In the workplace, non-compete agreements have always been a controversial issue.It is designed to protect a company's trade secrets and customer relationships, but is often abused and becomes a “shackle” that restricts employees' free development.But across the pond, the FTC, led by Lena Khan, is pushing for a change in non-compete agreements.
As chairperson of the U.S. Federal Trade Commission (FTC), Lena Khan is not only an antitrust advocate, but also a promoter of antitrust investigations and lawsuits against technology giants. Soon after taking office, she led the antitrust litigation against Facebook's acquisition of Instgram and WhatsApp, and has since led antitrust litigation against major companies such as Meta and Amazon.
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Now, she has raised the banner of breaking the shackles of the workplace for workers. On April 23, local time, the FTC led by Lena Khan announced that it would completely prohibit all employees (including senior managers) from signing new non-competition agreements. Prohibited Agreement.
The FTC's ban on non-compete agreements under her leadership is estimated to have a series of positive impacts: the establishment rate of new companies increased by 2.7%, with 8,500 new companies added every year; an average of 17,000 to 29,000 patents were added every year, and the annual patent growth rate in ten years is 11%~19%; in the next ten years, the average annual income of employees will increase by an additional US$524 (approximately 3,796 yuan), and innovation and the labor market will be injected with more vitality.
The FTC's ban on non-competition agreements has aroused widespread concern at home and abroad. Will the domestic workplace trigger a re-examination and reform of non-competition agreements?
After all, although non-compete agreements are necessary to protect the company's interests, the restrictions and troubles it imposes on employees cannot be ignored. In the future, if domestic non-competition protection can become more refined and rationalized, a more balanced solution may be found between employees’ freedom of development and corporate business opportunity protection, thereby awakening more entrepreneurial motivation and innovation vitality.
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FTC: Total ban on signing new non-compete agreements
On April 23, local time, the U.S. Federal Trade Commission (FTC) announced that it would completely prohibit all employees (including senior managers) from signing new non-compete agreements in order to protect workers’ basic freedom to change jobs and improve their ability to innovate. Facilitate the establishment of new businesses.
With respect to existing non-competition agreements, existing non-competition agreements for senior management remain in effect and are no longer enforceable for other employees after the stated effective date. “Senior managers,” defined as those in decision-making positions who earn more than $151,164, currently make up less than 0.75% of the workforce. This rule will take effect 120 days after publication.
FTC announces ban on non-compete agreements｜Image source: FTC
Why Does the FTC Ban Non-Competition Agreements?
Non-compete agreements were originally created to protect a company's trade secrets and preserve the relationship between the company and its customers, and their history goes back centuries. The earliest relevant legal dispute reportedly occurred in England in 1414, involving an apprentice.
However, over time, and across numerous industries, some employers have begun to misinterpret the original intent of non-compete agreements. They often formulate broader and even eye-popping terms. Even if these terms may not be strictly enforced in practice, this approach has actually violated the non-compete agreement's obligation to protect business interests and customer relationships to a certain extent. original intention.
According to the FTC, “A non-compete is a pervasive and exploitative practice that imposes contract conditions that prevent workers from accepting new jobs or starting new businesses. Non-competes often force workers to either stay in the job they want to leave , or suffer other significant harms and costs, such as being forced to move to lower-wage fields, being forced to relocate, being forced to leave the labor market entirely, or being forced to defend expensive lawsuits.”
The FTC found that non-compete clauses tend to negatively impact competitive conditions in the labor market by inhibiting effective matching between workers and employers. In addition, non-competes often have a negative impact on the competitive environment in product and service markets, inhibiting the formation of new enterprises and innovative activities. There is also evidence that non-compete clauses lead to increased market concentration, which in turn drives up consumer product prices.
According to FTC Chairman Lina M. Khan, on the one hand, non-compete clauses keep workers’ wages at low levels for a long time, inhibit the birth of innovation and deprive the economy of vitality; on the other hand, Once non-compete clauses are banned, more than 8,500 new startups are expected to be launched each year. “The FTC’s final rule banning non-compete clauses will ensure that workers have the freedom to pursue new jobs, start new businesses or bring new ideas to market.” market.”
