May 29, 2024 • 24 mins
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.
Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Bob Sewell (00:04):
Is that even legal?
It's a question we askourselves on a daily basis.
We ask it about our neighbors,we ask it about our elected
officials, we ask it about ourfamily and sometimes we ask it
to ourselves.
The law is complex and itimpacts everyone all the time,
and that's why we are here.
I'm attorney Bob Sewell andthis is season five of the
(00:26):
Worldwide Podcast that exploresthat one burning question.
Is that even legal?
Let's go.
Today on the show is DaveWilliams.
Dave Williams is one of mypartners.
He's a fantastic attorney,fantastic guy.
He's an expert inadministrative law issues.
(00:46):
He's also an expert innon-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 ofthe administrative state.
It's something that I've beenthinking about in my personal
time.
I've been thinking about it andtalking about it on the podcast
.
The administrative state is notsomeone that we've elected.
(01:09):
This is a bureaucraticorganization that's run by the
executive, either your governoror your president and it affects
us, it changes us, it changesour laws and recently the FTC
did some rulemaking onnon-compete agreements and this
rulemaking, from what Iunderstand and I brought you on
(01:31):
to talk about it, is extensive,it's unique and traditionally
non-compete agreements arecreatures of state law.
So why do I care what the FTCis doing here?
What's going on?
Attorney David Williams (01:45):
Well, thanks, bob.
You've raised an issue thatkind of intersects with a lot of
different areas.
You've raised an issue thatintersects with the growth of
the administrative state.
You've raised some issuesrelated to how companies protect
their business information andhow they protect their business
interests when they train andtake time for an employee.
(02:06):
So let me give you a story, anexample of how a non-compete
works.
I have a client who started avery unique business and they
had a very unique kind ofproduct and they were trying to
get market space.
And so they bring in a salesguy who's going to cover like
Northern Arizona and this guyworks in the Flagstaff area,
covers all of Northern Arizona,and my client spends a lot of
(02:30):
their money to go out andadvertise and develop a presence
in Flagstaff and they'vedeveloped relationships with key
vendors and referral sourcesand customers that they can sell
their products to, or vendorsthat they can sell their
products through to downstreamin the economy.
So they bring on a sales guyand they basically say to this
(02:53):
guy look, we're going tointroduce you to all of our
vendors, we're going tointroduce you to all of our key
people and we're going to letyou work Northern Arizona and
you're going to get paid acommission to help sell our
products.
And so Bob or Jim we'll callhim Jim, since there's already a
Bob in front of me.
So Jim goes up there and heworks in Northern Arizona for
like three or four years and hedevelops relationships with
these guys on behalf of hisemployer, who spent all this
(03:14):
money to bring him on board,train him, help him learn the
industry.
Bob or Jim gets a job offerfrom a competitor of my client
and then goes across the street,gets a job working across the
street, still working inNorthern Arizona, and then tries
to take all of my client'scustomers to his new job.
One of the ways that we stop himfrom doing that is by
(03:37):
introducing something called anon-compete agreement, and a
non-compete agreement issomething that says when Jim
leaves my employment, leaves mycompany for a period of time six
months a year he cannot competein Flagstaff in my industry,
and so the reason that thatagreement is found to be upheld
(03:58):
is because it's designed toprotect that employer my company
who spent a lot of moneyinvesting in this area and
teaching Jim that product, andthen having Jim turn around and
walk across the street and stealthat business out the back door
without having done anything toearn it on his own.
That's what a non-compete is.
And so now what you have is theFederal Trade Commission, who
(04:21):
is a non-elected body appointedby the president, confirmed by
the Senate, who comes in andsays we are going to invalidate,
make them illegal, everynon-compete across the United
States which is in four, and itessentially this rule, if it
goes into effect in 120 days,would invalidate non-compete
(04:45):
agreements across 46 states.
It would affect one in fiveAmerican workers, or essentially
30 million US citizens.
That's a lot of non-competeagreements that just got
invalidated by the swipe of somebureaucrat's pen, and it
impacts a lot of people becausenon-competes have been around
for a hundred years and there'sthere's case law that's
(05:07):
developed on a state by state,case by case basis as to why
these are viewed reasonable insome States versus other States.
And so now you've got again anadministrative body that comes
to, comes in and tries to imposea one size fits all solution to
something that is not aone-size-fits-all.
Bob Sewell (05:26):
I want to talk a little bit more about this FTC
stuff, then I want to move intonon-competes more generally, and
then I want to talk about,maybe, some alternatives that
business owners need to belooking at now.
Sure, I'm a little flustered.
(05:46):
This is not my area of law, asyou know, but I'm flustered.
It feels odd to me that the FTChas this much power to just
wipe out 50 states' laws andtheir common law on how each
state wants to deal with theirnon-competes, and they're just
(06:08):
stroking a pin by somebureaucrat.
