What if the future of your career hinged on a single legal clause? Join us as we unpack the complexities of non-compete agreements with attorney Dave Williams, an authority on administrative law and non-compete clauses. Listen to an eye-opening real-world cases that underscore the complex balance between how these agreements can protect businesses and how they also can potentially stifle innovation and competition. With the Federal Trade Commission’s recent move to invalidate non-competes nationwide, affecting 30 million U.S. workers, we question what the long term impact will be on the long-standing balance between safeguarding business interests and fostering a competitive job market.
This episode dives deep into not just the legal ramifications but also the human impact of non-competes. We explore how these agreements can either protect or hinder workers, especially in smaller communities where job opportunities are limited. To navigate this shifting landscape, we discuss alternative measures like non-solicitation and non-disclosure agreements, which businesses might find more enforceable. Gain insights on how to strategically protect confidential information and prepare for the possible new FTC rules that could reshape employment contracts forever. Don’t miss this essential conversation that blends legal expertise with practical advice for business owners and employees alike.
What if the future of your career hinged on a single legal clause? Join us as we unpack the complexities of non-compete agreements with attorney Dave Williams, an authority on administrative law and non-compete clauses. Listen to an eye-opening real-world cases that underscore the complex balance between how these agreements can protect businesses and how they also can potentially stifle innovation and competition. With the Federal Trade Commission’s recent move to invalidate non-competes nationwide, affecting 30 million U.S. workers, we question what the long term impact will be on the long-standing balance between safeguarding business interests and fostering a competitive job market.
This episode dives deep into not just the legal ramifications but also the human impact of non-competes. We explore how these agreements can either protect or hinder workers, especially in smaller communities where job opportunities are limited. To navigate this shifting landscape, we discuss alternative measures like non-solicitation and non-disclosure agreements, which businesses might find more enforceable. Gain insights on how to strategically protect confidential information and prepare for the possible new FTC rules that could reshape employment contracts forever. Don’t miss this essential conversation that blends legal expertise with practical advice for business owners and employees alike.
Bob Sewell:
Is that even legal? It's a question we ask ourselves on a daily basis. We ask it about our neighbors, we ask it about our elected officials, we ask it about our family and sometimes we ask it to ourselves. The law is complex and it impacts everyone all the time, and that's why we are here. I'm attorney Bob Sewell and this is season five of the Worldwide Podcast that explores that one burning question. Is that even legal? Let's go.
Bob Sewell:
Today on the show is Dave Williams. Dave Williams is one of my partners. He's a fantastic attorney, fantastic guy. He's an expert in administrative law issues. He's also an expert in non-compete agreements and litigating those agreements. Dave, welcome to the show. Hey, thanks, bob. Thank you for having me. I'm fascinated by the growth of the administrative state. It's something that I've been thinking about in my personal time. I've been thinking about it and talking about it on the podcast. The administrative state is not someone that we've elected. This is a bureaucratic organization that's run by the executive, either your governor or your president and it affects us, it changes us, it changes our laws and recently the FTC did some rulemaking on non-compete agreements and this rulemaking, from what I understand and I brought you on to talk about it, is extensive, it's unique and traditionally non-compete agreements are creatures of state law. So why do I care what the FTC is doing here? What's going on?
Attorney David Williams:
Well, thanks, bob. You've raised an issue that kind of intersects with a lot of different areas. You've raised an issue that intersects with the growth of the administrative state. You've raised some issues related to how companies protect their business information and how they protect their business interests when they train and take time for an employee. So let me give you a story, an example of how a non-compete works.
