The Future of Non-Competes

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Non-competes have long been used by companies to prevent employees from taking their inside knowledge and working in direct competition with a company. Note that this is different from a non-disclosure agreement (which prevents sharing information) and non-solicitation (which prevents stealing employees, clients, and/or partners). The idea is that the skills themselves gained during the employment can now be used in direct competition against the original company.

Important note: I am not a lawyer, and this is not legal advice. Read your contract, non-compete, and other legal documents carefully, understand the laws of your state, and, very importantly, have a lawyer review everything before you sign it.

Typically, a non-compete has three components. First, it restricts the type of company you can work for in the future. In some cases, it may explicitly name certain companies, calling out specific competitors, but often it describes an industry or class of companies. Second, it usually provides a geographic range as a distance from the employer. Third, there’s a time limit as to how long it’s in effect, typically a few years. It may also include certain clauses like non-solicitation of employees and clients as part of the non-compete or as part of other documents you might sign.

The courts need to balance competitive restrictions against fairness to the worker. If you’re a senior executive at a mid-sized accounting firm on Long Island, then if you go to another accounting firm on Long Island you’d be competing against your old firm and your inside knowledge of your former employer might give your new employer (possibly your own company that you start) an unfair advantage. On the other hand, a company couldn’t reasonably say you can’t ever work again at any accounting firm anywhere in the country. After all, you’re an accountant, and another accounting is where you’ll likely need to work in the future.

Seniority is also considered. McDonald’s isn’t going to stop a fry cook from taking the same job at Burger King, even though it’s a direct competitor. However, McDonald’s may restrict their VP of logistics from working at Burger King since the VP will have extensive inside knowledge of McDonald’s operations and competitive practices which it doesn’t want Burger King to employ.

In April of 2024 the FTC tried to ban nearly all non-competes, but that was recently struck down. While I can’t speak to the legality of the FTC’s mandate and the law, I can say that I believe non-competes are generally overused. They should be limited to senior management, and R&D, and perhaps salespeople or senior salespeople (although a non-solicitation may be sufficient for salespeople). Friction in the labor market, in nearly any form, drives up labor costs and limits innovation.

But the FTC approach is not the only issue we need to consider with the future of non-competes, the concept of geography is dated in today’s labor market. As noted above, there is usually a geographic limitation. Small accounting firms, like many local businesses, typically serve their local markets. That was true twenty years ago, but what about today? The tech companies I work for tend to be national, not local. Even that “local” accounting firm has gone virtual. Suppose you have two Long Island accounting firms; an employee leaves the first firm but has a non-compete preventing her from working at any accounting firm within fifty miles. The second firm is physically located twenty miles from the first firm. Can an employee with a non-compete move to the second firm if the employee is now based in California? What if the second firm closes its physical office and goes virtual? It can get a mailing address anywhere in the country, or it can incorporate in Delaware, or in upstate New York. The definition of “distance” starts to lose meaning in our remote-work world.

I have also long argued that common documents like a non-compete or non-disclosure agreement should have standard language. People aren’t lawyers and not everyone can afford to hire one. If the industry can move to standard terms, it will make it easier for people to understand what they are signing. Again, I recommend you always get a lawyer to review anything you sign (and again I am not a lawyer, and this is not legal advice), but practically speaking, standardizing language in legal contracts would help people who won’t get lawyers.

Even if we keep non-competes, which I suspect we’re likely to do, they will need to be modernized. Today’s virtual world means more companies operate nationally and as the scope expands in one dimension, the legislature (but realistically the courts) needs to ensure there is a subsequent restriction in another to not make modern non-competes overly onerous.

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