I didn't elect what's going on.
Attorney David Williams (06:13):
It's really troubling.
And, if you think about it,every state has their own sort
of way.
They've approached non-competeagreements, like in California
they're illegal, but in Arizonathey are considered legal within
certain boundaries.
In some states they've actuallypassed laws to enhance
non-competes, like in Georgia.
They've actually passed astatute that says we recognize
(06:34):
non-competes because we want toencourage some sorts of
competition or non-competitiontype provisions.
So what you need to understandis the Federal Trade Commission
has been around since about 1910, and it was formed to regulate
certain trade practices.
And originally, when it wasformed, it was set up sort of
(06:56):
like a ministerial court.
You have these commissionerswho investigate individual cases
of anti-competitive or thingsthat relate to federal trade
practices and they investigate,say, an employer or like an
industry that is involved insomething, and then they issue
some sort of ruling that mightinvolve monetary sanctions or
(07:18):
some sort of enforcement, likean order to stop them from doing
something.
That's typically what the FTChas done.
And then, about in the 1970s,they started saying well, now we
have what we call rulemakingauthority, which means not only
can we enforce cases on a caseby case basis, but now we can
actually issue a rule nationwidethat applies to the entire
industry.
(07:39):
The Congress passed other lawsalong the way, that sort of
enhanced specific powers theyhad.
There's something called theMagnuson Moss Warranty Act which
gives the FTC the power toregulate, like warranties and
things like that, like if youbuy a car, you have a warranty
that comes with it.
But they've never Congress hasnever issued a broad rule that
(08:11):
says the FTC has nationwiderulemaking authority.
That was developed out of acase in the 1970s which hasn't
really aged well, and so now theFTC, for the first time really
ever, has taken this new powerand said even though we've never
done this before, we're justgoing to issue a nationwide rule
that bans these types ofagreements nationwide.
And there are industries thatare currently taking them to
court.
There's a case pending in theNorthern District of Texas that
(08:32):
is seeking to a group ofplaintiffs.
Business owners are seeking toinvalidate 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 bybusiness owners objecting to
this rule and there was a bunchof reasons why it would be bad
(08:53):
for the industry, bad forbusiness, bad for commerce and
sort of.
The FTC ignored that and againwith the stroke of a pen by Fiat
, adopted this rule, and so nowthe rule has been adopted, it
will go into effect in 120 days,and if it's not, if a court
(09:15):
doesn't invalidate it or issuean injunction or issue some sort
of order, then this goes intoeffect.
Or Congress can pass a rule,can pass a law overriding the
FTC, but that's not likely tohappen given the current
political environment.
Bob Sewell (09:24):
That's amazing.
I want to have you on, once weknow more about what's going to
happen, to talk about this again.
It really is.
People need to understand thatthis is an incredibly important
issue to business.
Attorney David Williams (09:42):
It's an incredibly important issue to
how Arizona does business, howeach state does business, and it
changes how we're going to beapproaching our business lives
and our Think about it like thisIf you're a business owner, or
even like a maybe you're abusiness owner that does
business across multiple statesand you have a very specific
(10:06):
type of product or service oreven a business strategy, maybe,
like you're selling a certaintype of service and now you're
going to change your service andgo kind of into a different
area, you want to protect thatinformation from your
competitors and so we usenon-competes and other types of
restrictions on employees toprotect those.
(10:27):
And if you're a business andyou're a business owner and
you've sort of implemented thisstrategy based on what you think
the law is and that's designedto protect your business and
your product and your way oflife, and the government
basically comes in and says, hey, by the way, in four months
we're going to take awayeverything that you've used to
keep your company competitive,that's going to send shockwaves
(10:51):
through the economy, absolutely.
Bob Sewell (10:53):
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 somealternatives to non-competes,
because it's one thing to say,hey, I don't want you to compete
, but we could also in myparticular sphere.
(11:15):
But we could protect ourbusinesses through other means
as well.
Absolutely.
Attorney David Williams (11:19):
So we have to.
So a non-compete is a type ofrestriction in the business
world called a restrictivecovenant, and a restrictive
covenant is basically a type ofit's by contract, so an employee
has to voluntarily agree tothis, so usually as a condition
of employment.
And we're not talking like Joethe plumber or Sandy the
(11:43):
assembly person, like somebodywho's working on the assembly
line.
We're usually talking aboutsomeone who's a higher level
employee, a higher levelexecutive within a company who
has access to unique information, proprietary, confidential
information of their employer,business strategies, pricing,
(12:03):
identities of clients, thingsthat a company wants to
reasonably keep secret so thatthey don't have to share that
information with theircompetitors.
Or even on a more deeper level,a trade secret.
And a trade secret is like theformula for Coca-Cola, or, if
you're KFC, the 12 herbs andspices, and it's the special
(12:26):
secret sauce that you don't wantother people to know about and
so to protect that, employers, abusiness owner, will use
different things to do it.