Attorney David Williams:
I have a client who started a very unique business and they had a very unique kind of product and they were trying to get market space. And so they bring in a sales guy who's going to cover like Northern Arizona and this guy works in the Flagstaff area, covers all of Northern Arizona, and my client spends a lot of their money to go out and advertise and develop a presence in Flagstaff and they've developed relationships with key vendors and referral sources and customers that they can sell their products to, or vendors that they can sell their products through to downstream in the economy. So they bring on a sales guy and they basically say to this guy look, we're going to introduce you to all of our vendors, we're going to introduce you to all of our key people and we're going to let you work Northern Arizona and you're going to get paid a commission to help sell our products. And so Bob or Jim we'll call him Jim, since there's already a Bob in front of me. So Jim goes up there and he works in Northern Arizona for like three or four years and he develops relationships with these guys on behalf of his employer, who spent all this money to bring him on board, train him, help him learn the industry. Bob or Jim gets a job offer from a competitor of my client and then goes across the street, gets a job working across the street, still working in Northern Arizona, and then tries to take all of my client's customers to his new job.
Attorney David Williams:
One of the ways that we stop him from doing that is by introducing something called a non-compete agreement, and a non-compete agreement is something that says when Jim leaves my employment, leaves my company for a period of time six months a year he cannot compete in Flagstaff in my industry, and so the reason that that agreement is found to be upheld is because it's designed to protect that employer my company who spent a lot of money investing in this area and teaching Jim that product, and then having Jim turn around and walk across the street and steal that business out the back door without having done anything to earn it on his own.
Attorney David Williams:
That's what a non-compete is. And so now what you have is the Federal Trade Commission, who is a non-elected body appointed by the president, confirmed by the Senate, who comes in and says we are going to invalidate, make them illegal, every non-compete across the United States which is in four, and it essentially this rule, if it goes into effect in 120 days, would invalidate non-compete agreements across 46 states. It would affect one in five American workers, or essentially 30 million US citizens. That's a lot of non-compete agreements that just got invalidated by the swipe of some bureaucrat's pen, and it impacts a lot of people because non-competes have been around for a hundred years and there's there's case law that's developed on a state by state, case by case basis as to why these are viewed reasonable in some States versus other States. And so now you've got again an administrative body that comes to, comes in and tries to impose a one size fits all solution to something that is not a one-size-fits-all.
Bob Sewell:
I want to talk a little bit more about this FTC stuff, then I want to move into non-competes more generally, and then I want to talk about, maybe, some alternatives that business owners need to be looking at now. Sure, I'm a little flustered. This is not my area of law, as you know, but I'm flustered. It feels odd to me that the FTC has this much power to just wipe out 50 states' laws and their common law on how each state wants to deal with their non-competes, and they're just stroking a pin by some bureaucrat. I didn't elect what's going on.
Attorney David Williams:
It's really troubling. And, if you think about it, every state has their own sort of way. They've approached non-compete agreements, like in California they're illegal, but in Arizona they are considered legal within certain boundaries. In some states they've actually passed laws to enhance non-competes, like in Georgia. They've actually passed a statute that says we recognize non-competes because we want to encourage some sorts of competition or non-competition type provisions.
Attorney David Williams:
So what you need to understand is the Federal Trade Commission has been around since about 1910, and it was formed to regulate certain trade practices. And originally, when it was formed, it was set up sort of like a ministerial court. You have these commissioners who investigate individual cases of anti-competitive or things that relate to federal trade practices and they investigate, say, an employer or like an industry that is involved in something, and then they issue some sort of ruling that might involve monetary sanctions or some sort of enforcement, like an order to stop them from doing something. That's typically what the FTC has done. And then, about in the 1970s, they started saying well, now we have what we call rulemaking authority, which means not only can we enforce cases on a case by case basis, but now we can actually issue a rule nationwide that applies to the entire industry. The Congress passed other laws along the way, that sort of enhanced specific powers they had. There's something called the Magnuson Moss Warranty Act which gives the FTC the power to regulate, like warranties and things like that, like if you buy a car, you have a warranty that comes with it. But they've never Congress has never issued a broad rule that says the FTC has nationwide rulemaking authority. That was developed out of a case in the 1970s which hasn't really aged well, and so now the FTC, for the first time really ever, has taken this new power and said even though we've never done this before, we're just going to issue a nationwide rule that bans these types of agreements nationwide.
