The Federal Trade Commission voted 3-2 on Tuesday to ban the use of most non-compete agreements. The ruling means companies cannot require employees who are not senior managers to wait a certain period of time before joining a competitor or starting their own company in the same category. The FTC’s ruling will have the biggest impact on industries such as financial services and hedge funds, but it could also affect emerging companies because such agreements are prevalent in these industries.
In fact, this ban could be positive news for startup founders and recruiters in many ways. For one thing, it could open up more hiring opportunities, said Nick Chromidas, co-founder and CEO of recruitment startup Hunt Club.
“Going forward, we could see more cross-pollination between companies that really understand business models and business spaces,” Chromidas said. “I think we’re going to see more hires with direct domain experience than ever before.”
Ryan Vann, employment law partner at Cooley, agreed. He said some clients are nervous about hiring innovative talent from large companies for fear that the companies will act under non-compete agreements.
Prohibiting non-compete agreements may also encourage startups to develop a strong corporate culture that nurtures talent. want Chromidas said it’s important to stay, rather than use intimidation to keep them.
Some members of the startup community also seem happy with the ruling, which is a rarity these days when it comes to decisions by the FTC. Sarah Guo, founder of her AI-focused VC firm Conviction, said: tweeted We believe that banning non-compete agreements is a victory for innovation. Cole Harrington, Co-Founder and CEO of ThoughtWave AI agreed with her.
Understandably, some startup CEOs are concerned about how the repeal of anti-competes could affect the security of their intellectual property, but how can companies protect themselves? There are others, Cromidas said. Startups can have their employees sign non-disclosure agreements regarding intellectual property and spend more time filing patents. Such alternatives do not prevent the employee from future employment, but rather prevent the employee from using knowledge of the previous employer’s intellectual property in the new workplace.
For two other reasons, employees at startups may not see much change, Bang said. One is that non-compete agreements were already very difficult to enforce, and in any case, non-compete agreements are falling out of fashion among start-up companies. Certain states, such as California, which has a large number of startups, have existing state laws that restrict startups. However, he added that despite the low rate of actual use of them, his clients who can use them typically do.
“Even without this prohibition, nearly every U.S. court will hold a court in the United States that does not allow a person to compete in a competitive business unless there are additional adverse facts, such as theft of confidential information, soliciting a customer before going, or attempting to start a competing business in advance.” It’s really very difficult to enforce a business ban. You go,” Vann said. “Absent that kind of evidence or misappropriation of trade secrets, I almost never take a case.”
Given this context, non-competitions are becoming less common, according to Hunt Club company data. Five years ago, 90% of offers received through HuntClub’s platform included non-compete agreements; today, that number is around 40%. However, Cromidas said there is no doubt that they are emerging again in hot fields such as AI, where intellectual property is important and competition for talent is fierce.
So what should startup CEOs do if they currently have non-compete agreements in place with their employees? According to Van, who questions whether the ban actually applies, nothing at all. He says there is no. Multiple lawsuits have already been filed against the ruling, including one from the U.S. Chamber of Commerce and another from tax services firm Ryan LLC.
Van believes this potential ban could be struck down by a majority court. Clearing these legal hurdles would make it incredibly easy for startups that want to hire potential signatories to terminate existing non-compete agreements.
“If you’re a startup and you hire someone with a non-compete, the worst-case scenario is that all you have to do is issue a notice that the non-compete is unenforceable,” Vann said. Ta. “Right now we’re going to keep things the way they are and monitor what’s going on.”