They will employ something likea non-compete and really in its
purest form.
A non-compete says for a periodof time after you leave my
employment, you will not be ableto compete in this industry in
(12:47):
a specific geographic region fora period of time.
So those types of agreementsare generally upheld if they're
reasonable, which means they'renarrowly tailored to protect a
specific interest of theemployer, like my customer base,
my referral sources, for a veryspecific period of time.
These non-competes go off therails when they say, well, I'm
going to prevent you fromworking everywhere in the United
(13:09):
States, or I've seen some thatliterally prevented some people
from working within the universe.
I mean, there are some really,really non-competes.
But, they have to be reasonable,right, Exactly, they have to be
reasonable in scope, durationand things like that.
So that's the purest form ofrestrictive covenant.
There are other types ofrestrictive covenants one called
(13:31):
a non-solicitation agreement,which basically says after you
leave my employment, you're notgoing to go out and contact my
employees to get them to recruitthem to come work for your new
boss at your new job, or you'renot going to go steal my
customers or solicit or try tosteal my customers for a year,
18 months, after you leave mywork.
(13:52):
So I can't stop you fromworking in Flagstaff, but I can
prevent you from stealing myemployees or stealing my
customers.
So let's say Jim the Flagstaffguy, example let's say he wants
to go start his own company.
Now he knows how to run acompany.
Because I's say he wants to gostart his own company, Now he
knows how to run a companybecause I've taught him how to
run it in my industry.
So he's going to go start up anew company and now he's going
(14:13):
to try to steal all my customers.
The non-solicitation agreementprevents him from doing that
stealing my customers, stealingmy employees.
The other kind of agreement issomething called a
confidentiality agreement whichbasically just says or a
nondisclosure agreement whichsays I'm giving you access to
very, very sensitiveconfidential information in my
company and you are not going toshare that after you leave my
(14:36):
employment.
That's my information, I'mgiving it to you by virtue of
the fact that you work for me todo better in your job, from a
benefit of me as the owner, andso you're not going to be able
to steal that information on theback end and go, take it over
to another company and use it.
Or if you want to start yourown company.
So those are the main kinds oftypes of agreements.
So if this FTC rule goes intoeffect, it invalidates
(15:00):
non-compete agreements for avery large group of people.
The only exception to that issomething they call senior
executives, which would be likehigh, high, high level employees
.
Or if I sold you a business andI'm the owner of the business
and I turn around and sell it toyou, I'm still bound by a
non-compete, by me selling youthe agreement.
So those are the exceptions.
So now employers or businessowners are going to have to use
(15:23):
other kinds of restrictivecovenants, primarily
non-disclosure agreements,non-solicitation agreements, as
an alternative to a non-compete.
Bob Sewell (15:33):
Okay, so let me push back a little bit.
Okay, so you and I are takingthis from the perspective of
business owners.
Yep, we obviously are biased,okay, but nonetheless, we are
definitely in the camp of abusiness owner.
Now, how do non-competes impactworkers?
Attorney David Williams (16:01):
So they impact workers in a couple of
ways.
Depending on if they'reoverbroad and they're not
reasonably narrowly tailored,they can prevent someone from
working in their field.
So if I'm Joe or Jim, the guyin Flagstaff, well, flagstaff's
a pretty small community innorthern Arizona.
So now you've limited myability to go get a job in a
(16:23):
field that I want to work in.
Okay, so it limits the abilityof workers to seek employment in
their chosen field if they'renot narrowly tailored.
So it is in.
The US economy is based on afree market economy.
We want to encourage freemarket competition.
We want to encourage people tobe able to go out and start a
(16:45):
business, get a job at thehighest pay.
They can do it.
You know you want businessowners to act ethically of
covenants is anti-competitive.
It means it cuts down oncompetition in the marketplace
when they're not reasonable andtherefore you limit the use of
workers.
(17:05):
But you also limit competitionamong other businesses if
they're not fair.
So you've got to balance theneed for a non-compete versus
the effect that it has oncompetition.
Bob Sewell (17:15):
So one of the things that.
So one of the things that youknow when I hear this is yeah,
you know about non-competes andI again, I tend to favor the
business owner's perspectivebecause I know what it's like to
start a business.
I've started, you know, Istarted my own little business
when I was a young man and rightnow I'm running a law firm with
(17:36):
you, david, and I know theblood, sweat and tears I put in
to be equity partner of thisfirm 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.
(17:59):
But I got to be honest with youfrom a consumer perspective, I
don't give a crap who gives methe service.
I want the best service at thebest price and non-competes are
getting in my way.
Know, if I like non-competes?
(18:21):
Because I want the best serviceat the best price, and the
traditional wisdom in America,in our free market economy, is
that the more competition wehave, the more creative people
get, the better off the consumeris.
That's the traditional wisdom.
