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Noncompete Clauses: What They Are and What to Know Before Signing Your Contract -- WSJ

The Wall Street Journal · 01/06/2023 12:10
-- Is it reasonable? -- Is it enforceable? -- Is it negotiable?

By Lauren Weber

The Federal Trade Commission on Jan. 5 issued a plan to ban noncompete clauses, which the agency said suppress wages, stall new business formation and stifle companies from hiring the workers they need to grow.

It isn't known whether the FTC will vote to adopt the proposal and create a new regulation. Even if it does, the measure is likely to be challenged by businesses in court.

The FTC says nearly one in five American workers are affected by noncompete clauses.

Here's what you need to know about noncompete clauses, and what to keep in mind before signing.

What is a noncompete clause?

Noncompete clauses prohibit departing workers from sharing trade secrets or proprietary information with new employers, or from taking proprietary information, such as customer lists, and using it to establish their own business.

When used, these clauses are typically contained in a longer employment agreement that a worker signs. The clauses usually apply for a period of time, such as a year or two years, or to a geographic area.

Why is the FTC considering banning them?

The FTC says that noncompete clauses constitute "an unfair method of competition" and therefore violate a section of the Federal Trade Commission Act.

In announcing the proposal, FTC Chair Lina 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."

Why would a business have a noncompete clause?

Many companies say that noncompete agreements are necessary to protect trade secrets, which can include confidential information such as customer data as well as intellectual property such as technical formulas and processes.

The U.S. Chamber of Commerce has previously said that courts provide an adequate avenue for determining when noncompete clauses are abusive. After the FTC announced its proposal to ban noncompetes, the Chamber said it was weighing whether to file a lawsuit if the proposal is adopted.

What kinds of workers are most likely to be affected by noncompete clauses?

Noncompete clauses have commonly been included in the employment contracts of executives, salespeople, scientists and others with access to confidential or proprietary information. Over time, they have been applied to larger swaths of the U.S. workforce, including blue-collar workers. Regulators, researchers and journalists have documented noncompete clauses applied to janitors, baristas, hair stylists, schoolteachers and entry-level workers.

What should you ask yourself before signing a noncompete clause?

First, research your state's regulations regarding noncompetes. Then ask the following questions, ideally in consultation with an attorney:

What do state laws say about noncompete agreements?

Most states limit noncompete clauses in some way or require that the agreements contain reasonable restrictions, which leaves them open to courts' interpretations. A handful of states, including California, Oklahoma and North Dakota, hold that the clauses are unenforceable in all or nearly all employment contracts. Others, such as Colorado, Illinois, Maine, New Hampshire, Oregon and Washington, ban them for workers earning below a certain wage threshold.

Even in states where the clauses would be voided by courts, companies still add them because they expect few employees to challenge them, researchers say.

Can you get out of a noncompete clause?

A noncompete clause can be challenged in court and a judge may find that a clause's restrictions are unreasonable and therefore unenforceable. But many workers lack the information or resources to hire a lawyer, opponents of noncompete clauses say.

What are the consequences if you break a noncompete clause?

Companies don't always enforce their own noncompete clauses. But if they choose to, they can seek an injunction forcing you to honor the noncompete. They can also sue former employees to force them to turn down job offers, quit new jobs, or close a new business they have opened. In some cases, employers are awarded monetary damages if they can prove they have been hurt by an employee's decision to join a new firm or start their own business.

This explanatory article may be periodically updated.

Write to Lauren Weber at Lauren.Weber@wsj.com

(END) Dow Jones Newswires

January 06, 2023 12:10 ET (17:10 GMT)

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