Attorney David Williams:
And there are industries that are currently taking them to court. There's a case pending in the Northern District of Texas that is seeking to a group of plaintiffs. Business owners are seeking to invalidate this FTC rule. When the FTC passed this rule, they have to list it and then they have to get comments on it. There were 27,000 comments by business owners objecting to this rule and there was a bunch of reasons why it would be bad for the industry, bad for business, bad for commerce and sort of. The FTC ignored that and again with the stroke of a pen by Fiat, adopted this rule, and so now the rule has been adopted, it will go into effect in 120 days, and if it's not, if a court doesn't invalidate it or issue an injunction or issue some sort of order, then this goes into effect. Or Congress can pass a rule, can pass a law overriding the FTC, but that's not likely to happen given the current political environment.
Bob Sewell:
That's amazing. I want to have you on, once we know more about what's going to happen, to talk about this again. It really is. People need to understand that this is an incredibly important issue to business.
Attorney David Williams:
It's an incredibly important issue to how Arizona does business, how each state does business, and it changes how we're going to be approaching our business lives and our Think about it like this If you're a business owner, or even like a maybe you're a business owner that does business across multiple states and you have a very specific type of product or service or even a business strategy, maybe, like you're selling a certain type of service and now you're going to change your service and go kind of into a different area, you want to protect that information from your competitors and so we use non-competes and other types of restrictions on employees to protect those. And if you're a business and you're a business owner and you've sort of implemented this strategy based on what you think the law is and that's designed to protect your business and your product and your way of life, and the government basically comes in and says, hey, by the way, in four months we're going to take away everything that you've used to keep your company competitive, that's going to send shockwaves through the economy, absolutely.
Bob Sewell:
Yeah, and the thing is, if people had the foresight that this was going to happen, they could have drafted the contracts differently. Let's talk about some alternatives to non-competes, because it's one thing to say, hey, I don't want you to compete, but we could also in my particular sphere. But we could protect our businesses through other means as well. Absolutely.
Attorney David Williams:
So we have to. So a non-compete is a type of restriction in the business world called a restrictive covenant, and a restrictive covenant is basically a type of it's by contract, so an employee has to voluntarily agree to this, so usually as a condition of employment. And we're not talking like Joe the plumber or Sandy the assembly person, like somebody who's working on the assembly line. We're usually talking about someone who's a higher level employee, a higher level executive within a company who has access to unique information, proprietary, confidential information of their employer, business strategies, pricing, identities of clients, things that a company wants to reasonably keep secret so that they don't have to share that information with their competitors. Or even on a more deeper level, a trade secret. And a trade secret is like the formula for Coca-Cola, or, if you're KFC, the 12 herbs and spices, and it's the special secret sauce that you don't want other people to know about and so to protect that, employers, a business owner, will use different things to do it.
Attorney David Williams:
They will employ something like a non-compete and really in its purest form. A non-compete says for a period of time after you leave my employment, you will not be able to compete in this industry in a specific geographic region for a period of time. So those types of agreements are generally upheld if they're reasonable, which means they're narrowly tailored to protect a specific interest of the employer, like my customer base, my referral sources, for a very specific period of time. These non-competes go off the rails when they say, well, I'm going to prevent you from working everywhere in the United States, or I've seen some that literally prevented some people from working within the universe. I mean, there are some really, really non-competes.