Tell me why I'm wrong.
Attorney David Williams (18:36):
So I agree with what you're saying,
but it has to be faircompetition, okay.
So there's a balance.
So if you use, if you takenon-competes or
non-solicitations ornon-disclosure agreements to
their extreme, then they theykill competition.
At the same time, they'rethey're a necessary evil to
protect a new business andpromote investment, promote
(19:01):
research, promote innovation,because I'm not going to want to
spend my hard-earned capital todo research and development.
Come up with new drugs, come upwith new processes, come up
with new technology.
If I think that someone's goingto be able to turn around and
steal my technology when I hirean engineer or I hire a data
(19:23):
processor or I hire someone andI pay that person well to help
me develop my product, to havethat engineer take the knowledge
that I just gave them and Ipaid them for their technical
knowledge, but I gave them myknowledge as far as what I
wanted for my product, and theyturn around and they go across
the street and work for mycompetitor knowledge as far as
what I wanted for my product andthey turn around and they go
across the street and work formy competitor.
Okay, so my competitor justtook the millions of dollars
(19:44):
that I invested in a in my superproduct and now my competitor
is using my investment for theiradvantage.
So that's that's the realreason why a non-compete in
certain circumstances is isnecessary to promote research
development innovation, becauseif people know that they can't
(20:04):
get their innovative productsprotected, then they're not
going to invest the money to doinnovative products.
Bob Sewell (20:11):
Okay.
So we've talked about somealternatives.
We've talked about this new FTCrule.
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 (20:29):
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 aweird economy, people are
bouncing around and they'reworried that they're and they
have non-competes and sometimeswe have to, you know, take
someone to court to enforcethose non-competes.
And so now you've also gotbusinesses that have used these
(20:51):
types of agreements as part oftheir business strategy and now,
if this rule goes into effect,it is going to upend what they
do as far as their businessstrategy.
So the world right now is kindof uneven ground.
We don't know what the worldlooks like over the next three
or four months.
If this rule goes into effect,businesses are going to have to
(21:13):
rethink how they protect theirproprietary, commercially
sensitive information andthey're going to have to come up
with new and unique ways to dothat, such as a non-solicitation
agreement, such as anon-disclosure agreement, and
they're probably going to relyupon those more than they will
in non-compete.
Those non-solicitation andnon-disclosure agreements are
(21:45):
more commonly enforced andupheld by courts than a
non-compete agreement, but again, it's on a case-by-case basis.
So non-competes have theirplace, but I think what you're
going to see is business ownersneed to start to move away from
heavily relying on non-competesand more towards relying on
well-drafted non-solicitation,well-drafted non-disclosure
agreements and also working witha competent attorney to help
(22:09):
them put into place ways toprotect their confidential
information, putting in certainroadblocks limiting access to
people within their company thatdon't need to have access to
certain information.
That's the way they can protecttheir proprietary information
going forward.
Bob Sewell (22:24):
Dave, if I am a person who signed a non-compete
and I want to get out of it, orI'm a business owner that has a
bunch of non-competes out thereand I'm worried that they're
going to be gone, how do I get ahold of you?
Attorney David Williams (22:39):
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 dotcom.
And again, I think there'syou're probably looking at three
people right now the person whoworks under a non-compete what
do I do if I have a non-competeand I can, and lawyers in this
area should be able to look at anon-compete and tell you
whether it's enforceable, andlawyers in this area should be
able to look at a non-competeand tell you whether it's
(22:59):
enforceable.
Or if you're a business ownerand you don't know what the
world looks like, you want tosit down with an attorney to
help you come up with a strategyto live without non-competes,
and that's what I, and certainlyI can do that.
There's other great attorneysthat can do that and I would
love the opportunity to sit downwith either the employee or the
employer and help them workthrough these issues.
Bob Sewell (23:25):
Dave, thanks for coming on.
I'm going to have you backagain, so brace yourself, and
we're going to be talking aboutwhat happened on the back end of
those cases that are comingdown the pike.
Yeah, it'll be fun.
I'm looking forward to it.
Take care Bye, thank you.
Thanks for listening to thepodcast.
Is that Even Legal is nowlistened to in 100 countries and
available on virtually allpodcast platforms.
Leave us a review, send us someshow ideas and do so at
(23:47):
producer at evenlegalcom.
Don't forget, as smart as wesound and as lovable as we are,
we are not your lawyers and weare not giving you legal advice.
But if you need some legaladvice, get some.
There's some great lawyers outthere and we are always ready to
help.
See you next time.
Is that even legal?
It's a question we askourselves on a daily basis.
We ask it about our neighbors,we ask it about our elected
officials, we ask it about ourfamily and sometimes we ask it
to ourselves.
The law is complex and itimpacts everyone all the time,
and that's why we are here.
I'm attorney Bob Sewell andthis is season five of the
(00:26):
Worldwide Podcast that exploresthat one burning question.
