Break Away From The Pack

Would FTC limits on non-compete agreements really change anything?

| Jul 13, 2021 | Business And Commercial Litigation |

This month, President Biden announced that he’s planning to sign an executive order that would limit the use of non-compete agreements. While the specifics of the order weren’t announced, it would involve asking the Federal Trade Commission (FTC) to develop new rules.

Those in the advisory and brokerage industry reacted with optimism tempered by a heavy dose of caution. They note that even a ban on non-compete agreements might still allow employers to include non-solicitation restrictions in contracts that prevent investment advisors and other professionals from taking clients with them when they start or move to another firm.

Non-compete agreements have lost some of their power and become less common in the last couple of decades, and they vary considerably by state. Here in California, they’re not legally enforceable if they restrict someone’s professional actions after their contract with a company is up. 

Employers have found alternatives to non-compete agreements

Firms utilize various contractual strategies to limit the ability of their brokers to compete against them after they leave. Some use strategies like requiring brokers to forfeit their deferred compensation packages if they leave to go to (or become) the competition or garden leave provisions that require exiting employees to stay out of the workplace in exchange for a continuation of their salary. 

An attorney who heads one business and regulatory compliance consulting firm notes, “The real question is going to be whether this executive order goes beyond non-compete agreements and discourages or limits the application of other types of restrictive covenants, including non-solicitation provisions.” He also questions the FTC’s authority to prohibit non-compete agreements when it’s “historically been the exclusive domain of the states.”

Much of the push for ending non-compete agreements has come from outside the financial industry. One official noted that more than 30 million Americans have signed non-compete agreements, and they affect “construction workers, hotel workers, many blue-collar jobs, not just high-level executives.”

Companies that employ investment and financial professionals, as we noted, can find numerous ways to limit competition from former employees, contractors and partners even without a specific non-compete agreement. That’s why it’s wise to seek legal guidance regarding your soon-to-be former employer if you plan to leave to start your own firm.