The Arguments Against Noncompetes

Many career transitions begin with what’s known as a “lift-out analysis.” This involves carefully reviewing employment agreements to determine whether, and to what extent, an individual is restricted from competing with their current employer or soliciting clients after departure.

The more I help clients navigate this world, the more I appreciate the public policy rationale behind the growing trend to significantly restrict, and even ban, noncompetes.

There are certainly times when noncompetes make sense. For example, if someone sells their book of business, it’s reasonable for the buyer to prevent the seller from immediately launching a competing venture and taking back the very clients they just sold.

But in my work, I also see noncompetes signed by relatively junior employees early in their careers. In the excitement of landing a great job, they may not fully grasp what they’re agreeing to -- only to discover years later, when they’re ready for a change, that their options are sharply limited by a noncompete.

Outside of certain exceptional circumstances like business sales, I’ve come to appreciate the arguments against noncompetes: They impede professional growth, keep salaries artificially low, limit competition in the marketplace, and restrict employees from leaving jobs they don’t like.

When an employee is bound by a noncompete, moving to a new employer becomes much harder. That means less leverage to negotiate for better pay, improved working conditions, or promotions. In most negotiations, an employee’s biggest (usually unspoken) leverage is the option to leave for another job, but that leverage all but disappears when a noncompete is in play.

These are among the reasons the FTC tried to ban most noncompetes at the federal level, although that effort was blocked in court and the current administration has indicated it won’t appeal. At the same time, more states are passing their own laws banning noncompetes -- and, in turn, making venue and choice-of-law provisions in employment agreements more important than ever.

While the trend away from noncompetes has been welcomed by many employees, and is rooted in good public policy, there’s another side to this coin. I’ll explore some of the arguments in favor of noncompetes in a future post.

To read about the current state of the law regarding noncompetes and restrictive covenants, read Understanding Restrictive Covenants and Current Challenges to Noncompetes.