Is that even legal?
Let's go.
Today on the show is DaveWilliams.
Dave Williams is one of mypartners.
He's a fantastic attorney,fantastic guy.
He's an expert inadministrative law issues.
(00:46):
He's also an expert innon-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 ofthe administrative state.
It's something that I've beenthinking about in my personal
time.
I've been thinking about it andtalking about it on the podcast
.
The administrative state is notsomeone that we've elected.
(01:09):
This is a bureaucraticorganization that's run by the
executive, either your governoror your president and it affects
us, it changes us, it changesour laws and recently the FTC
did some rulemaking onnon-compete agreements and this
rulemaking, from what Iunderstand and I brought you on
(01:31):
to talk about it, is extensive,it's unique and traditionally
non-compete agreements arecreatures of state law.
So why do I care what the FTCis doing here?
What's going on?
Attorney David Williams (01:45):
Well, thanks, bob.
You've raised an issue thatkind of intersects with a lot of
different areas.
You've raised an issue thatintersects with the growth of
the administrative state.
You've raised some issuesrelated to how companies protect
their business information andhow they protect their business
interests when they train andtake time for an employee.
(02:06):
So let me give you a story, anexample of how a non-compete
works.
I have a client who started avery unique business and they
had a very unique kind ofproduct and they were trying to
get market space.
And so they bring in a salesguy who's going to cover like
Northern Arizona and this guyworks in the Flagstaff area,
covers all of Northern Arizona,and my client spends a lot of
(02:30):
their money to go out andadvertise and develop a presence
in Flagstaff and they'vedeveloped relationships with key
vendors and referral sourcesand customers that they can sell
their products to, or vendorsthat they can sell their
products through to downstreamin the economy.
So they bring on a sales guyand they basically say to this
(02:53):
guy look, we're going tointroduce you to all of our
vendors, we're going tointroduce you to all of our key
people and we're going to letyou work Northern Arizona and
you're going to get paid acommission to help sell our
products.
And so Bob or Jim we'll callhim Jim, since there's already a
Bob in front of me.
So Jim goes up there and heworks in Northern Arizona for
like three or four years and hedevelops relationships with
these guys on behalf of hisemployer, who spent all this
(03:14):
money to bring him on board,train him, help him learn the
industry.
Bob or Jim gets a job offerfrom a competitor of my client
and then goes across the street,gets a job working across the
street, still working inNorthern Arizona, and then tries
to take all of my client'scustomers to his new job.
One of the ways that we stop himfrom doing that is by
(03:37):
introducing something called anon-compete agreement, and a
non-compete agreement issomething that says when Jim
leaves my employment, leaves mycompany for a period of time six
months a year he cannot competein Flagstaff in my industry,
and so the reason that thatagreement is found to be upheld
(03:58):
is because it's designed toprotect that employer my company
who spent a lot of moneyinvesting in this area and
teaching Jim that product, andthen having Jim turn around and
walk across the street and stealthat business out the back door
without having done anything toearn it on his own.
That's what a non-compete is.
And so now what you have is theFederal Trade Commission, who
(04:21):
is a non-elected body appointedby the president, confirmed by
the Senate, who comes in andsays we are going to invalidate,
make them illegal, everynon-compete across the United
States which is in four, and itessentially this rule, if it
goes into effect in 120 days,would invalidate non-compete
(04:45):
agreements across 46 states.
It would affect one in fiveAmerican workers, or essentially
30 million US citizens.
That's a lot of non-competeagreements that just got
invalidated by the swipe of somebureaucrat's pen, and it
impacts a lot of people becausenon-competes have been around
for a hundred years and there'sthere's case law that's
(05:07):
developed on a state by state,case by case basis as to why
these are viewed reasonable insome States versus other States.
And so now you've got again anadministrative body that comes
to, comes in and tries to imposea one size fits all solution to
something that is not aone-size-fits-all.
Bob Sewell (05:26):
I want to talk a little bit more about this FTC
stuff, then I want to move intonon-competes more generally, and
then I want to talk about,maybe, some alternatives that
business owners need to belooking at now.
Sure, I'm a little flustered.
(05:46):
This is not my area of law, asyou know, but I'm flustered.
It feels odd to me that the FTChas this much power to just
wipe out 50 states' laws andtheir common law on how each
state wants to deal with theirnon-competes, and they're just
(06:08):
stroking a pin by somebureaucrat.
I didn't elect what's going on.
Attorney David Williams (06:13):
It's really troubling.
And, if you think about it,every state has their own sort
of way.
They've approached non-competeagreements, like in California
they're illegal, but in Arizonathey are considered legal within
certain boundaries.
In some states they've actuallypassed laws to enhance
non-competes, like in Georgia.
They've actually passed astatute that says we recognize
(06:34):
non-competes because we want toencourage some sorts of
competition or non-competitiontype provisions.
