As published in Forefront

By Andrew Malec, Ph.D.

Non-compete clauses are provisions in employment agreements that restrict employees from working for a competing employer for some period of time after their employment ends. From 2000 to 2008, the number of court cases involving non-competition agreements nearly doubled,¹ which has raised concern at the Federal Trade Commission (“FTC”). On January 9, 2020, the FTC held a public workshop in Washington, D.C. to assess whether it should restrict the use of non-compete clauses in employment agreements. The workshop focused on the growing use of non-compete agreements by employers across industries, whether the use of these agreements is anti-competitive, and what authority the FTC has to regulate the use of these agreements in the  labor market.²

For the most part, panelists were in agreement that there is no legal or business justification for the use of non-compete agreements for low-wage/low-skill workers (e.g., fast food workers, dog walkers, etc.) and cited evidence that such agreements resulted in depressed wages, diminished labor mobility, and limited employee bargaining power. It should also be noted that the rate of use of non-compete agreements in states where they are unenforceable is similar to the rate of use in states where they are legal, which led panelists to state that low-wage workers are unfamiliar with state laws governing their employment agreements and/or unable to hire counsel to advise them of their rights.³ In fact, a recent study found that banning non-competes for low-wage workers in Oregon increased hourly wages and job mobility.⁴ However, it is unclear whether the FTC has the authority to address non-compete agreements through rule-making.

In contrast to the effects on low-skill/low-wage workers, panelists noted that studies also show that non-compete agreements may benefit other types of high-skilled/highly compensated employees (e.g., CEOs and physicians). According to Lexology, economists on the panel believe that a ban on non-compete agreements would be difficult for the FTC to justify and noted that more research is necessary to determine whether the potential anti-competitive effects of non-compete agreements (e.g., stagnant wages, lack of mobility in the labor market, and limited employee bargaining power) outweigh any potential benefits (e.g., incentivizing employees to invest in training and protecting trade secrets). While the merits of non-compete agreements are being debated at the FTC, our firm is routinely asked to assist with economic damage quantification/expert witness testimony on non-compete and trade secret litigation.

A typical litigation matter for which we are asked to assist is where a sales representative who has signed a non-compete agreement leaves his employer, joins a competitor, and competes with the prior employer. In this example, plaintiff’s economic expert will often quantify plaintiff’s lost profits.

We also see situations where an employee starts a business and directly competes with their current employer by utilizing misappropriated trade secrets to divert customers from their current employer to their newly formed entity. In this case, it is typical to see a plaintiff’s expert compute defendant’s profits to ascertain the profits that the plaintiff would have garnered had it not been for the actions of the defendant.

Litigation involving theft of confidential information is another area for which we are asked to assist. It is common to see matters where confidential information has been taken by a former employee; however, that information has not yet been utilized at the new employer. In this case, one cannot compute defendant’s profits. It is also speculative to compute plaintiff’s lost profit. However, it does not mean that those trade secrets do not have value. At a minimum, they are worth the cost to recreate the asset (e.g., blue print or business plan).

It is unclear what authority the FTC has in regulating non-competition agreements.
In the current state, non-compete litigation is prevalent. It is also common to see
litigation where there are breach of  the non-competition agreement and trade secret misappropriation claims since, in many instances, it is alleged that a former employee has taken trade secret information to get a “head-start” at the new employer. While lawmakers and the FTC wrestle with the idea of restricting the use of non-compete clauses in employment agreements, there is no doubt that we can expect to see more litigation in this area.

¹Starr, Evan, “The Use, Abuse, and Enforceability of Non-Compete and No-Poach Agreements,” Economic Innovation Group, February 2019.

²“Key Takeaways from the FTC’s Noncompete Workshop,” Lexology, January 19, 2020.

³Ibid.

^⁴Lipsitz, Michael and Evan Starr, “Low Wage Workers and the Enforceability of Non-Compete Agreements” (December 9, 2019), Available at SSRN.