The FTC estimates that the implementation of the final rule on non-compete clauses will drive the annual growth rate in the number of new businesses to 2.7%, which means that more than 8,500 new businesses will be added every year, and workers’ income will increase. It is estimated that the average number of new businesses will increase by 2.7%. Workers can expect to earn $524 more per year. Additionally, this rule is expected to significantly reduce health care costs by as much as $194 billion over the next 10 years. At the same time, the rule is expected to have a positive impact on innovation, with an average of 17,000 to 29,000 new patents expected to be added each year over the next 10 years.
This rule was originally proposed in January 2023. During the 90-day public comment period, the FTC received more than 26,000 comments on the proposed rule, of which more than 25,000 comments supported the FTC's proposed non-competition clause. It can be seen that the public has been struggling with the non-competition clause for a long time.
The FTC rules also identify some alternatives to non-competes, such as trade secret laws and confidentiality agreements. These alternatives can help employers protect their proprietary and other sensitive information without restricting workers’ freedoms.
Where do domestic non-competition agreements go?
Amazon abroad has previously filed lawsuits against many employees who changed jobs. For example, three lawsuits were filed in 2014, 2019, and 2020 against former employees who joined Google. Google claimed US$179 million in liquidated damages against the former star engineer of Waymo who founded the self-driving car company…
In China, non-compete agreements are also a long-standing problem. Many employees are restricted and troubled because of non-competition agreements. Tencent, Baidu, ByteDance, Pinduoduo, etc. have all launched non-competitions and demanded compensation from former employees. Individual compensation ranging from hundreds of thousands to millions. The cases not only involve senior employees and management of the company, but also junior employees who have just joined the company.
Although companies in non-competition agreements generally pay a certain amount of money as “compete compensation” to balance the implementation of the agreement by employees who signed the non-competition agreement, so after an individual violates the agreement, the compensation will be refunded or even the compensation for violating the agreement will be borne. It is supported by law. However, because the company, as a strong party, can even require employees to sign a non-competition agreement as a condition for joining the company, and has the initiative to continuously expand the number of competitors, this seemingly fair agreement is actually very passive for individuals. , and even unfairness may occur in reality.
So if the domestic non-competition agreement is also cancelled, in addition to making individuals more free, will it also bring about some positive changes in the business society?
First, eliminating non-compete agreements would provide employees with greater employment freedom and flexibility. Under the current circumstances, many employees are restricted and troubled by non-competition agreements, and even face problems such as liquidated damages when changing jobs.
There is no doubt that if these restrictions were lifted, employees would be freer to choose the jobs they want or suit them, thereby releasing more work capabilities and creativity into the market, thereby increasing the flexibility and efficiency of the entire labor market.
However, the choice of a non-compete agreement cannot be considered from one side alone. After all, after a company trains its employees, if they are easily poached by competitors, it may lead to the loss of the company's core knowhow and competitive advantages. This is unfair to the company. of.Therefore, it is also necessary to strike a balance between the company's protection of trade secrets and competitive position and employees' pursuit of personal development.
For example, in terms of protecting a company's sensitive information and core competitiveness, legal constraints can actually be imposed at the intellectual property level. At present, the implementation of some domestic non-compete agreements is too broad and tough, which in turn limits the career development of employees, and even in some cases , seriously affecting the career survival and development of employees. This is essentially the company choosing the simplest and roughest way to protect itself, without truly clearly and in detail defining what it really needs to protect.
For example, in actual practice, many companies’ non-competition agreement restrictions do not have hierarchical definitions based on the work that employees actually participate in and their impact on the company. In the end, non-competition restrictions may include almost all companies in the same industry, which results in employees leaving once they leave. It is difficult for the original company to continue its career in the same industry. Such broad restrictions are clearly unreasonable because not all employees possess the company's confidential information, and not everyone joining a rival company will have a fundamental impact on the original company's competitive position.
In the future, the issue of non-competition protection indeed needs to be more refined and rationalized. The FTC’s prohibition on non-competition agreements may also promote further thinking about non-competition agreements in the domestic workplace.
Perhaps in the near future, domestic companies and employees can find a more balanced and reasonable responsibility, and the activity of innovation and entrepreneurship can be more awakened. After all, in the current environment, many people may be tied up because of non-compete agreements. , unable to release the ability accumulated by one’s own experience and history. But if these restrictions disappear, more entrepreneurial motivation and innovation vitality will be released, which will be a good thing for China's technology industry.