So what you need to understandis the Federal Trade Commission
has been around since about 1910, and it was formed to regulate
certain trade practices.
And originally, when it wasformed, it was set up sort of
(06:56):
like a ministerial court.
You have these commissionerswho investigate individual cases
of anti-competitive or thingsthat relate to federal trade
practices and they investigate,say, an employer or like an
industry that is involved insomething, and then they issue
some sort of ruling that mightinvolve monetary sanctions or
(07:18):
some sort of enforcement, likean order to stop them from doing
something.
That's typically what the FTChas done.
And then, about in the 1970s,they started saying well, now we
have what we call rulemakingauthority, which means not only
can we enforce cases on a caseby case basis, but now we can
actually issue a rule nationwidethat applies to the entire
industry.
(07:39):
The Congress passed other lawsalong the way, that sort of
enhanced specific powers theyhad.
There's something called theMagnuson Moss Warranty Act which
gives the FTC the power toregulate, like warranties and
things like that, like if youbuy a car, you have a warranty
that comes with it.
But they've never Congress hasnever issued a broad rule that
(08:11):
says the FTC has nationwiderulemaking authority.
That was developed out of acase in the 1970s which hasn't
really aged well, and so now theFTC, for the first time really
ever, has taken this new powerand said even though we've never
done this before, we're justgoing to issue a nationwide rule
that bans these types ofagreements nationwide.
And there are industries thatare currently taking them to
court.
There's a case pending in theNorthern District of Texas that
(08:32):
is seeking to a group ofplaintiffs.
Business owners are seeking toinvalidate 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 bybusiness owners objecting to
this rule and there was a bunchof reasons why it would be bad
(08:53):
for the industry, bad forbusiness, bad for commerce and
sort of.
The FTC ignored that and againwith the stroke of a pen by Fiat
, adopted this rule, and so nowthe rule has been adopted, it
will go into effect in 120 days,and if it's not, if a court
(09:15):
doesn't invalidate it or issuean injunction or issue some sort
of order, then this goes intoeffect.
Or Congress can pass a rule,can pass a law overriding the
FTC, but that's not likely tohappen given the current
political environment.
Bob Sewell (09:24):
That's amazing.
I want to have you on, once weknow more about what's going to
happen, to talk about this again.
It really is.
People need to understand thatthis is an incredibly important
issue to business.
Attorney David Williams (09:42):
It's an incredibly important issue to
how Arizona does business, howeach state does business, and it
changes how we're going to beapproaching our business lives
and our Think about it like thisIf you're a business owner, or
even like a maybe you're abusiness owner that does
business across multiple statesand you have a very specific
(10:06):
type of product or service oreven a business strategy, maybe,
like you're selling a certaintype of service and now you're
going to change your service andgo kind of into a different
area, you want to protect thatinformation from your
competitors and so we usenon-competes and other types of
restrictions on employees toprotect those.
(10:27):
And if you're a business andyou're a business owner and
you've sort of implemented thisstrategy based on what you think
the law is and that's designedto protect your business and
your product and your way oflife, and the government
basically comes in and says, hey, by the way, in four months
we're going to take awayeverything that you've used to
keep your company competitive,that's going to send shockwaves
(10:51):
through the economy, absolutely.
Bob Sewell (10:53):
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 somealternatives to non-competes,
because it's one thing to say,hey, I don't want you to compete
, but we could also in myparticular sphere.
(11:15):
But we could protect ourbusinesses through other means
as well.
Absolutely.
Attorney David Williams (11:19):
So we have to.
So a non-compete is a type ofrestriction in the business
world called a restrictivecovenant, and a restrictive
covenant is basically a type ofit's by contract, so an employee
has to voluntarily agree tothis, so usually as a condition
of employment.
And we're not talking like Joethe plumber or Sandy the
(11:43):
assembly person, like somebodywho's working on the assembly
line.
We're usually talking aboutsomeone who's a higher level
employee, a higher levelexecutive within a company who
has access to unique information, proprietary, confidential
information of their employer,business strategies, pricing,
(12:03):
identities of clients, thingsthat a company wants to
reasonably keep secret so thatthey don't have to share that
information with theircompetitors.
Or even on a more deeper level,a trade secret.
And a trade secret is like theformula for Coca-Cola, or, if
you're KFC, the 12 herbs andspices, and it's the special
(12:26):
secret sauce that you don't wantother people to know about and
so to protect that, employers, abusiness owner, will use
different things to do it.
They will employ something likea non-compete and really in its
purest form.
A non-compete says for a periodof time after you leave my
employment, you will not be ableto compete in this industry in
(12:47):
a specific geographic region fora period of time.
So those types of agreementsare generally upheld if they're
reasonable, which means they'renarrowly tailored to protect a
specific interest of theemployer, like my customer base,
my referral sources, for a veryspecific period of time.
