The FTC Has Proposed Banning Most Noncompete Agreements

For the supposed purpose of fostering competition in the labor market, the Biden administration’s Federal Trade Commission is proposing to ban most noncompetition agreements. Restrictions in noncompetes have usually been governed by state laws, and the courts have often looked at them under the lens of reasonableness. But the agreements have helped to protect trade secrets, confidential information, and goodwill from unfair competition by former employees.

Some states already limit or prohibit some or all noncompetes, but the FTC proposal would go beyond the state laws in some cases. There are some exceptions such as for a selling by a 25% or more owner of a business. California has banned or severely restricted most noncompete agreements, so it serves potentially as a good test market for the FTC proposal.

Consider Meta’s new Twitter clone, Threads. It has already been sued by Twitter and Elon Musk, which claims that it uses Twitter trade secrets, provided presumably by former Twitter employees, for its operating platform. Trade secrets might be protected under other statutes, but the point is made that banning noncompetes creates more hurdles for protecting its business. It will be interesting to see how the Meta/Twitter battle unfolds.

Generally speaking, the FTC proposal is a “bad for businesses” proposal. What is bad for business can often be bad for the U.S. economy (but not always). The FTC proposal is likely to receive widespread legal challenges.  

Loss of noncompetes can have a great impact on the value of a business also. Let's say Twitter fails in its legal challenges to Meta’s Threads. Some business analysts are already saying that Threads could be a death knell to Twitter. How do you value Twitter if it cannot protect itself from loss of its trade secrets? How do you value any business when its key employees can freely walk across the street tomorrow and set up a competing business? This could be a significant challenge to the valuation profession. Keep an eye on this proposal.