noncompeteMichigan’s Attorney General (AG) Dana Nessel joined 17 other State Attorneys General to respond to the Federal Trade Commission’s (FTC) request for public comments. These comments concern the FTC’s public hearings on Competition and Consumer Protection in the 21st Century. Ms. Nessel’s response echoes a growing concern across the United States about the use and enforcement of non-compete restrictions: See Employees Are Winners in Push-Back Against Non-compete Restrictions

Among the recommendations made by Attorney General Nessel and her colleagues is for the FTC to scrutinize post-employment restrictions. Here’s the AG’s full recommendations and report: State Attorneys General Comments on Labor Issues in Antitrust. Specific to non-compete restrictions, the AGs recommend:

At a minimum, we recommend that the FTC use its authority to ban intra-franchise no-poach agreements and noncompete agreements for low-wage workers. … We further propose the FTC consider a ban on non-competes involving multi-sided platforms [referring to “gig” employees who depend on an app or platform that connects different groups of users of the platform].

Kinds of post-employment restrictions employees face.

The recommendations are in response to various post-employment restrictions that employees increasingly must enter into as a condition of employment. As we’ve reported, such restrictions often extend to low-wage workers. These restrictions may be summarized as follows:

  1. A non-compete agreement between an employer and an employee restricts an employee’s ability to work for a competitor after leaving their employer.
  2. Under a non-solicitation agreement, the employer and employee agree that if the employee leaves the company, she will not solicit other employees from the old company to join the new company.
  3. Agreements between employers to not hire each other’s employees are called horizontal agreements. These restrictions between competitors reduce competition for labor. However, such limits are almost always illegal
  4. “No-poach” agreements are another post-employment restriction. These are similar to horizontal agreements but are between related organizations. An example would be a franchisor and a franchisee. Under these restrictions, the franchisee agrees not to hire employees of other franchisees. Notably, employees may not know of or consent to such restrictions because they are between employers.

Is more scrutiny needed for enforcing Noncompete restrictions?

The AGs offer detailed and well-supported arguments for why assessing such restrictions are needed.

Critics suggest good counter-points. But they also too easily dismiss the recommendations as an interference “with state contractual rights.” Or they downplay the argument that “the agreements can harm workers by limiting their employment options and ability to seek higher-paying jobs.”

I agree to some degree that non-compete and other post-employment restrictions have a rightful place in business. Admittedly, we routinely represent employers in drafting, implementing, and enforcing non-compete and related restrictions. But such representation is generally limited to important business interests, e.g., executives, sales representatives, buyers or sellers in business transactions, or similar considerations are involved. And we encourage our business clients to carefully consider which employees/positions are subject to post-employment restrictions. So throwing the proverbial “baby” out with the bathwater is not the answer.

But requiring all employees – irrespective of position or other meaningful assessment is also the wrong answer. This is because egregious misuse of post-employment restrictions abounds, something even the most entrenched critics favoring unfettered enforcement of post-employment restrictions acknowledges.

Wage suppression through non-solicitation restrictions.

Further, post-employment limitations are increasingly misused for anti-competitive purposes that do not protect legitimate business interests. In this regard, we have been in the “litigation trenches” representing numerous clients against questionable to outright unlawful non-compete litigation.

Case in point, we recently resolved a lawsuit filed by an employer who claimed its former employees “damaged” the plaintiff by “attempting” to solicit away employees ranging from a used car salesman, “insurance personnel,” “billers,” and other auto dealership employees. The former employees had joined a new entrant into the new and used car dealership business.

The damages; Plaintiff did not lose a single employee (outside the defendants who ended their employment for other opportunities). But the plaintiff claimed it was “forced” to offer more compensation to retain those individuals allegedly solicited by defendants. The price-tag: almost $250,000.00 in damages (or so the story goes).

In other words, the plaintiff was using its non-solicitation restriction to suppress its workforce wages. Such damages, however, were not convincing (it resolved for nuisance value). Nonetheless, the individuals lost good-paying jobs with the new employer (who wanted nothing to do with a lawsuit) and they incurred legal and mediation fees.

Leveling the playing field for enforcing post-employment restrictions.

The common denominator in lawsuits like the preceding is that the former employer rarely needs to “win.” Or, a minimal investment of time and resources is all that is required; merely threatening litigation. Such actions are generally enough to scare off a competitor or start-up from hiring the worker away. See Running out the Clock in Non-compete Disputes: A Frustrating Reality for Employees.

One recommendation that could temper such abuses without invalidating non-compete and other post-employment restrictions would be to amend statutes concerning the enforcement of non-compete agreements to include a bad-faith provision. Such an amendment could be similar to Michigan and other states’ that allow for the statutory recovery of attorney’ fees in bad-faith secret misappropriation claims. While no silver bullet, at least this would create some mechanism to compel a company to carefully scrutinize its liability before pursuing post-employment restrictions for improper purposes, e.g., suppressing wages or eliminating legitimate competition.

Use this link to contact Michigan attorney Jason Shinn, if you have questions about this article, Michigan non-compete law, or litigation enforcing or defending against non-compete claims. Since 2001 he has represented companies and individuals in drafting, negotiating, and litigating non-compete disputes.