These non-competes go off therails when they say, well, I'm
going to prevent you fromworking everywhere in the United
(13:09):
States, or I've seen some thatliterally prevented some people
from working within the universe.
I mean, there are some really,really non-competes.
But, they have to be reasonable,right, Exactly, they have to be
reasonable in scope, durationand things like that.
So that's the purest form ofrestrictive covenant.
There are other types ofrestrictive covenants one called
(13:31):
a non-solicitation agreement,which basically says after you
leave my employment, you're notgoing to go out and contact my
employees to get them to recruitthem to come work for your new
boss at your new job, or you'renot going to go steal my
customers or solicit or try tosteal my customers for a year,
18 months, after you leave mywork.
(13:52):
So I can't stop you fromworking in Flagstaff, but I can
prevent you from stealing myemployees or stealing my
customers.
So let's say Jim the Flagstaffguy, example let's say he wants
to go start his own company.
Now he knows how to run acompany.
Because I's say he wants to gostart his own company, Now he
knows how to run a companybecause I've taught him how to
run it in my industry.
So he's going to go start up anew company and now he's going
(14:13):
to try to steal all my customers.
The non-solicitation agreementprevents him from doing that
stealing my customers, stealingmy employees.
The other kind of agreement issomething called a
confidentiality agreement whichbasically just says or a
nondisclosure agreement whichsays I'm giving you access to
very, very sensitiveconfidential information in my
company and you are not going toshare that after you leave my
(14:36):
employment.
That's my information, I'mgiving it to you by virtue of
the fact that you work for me todo better in your job, from a
benefit of me as the owner, andso you're not going to be able
to steal that information on theback end and go, take it over
to another company and use it.
Or if you want to start yourown company.
So those are the main kinds oftypes of agreements.
So if this FTC rule goes intoeffect, it invalidates
(15:00):
non-compete agreements for avery large group of people.
The only exception to that issomething they call senior
executives, which would be likehigh, high, high level employees
.
Or if I sold you a business andI'm the owner of the business
and I turn around and sell it toyou, I'm still bound by a
non-compete, by me selling youthe agreement.
So those are the exceptions.
So now employers or businessowners are going to have to use
(15:23):
other kinds of restrictivecovenants, primarily
non-disclosure agreements,non-solicitation agreements, as
an alternative to a non-compete.
Bob Sewell (15:33):
Okay, so let me push back a little bit.
Okay, so you and I are takingthis from the perspective of
business owners.
Yep, we obviously are biased,okay, but nonetheless, we are
definitely in the camp of abusiness owner.
Now, how do non-competes impactworkers?
Attorney David Williams (16:01):
So they impact workers in a couple of
ways.
Depending on if they'reoverbroad and they're not
reasonably narrowly tailored,they can prevent someone from
working in their field.
So if I'm Joe or Jim, the guyin Flagstaff, well, flagstaff's
a pretty small community innorthern Arizona.
So now you've limited myability to go get a job in a
(16:23):
field that I want to work in.
Okay, so it limits the abilityof workers to seek employment in
their chosen field if they'renot narrowly tailored.
So it is in.
The US economy is based on afree market economy.
We want to encourage freemarket competition.
We want to encourage people tobe able to go out and start a
(16:45):
business, get a job at thehighest pay.
They can do it.
You know you want businessowners to act ethically of
covenants is anti-competitive.
It means it cuts down oncompetition in the marketplace
when they're not reasonable andtherefore you limit the use of
workers.
(17:05):
But you also limit competitionamong other businesses if
they're not fair.
So you've got to balance theneed for a non-compete versus
the effect that it has oncompetition.
Bob Sewell (17:15):
So one of the things that.
So one of the things that youknow when I hear this is yeah,
you know about non-competes andI again, I tend to favor the
business owner's perspectivebecause I know what it's like to
start a business.
I've started, you know, Istarted my own little business
when I was a young man and rightnow I'm running a law firm with
(17:36):
you, david, and I know theblood, sweat and tears I put in
to be equity partner of thisfirm 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.
(17:59):
But I got to be honest with youfrom a consumer perspective, I
don't give a crap who gives methe service.
I want the best service at thebest price and non-competes are
getting in my way.
Know, if I like non-competes?
(18:21):
Because I want the best serviceat the best price, and the
traditional wisdom in America,in our free market economy, is
that the more competition wehave, the more creative people
get, the better off the consumeris.
That's the traditional wisdom.
Tell me why I'm wrong.
Attorney David Williams (18:36):
So I agree with what you're saying,
but it has to be faircompetition, okay.
So there's a balance.
So if you use, if you takenon-competes or
non-solicitations ornon-disclosure agreements to
their extreme, then they theykill competition.
At the same time, they'rethey're a necessary evil to
protect a new business andpromote investment, promote
(19:01):
research, promote innovation,because I'm not going to want to
spend my hard-earned capital todo research and development.
