The Federal Trade Commission voted 3-2 against prohibit the use of most non-compete agreements on Tuesday. This decision means that companies cannot require non-senior employees to wait a specified period of time before joining a competitor or starting their own company in the same category. While the FTC’s decision will most affect industries such as financial services and hedge funds, due to the prevalence of such deals in those industries, it could also affect startups.
The ban could actually be positive news for startup founders and hiring managers in a number of ways. First, it could open up the hiring pool, says Nick Cromydas, the co-founder and CEO of recruiting and recruiting startup Hunt Club.
“Now there will be more potential cross-pollination of companies that really understand business models and spaces,” Cromydas said. “I expect you’ll see more hiring with direct domain experience than you’ve seen in a while.”
Ryan Vann, a partner who focuses on employment law at Cooley, agreed. He said he had clients who were too anxious to hire game-changing talent away from larger firms, fearing those firms would act on the non-compete agreement.
Banning non-compete agreements could also encourage startups to foster a strong corporate culture that makes people I want to stay, as opposed to using threats to keep them, Kromydas said.
Some members of the startup community also seem happy about the ruling — a rarity these days when it comes to FTC rulings. Sarah Guo, founder of AI-focused VC firm Conviction, he tweeted that banning non-compete agreements is a win for innovation. Cole Harrington, the co-founder and CEO of ThoughtWave AI, agreed with her.
Understandably, some startup CEOs are concerned about how ending non-competes could affect intellectual property security, but Cromydas said there are other ways companies can protect themselves. Startups can ask employees to sign intellectual property non-disclosure agreements or spend more time filing patents. Rather than barring an employee’s future employment, such alternatives prevent them from using their previous employer’s intellectual property knowledge in their new jobs.
Startup workers may not see much of a change for two other reasons: non-compete agreements were already very difficult to enforce, Vann said, and they were out of fashion among startups anyway. Some states, including startup-heavy California, have existing state laws restricting them. Although, he added that any of his customers who can use them usually do, despite the low percentage of them actually making it into the game.
“Even without that prohibition, it’s really, really hard in almost any court in America to enforce a non-compete unless you add something that’s bad facts, like stealing confidential information, getting customers before you go, trying to build a competing business before you leave Van said. “I would almost never get into lawsuits if I wasn’t armed with this kind of evidence or misappropriation of trade secrets.”
Given all this, non-competitors are becoming less common, according to company data from the Hunt Club. While five years ago 90% of offers coming through Hunt Club’s platform included a non-compete agreement, this figure is now around 40%. Although, Cromydas said he wouldn’t dispute that they’re rising again in hot fields like artificial intelligence, where intellectual property is crucial and the war for talent is high.
So what should startup CEOs do if they currently use non-compete agreements with their employees? Absolutely nothing, according to Vann, who questions whether the ban will actually stand. Several lawsuits have already been filed against the decision, including one by US Chamber of Commerce and another from the tax office Ryan LLC.
Vann believes this potential ban could be struck down by several courts. If it clears those legal hurdles, startups looking to hire someone who might have signed up can end existing non-compete agreements incredibly easily.
“Worst-case scenario if you’re a startup and you hire someone with a non-compete, all you have to do is issue the notice to say your non-compete is unenforceable,” Vann said. “I would keep it status quo right now and watch what happens.”