Attorney David Williams:
But, they have to be reasonable, right, Exactly, they have to be reasonable in scope, duration and things like that. So that's the purest form of restrictive covenant. There are other types of restrictive covenants one called a non-solicitation agreement, which basically says after you leave my employment, you're not going to go out and contact my employees to get them to recruit them to come work for your new boss at your new job, or you're not going to go steal my customers or solicit or try to steal my customers for a year, 18 months, after you leave my work. So I can't stop you from working in Flagstaff, but I can prevent you from stealing my employees or stealing my customers. So let's say Jim the Flagstaff guy, example let's say he wants to go start his own company. Now he knows how to run a company. Because I's say he wants to go start his own company, Now he knows how to run a company because I've taught him how to run it in my industry. So he's going to go start up a new company and now he's going to try to steal all my customers. The non-solicitation agreement prevents him from doing that stealing my customers, stealing my employees.
Attorney David Williams:
The other kind of agreement is something called a confidentiality agreement which basically just says or a nondisclosure agreement which says I'm giving you access to very, very sensitive confidential information in my company and you are not going to share that after you leave my employment. That's my information, I'm giving it to you by virtue of the fact that you work for me to do better in your job, from a benefit of me as the owner, and so you're not going to be able to steal that information on the back end and go, take it over to another company and use it. Or if you want to start your own company. So those are the main kinds of types of agreements.
Attorney David Williams:
So if this FTC rule goes into effect, it invalidates non-compete agreements for a very large group of people. The only exception to that is something they call senior executives, which would be like high, high, high level employees. Or if I sold you a business and I'm the owner of the business and I turn around and sell it to you, I'm still bound by a non-compete, by me selling you the agreement. So those are the exceptions. So now employers or business owners are going to have to use other kinds of restrictive covenants, primarily non-disclosure agreements, non-solicitation agreements, as an alternative to a non-compete.
Bob Sewell:
Okay, so let me push back a little bit. Okay, so you and I are taking this from the perspective of business owners. Yep, we obviously are biased, okay, but nonetheless, we are definitely in the camp of a business owner. Now, how do non-competes impact workers?
Attorney David Williams:
So they impact workers in a couple of ways. Depending on if they're overbroad and they're not reasonably narrowly tailored, they can prevent someone from working in their field. So if I'm Joe or Jim, the guy in Flagstaff, well, flagstaff's a pretty small community in northern Arizona. So now you've limited my ability to go get a job in a field that I want to work in. Okay, so it limits the ability of workers to seek employment in their chosen field if they're not narrowly tailored. So it is in.
Attorney David Williams:
The US economy is based on a free market economy. We want to encourage free market competition. We want to encourage people to be able to go out and start a business, get a job at the highest pay. They can do it. You know you want business owners to act ethically of covenants is anti-competitive. It means it cuts down on competition in the marketplace when they're not reasonable and therefore you limit the use of workers. But you also limit competition among other businesses if they're not fair. So you've got to balance the need for a non-compete versus the effect that it has on competition.
Bob Sewell:
So one of the things that. So one of the things that you know when I hear this is yeah, you know about non-competes and I again, I tend to favor the business owner's perspective because I know what it's like to start a business. I've started, you know, I started my own little business when I was a young man and right now I'm running a law firm with you, david, and I know the blood, sweat and tears I put in to be equity partner of this firm and I know what it takes to run this and it ain't pretty. There's a lot of late nights, there's a lot of hard decisions and you want to protect it. That makes sense to me.
Bob Sewell:
But I got to be honest with you from a consumer perspective, I don't give a crap who gives me the service. I want the best service at the best price and non-competes are getting in my way. Know, if I like non-competes? Because I want the best service at the best price, and the traditional wisdom in America, in our free market economy, is that the more competition we have, the more creative people get, the better off the consumer is. That's the traditional wisdom. Tell me why I'm wrong.
Attorney David Williams:
So I agree with what you're saying, but it has to be fair competition, okay. So there's a balance. So if you use, if you take non-competes or non-solicitations or non-disclosure agreements to their extreme, then they they kill competition. At the same time, they're they're a necessary evil to protect a new business and promote investment, promote research, promote innovation, because I'm not going to want to spend my hard-earned capital to do research and development. Come up with new drugs, come up with new processes, come up with new technology.