Come up with new drugs, come upwith new processes, come up
with new technology.
If I think that someone's goingto be able to turn around and
steal my technology when I hirean engineer or I hire a data
(19:23):
processor or I hire someone andI pay that person well to help
me develop my product, to havethat engineer take the knowledge
that I just gave them and Ipaid them for their technical
knowledge, but I gave them myknowledge as far as what I
wanted for my product, and theyturn around and they go across
the street and work for mycompetitor knowledge as far as
what I wanted for my product andthey turn around and they go
across the street and work formy competitor.
Okay, so my competitor justtook the millions of dollars
(19:44):
that I invested in a in my superproduct and now my competitor
is using my investment for theiradvantage.
So that's that's the realreason why a non-compete in
certain circumstances is isnecessary to promote research
development innovation, becauseif people know that they can't
(20:04):
get their innovative productsprotected, then they're not
going to invest the money to doinnovative products.
Bob Sewell (20:11):
Okay.
So we've talked about somealternatives.
We've talked about this new FTCrule.
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 (20:29):
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 aweird economy, people are
bouncing around and they'reworried that they're and they
have non-competes and sometimeswe have to, you know, take
someone to court to enforcethose non-competes.
And so now you've also gotbusinesses that have used these
(20:51):
types of agreements as part oftheir business strategy and now,
if this rule goes into effect,it is going to upend what they
do as far as their businessstrategy.
So the world right now is kindof uneven ground.
We don't know what the worldlooks like over the next three
or four months.
If this rule goes into effect,businesses are going to have to
(21:13):
rethink how they protect theirproprietary, commercially
sensitive information andthey're going to have to come up
with new and unique ways to dothat, such as a non-solicitation
agreement, such as anon-disclosure agreement, and
they're probably going to relyupon those more than they will
in non-compete.
Those non-solicitation andnon-disclosure agreements are
(21:45):
more commonly enforced andupheld by courts than a
non-compete agreement, but again, it's on a case-by-case basis.
So non-competes have theirplace, but I think what you're
going to see is business ownersneed to start to move away from
heavily relying on non-competesand more towards relying on
well-drafted non-solicitation,well-drafted non-disclosure
agreements and also working witha competent attorney to help
(22:09):
them put into place ways toprotect their confidential
information, putting in certainroadblocks limiting access to
people within their company thatdon't need to have access to
certain information.
That's the way they can protecttheir proprietary information
going forward.
Bob Sewell (22:24):
Dave, if I am a person who signed a non-compete
and I want to get out of it, orI'm a business owner that has a
bunch of non-competes out thereand I'm worried that they're
going to be gone, how do I get ahold of you?
Attorney David Williams (22:39):
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 dotcom.
And again, I think there'syou're probably looking at three
people right now the person whoworks under a non-compete what
do I do if I have a non-competeand I can, and lawyers in this
area should be able to look at anon-compete and tell you
whether it's enforceable, andlawyers in this area should be
able to look at a non-competeand tell you whether it's
(22:59):
enforceable.
Or if you're a business ownerand you don't know what the
world looks like, you want tosit down with an attorney to
help you come up with a strategyto live without non-competes,
and that's what I, and certainlyI can do that.
There's other great attorneysthat can do that and I would
love the opportunity to sit downwith either the employee or the
employer and help them workthrough these issues.
Bob Sewell (23:25):
Dave, thanks for coming on.
I'm going to have you backagain, so brace yourself, and
we're going to be talking aboutwhat happened on the back end of
those cases that are comingdown the pike.
Yeah, it'll be fun.
I'm looking forward to it.
Take care Bye, thank you.
Thanks for listening to thepodcast.
Is that Even Legal is nowlistened to in 100 countries and
available on virtually allpodcast platforms.
Leave us a review, send us someshow ideas and do so at
(23:47):
producer at evenlegalcom.
Don't forget, as smart as wesound and as lovable as we are,
we are not your lawyers and weare not giving you legal advice.
But if you need some legaladvice, get some.
There's some great lawyers outthere and we are always ready to
help.
See you next time.
Popular Podcasts
Las Culturistas with Matt Rogers and Bowen Yang
Ding dong! Join your culture consultants, Matt Rogers and Bowen Yang, on an unforgettable journey into the beating heart of CULTURE. Alongside sizzling special guests, they GET INTO the hottest pop-culture moments of the day and the formative cultural experiences that turned them into Culturistas. Produced by the Big Money Players Network and iHeartRadio.
Dateline NBC
Current and classic episodes, featuring compelling true-crime mysteries, powerful documentaries and in-depth investigations. Follow now to get the latest episodes of Dateline NBC completely free, or subscribe to Dateline Premium for ad-free listening and exclusive bonus content: DatelinePremium.com
24/7 News: The Latest
The latest news in 4 minutes updated every hour, every day.