those who do join competitors after selling their company would suffer, since they would likely be disregarded in all future dealings as too much of a risk, which lowers the incentive to do so in the first place.  In addition to legal maneuvering (a battle which private companies will practically always win), there's also the matter of enforcement.  If this does in fact increase the risk of deal-making and companies design new contracts to reduce that, even if they did technically violate the ban there's little chance the FTC would have the power to enforce it when the entirety of the private sector is against them.  Point being, I just don't see this being a major change for large transactions when there's too much on the line.  If it's really that detrimental, deal makers would fight back with something more innovative.  

 

Exactly right.

You should always, always be skeptical when someone limits your freedom to reach an agreement with another party, and tells you that your freedom is actually being enhanced somehow. 

Lina Khan is the most arrogant and out-of-touch regulator I've ever come across, and that's saying something.  

 

I believe senior executives are only excluded from having their currently existing non-competes invalidated.  The rule will still ban new non-competes for everyone, including senior executives.

Hilariously, it defines senior executive as someone making over like $152k per year.  But again I dont' think that definition matters much because for new non-competes, the rule will apply to everyone.

One has to really be an aggressive disbeliever in free markets to think it will add value to take a negotiating point away from two parties.  Non-competes are valuable to companies in many situations, and that value accrues somewhat to the employee.  We will all be poorer for this over the long run.  Of course, the bureacrats who make these rules have never been valuable enough to be offered a non-compete before.  

 

As long as you are not setting firm policy, which god knows most people even above $151k in compensation are not setting any policy - then you are in the clear. This is a win. 

Non-competes are market interference.  

No matter how unenforceable a noncompete is, a potential employer will not want to deal with it and will tell you to just wait.  That's interference. 

 

It's not that I innately disagree with banning non-competes, but I don't think it's good for regulators to act as legislators. This is not some arcane rule that requires expertise to concoct and implement, which is the purview of regulators; this is a policy that is hotly contested and is different depending on the states and the determination of state legislative bodies. The FTC has no right to step in and just "decide" what is right and wrong, good and bad public policy. They don't possess special expertise that empowers them to make these rules.  

 

The federal trade commissions act and Clayton act were put in place long ago stating the commission is empowered to prevent unfair methods of competition and charged with preventing and eliminating unlawful / interlocking contracts 

they absolutely have the right to act and if you think only "legislators" and the elected should act, see the Supreme Court 

 

dutchduke

The federal trade commissions act and Clayton act were put in place long ago stating the commission is empowered to prevent unfair methods of competition and charged with preventing and eliminating unlawful / interlocking contracts 

they absolutely have the right to act and if you think only "legislators" and the elected should act, see the Supreme Court 

Non-competes are not necessarily "unfair" methods preventing competition. That's my point. This is a hotly debated topic with lots of different positions taken by various state legislatures. Regulators are supposed to make rules and regulations about items surrounding their expertise (e.g., making arcane rules about water management). They are not supposed to settle policy debates that are easily debated by elected bodies. That is not within the purview of regulators. In fact, this very principle is before the Supreme Court as we speak--the Chevron doctrine is a terrible doctrine and is being challenged.  

In fact, what you posted actually proves my point. According to what you posted, the FTC has had the power to regulate this for decades and hasn't, and it hasn't because it was perfectly well regulated by state legislative bodies. Nobody and nothing compelled the FTC to issue this regulation. 

 
dutchduke

The federal trade commissions act and Clayton act were put in place long ago stating the commission is empowered to prevent unfair methods of competition and charged with preventing and eliminating unlawful / interlocking contracts 

they absolutely have the right to act and if you think only "legislators" and the elected should act, see the Supreme Court 

Ever heard of major questions doctrine 

 
jl12

Legislators gave the FTC this regulatory authority. Congress very explicitly passed a law that authorizes this

It's like you people aren't even attempting to listen to or comprehend the other side of the argument. Congress passed a law that gave the FTC the power to make rules against unfair competition. For 110 years since the FTC was formed, states have regulated non-competes just fine. The FTC, which has never before asserted this power, has stepped in and ended debate among all 50 states + D.C. and said, "No, the debate is over; we've decided to blanket ban non-competes, with some rare exceptions, and your laws that were hotly debated among your elected bodies--yeah, those are no good." That's a really ugly way to govern--you strip the public of its ability to vote for people to make laws, especially laws on hotly contested policy. Bureaucracies are supposed to make rules and regulations on arcane topics that are outside of the educational capacity of legislative bodies; they are not supposed to end debate on public policy. 

 

Frankly if you're sr. enough to qualify for garden leave, I feel like you'd want to have it. A 6-12mo vacation with a clear, articulated reason sounds good to me lol

 

For reference, the rule .pdf is provided here:

https://www.ftc.gov/news-events/news/press-releases/2024/04/ftc-announc…

A brief scan of the details appears to exclude sale of business, contracts before the rule, non-profit, and other scenarios.

Also, from what I saw, an employer could still (likely) craft a strong NDA clause to still prohibit certain disclosure scenarios which might (in effect) come close to a non-compete, and would not likely limit any clawback provisions, at least from what I saw.

I might have missed something, but that was what I gathered from a quick scan of the document.

(Don't MS, I'm not offering my opinion here, I am merely providing the link, and a quick synopsis, for reference).

Investor (30+ years); IB/RE/PE/Corp (MD level); currently, head of boutique private equity firm; principal of family office.
 

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