FTC's ban on noncompetes could be good for startups. But might be struck down
The Federal Trade Commission voted 3-2 to ban the use of most noncompete agreements on Tuesday. This ruling means companies can’t require employees who aren’t senior executives to wait a set amount of time before joining a competitor or launching their own company in the same category. While the FTC’s ruling will impact industries like financial services and hedge funds the most, due to the prevalence of such agreements in those industries, it could also impact startups.
The ban could actually be positive news for startup founders and hiring managers in a number of ways. For one, it could open up the hiring pool, says Nick Cromydas, the co-founder and CEO of hiring and recruiting startup Hunt Club.
“Now there will be more potential cross-pollination of companies that really understand businesses’ models and spaces,” Cromydas said. “I expect you will see more hiring with direct domain experience than you’ve seen in a while.”
Ryan Vann, a partner focused on employment law at Cooley, agreed. He said that he’s had clients that were too anxious to hire potentially game-changing talent away from larger companies for fear those companies would act on the noncompete agreement.
Banning noncompete agreements could also encourage startups to foster a strong company culture that makes people want to stay, as opposed to using threats to keep them, Cromydas said.
Some members of the startup community seem happy about the ruling as well — rare these days when it comes to decisions by the FTC. Sarah Guo, the founder at AI-focused VC firm Conviction, tweeted that banning noncompete agreements is a win for innovation. Cole Harrington, the co-founder and CEO at ThoughtWave AI, agreed with her.
Understandably, some startup CEOs are worried about how the end of noncompetes could impact the security of intellectual property, but Cromydas said there are other ways for companies to protect themselves. Startups can have employees sign non-disclosure agreements regarding intellectual property, or spend more time filing patents. Instead of blocking an employee’s future employment, such alternatives prevent them from using the previous employer’s intellectual property knowledge at their new jobs.
Startup employees might not see much of a change for two other reasons: noncompete agreements were already very hard to enforce, Vann said, and they were trending out of vogue among startups anyway. Certain states, including startup-heavy California, have existing state laws that restrict them. Although, he added that any client of his that can use them typically does, despite the low rate of them actually coming into play.
“Even without this ban, it is really, really hard in virtually every court in America to enforce a noncompete unless you have something added that are bad facts, like theft of confidential information, soliciting customers before you go, trying to set up competing business before you go,” Vann said. “I would almost never go into litigation unless I was armed with that kind of evidence or misappropriation of trade secrets.”
Given all that, noncompetes are becoming less common, according to company data from Hunt Club. While five years ago 90% of offers that came through Hunt Club’s platform included a noncompete agreement, that figure now is about 40%. Although, Cromydas said he wouldn’t doubt it they were rising again in hot sectors like AI where intellectual property is crucial and the war for talent is high.
So what should startup CEOs do if they currently use noncompete agreements with their employees? Absolutely nothing, according to Vann, who questions whether the ban will actually stick. Multiple lawsuits against the ruling have already been filed including one from the U.S. Chamber of Commerce and another from tax service firm Ryan LLC.
Vann thinks this potential ban could be struck down by numerous courts. If it does clear these legal hurdles, startups wanting to hire someone that may have signed one can terminate existing noncompete agreements incredibly easily.
“The worse-case scenario if you are a startup and hire someone with a noncompete, is all you have to do is issue the notice to say that your noncompete is not enforceable,” Vann said. “I would keep it at status quo right now and monitor what’s happening.”