Attorney David Williams:
If I think that someone's going to be able to turn around and steal my technology when I hire an engineer or I hire a data processor or I hire someone and I pay that person well to help me develop my product, to have that engineer take the knowledge that I just gave them and I paid them for their technical knowledge, but I gave them my knowledge as far as what I wanted for my product, and they turn around and they go across the street and work for my competitor knowledge as far as what I wanted for my product and they turn around and they go across the street and work for my competitor. Okay, so my competitor just took the millions of dollars that I invested in a in my super product and now my competitor is using my investment for their advantage. So that's that's the real reason why a non-compete in certain circumstances is is necessary to promote research development innovation, because if people know that they can't get their innovative products protected, then they're not going to invest the money to do innovative products.
Bob Sewell:
Okay. So we've talked about some alternatives. We've talked about this new FTC rule. We talked about the challenge, this new FTC rule. We talked about the challenge. Where's my future here? What am I? I'm a business owner. I want to be proactive. What am I looking at?
Attorney David Williams:
Yeah, I mean right now. I mean I've been consulted, I've been called by a lot of clients in the last six months. Especially when you have a weird economy, people are bouncing around and they're worried that they're and they have non-competes and sometimes we have to, you know, take someone to court to enforce those non-competes. And so now you've also got businesses that have used these types of agreements as part of their business strategy and now, if this rule goes into effect, it is going to upend what they do as far as their business strategy. So the world right now is kind of uneven ground. We don't know what the world looks like over the next three or four months.
Attorney David Williams:
If this rule goes into effect, businesses are going to have to rethink how they protect their proprietary, commercially sensitive information and they're going to have to come up with new and unique ways to do that, such as a non-solicitation agreement, such as a non-disclosure agreement, and they're probably going to rely upon those more than they will in non-compete. Those non-solicitation and non-disclosure agreements are more commonly enforced and upheld by courts than a non-compete agreement, but again, it's on a case-by-case basis. So non-competes have their place, but I think what you're going to see is business owners need to start to move away from heavily relying on non-competes and more towards relying on well-drafted non-solicitation, well-drafted non-disclosure agreements and also working with a competent attorney to help them put into place ways to protect their confidential information, putting in certain roadblocks limiting access to people within their company that don't need to have access to certain information. That's the way they can protect their proprietary information going forward.
Bob Sewell:
Dave, if I am a person who signed a non-compete and I want to get out of it, or I'm a business owner that has a bunch of non-competes out there and I'm worried that they're going to be gone, how do I get a hold of you?
Attorney David Williams:
You can contact me through my website at davism Davis Miles dot com, or you can contact me by email at D Williams at Davis Miles dot com. And again, I think there's you're probably looking at three people right now the person who works under a non-compete what do I do if I have a non-compete and I can, and lawyers in this area should be able to look at a non-compete and tell you whether it's enforceable, and lawyers in this area should be able to look at a non-compete and tell you whether it's enforceable. Or if you're a business owner and you don't know what the world looks like, you want to sit down with an attorney to help you come up with a strategy to live without non-competes, and that's what I, and certainly I can do that. There's other great attorneys that can do that and I would love the opportunity to sit down with either the employee or the employer and help them work through these issues.
Bob Sewell:
Dave, thanks for coming on. I'm going to have you back again, so brace yourself, and we're going to be talking about what happened on the back end of those cases that are coming down the pike. Yeah, it'll be fun. I'm looking forward to it. Take care Bye, thank you.
Bob Sewell:
Thanks for listening to the podcast. Is that Even Legal is now listened to in 100 countries and available on virtually all podcast platforms. Leave us a review, send us some show ideas and do so at producer at evenlegalcom. Don't forget, as smart as we sound and as lovable as we are, we are not your lawyers and we are not giving you legal advice. But if you need some legal advice, get some. There's some great lawyers out there and we are always ready to help. See you next time.
