The FTC’s ban on noncompete clauses could be good for startups. But it also might be struck down. | TechCrunch

The Federal Trade Commission voted 3-2. Ban the use of most non-compete agreements on Tuesday. The decision means that companies cannot require their employees, who are not senior executives, to wait a set period of time before joining a competitor or launching their own company in the same category. While the FTC’s decision will most impact industries like financial services and hedge funds, due to the prevalence of such agreements in those industries, it could also impact startups.

The ban could actually be positive news for startup founders and hiring managers in several ways. For one thing, it could open up the hiring pool, says Nick Cromydas, co-founder and CEO of hiring and recruiting startup Hunt Club.

“There will now be more potential for cross-pollination of companies that really understand the business models and locations,” Kromidas said. “I expect you will see more hires with direct domain experience than we have seen in the past.”

Ryan Wan, a partner who focuses on employment law at Cooley, agreed. He said he has had clients who were very eager to keep potentially game-changing talent away from big companies because they feared those companies would enforce non-compete agreements.

Banning non-compete agreements can encourage startups to foster a strong company culture that makes people want To make them stay, as opposed to using threats to keep them, Cromidas said.

Some members of the startup community also seem happy with the decision – a rarity these days when it comes to FTC decisions. Sarah Guo, founder of AI-focused VC firm Conviction, Tweeted Banning non-compete agreements is a win for innovation. Cole Harrington, Co-Founder and CEO of ThoughtWave AI Agreed With him.

Understandably, some startup CEOs are concerned about how the end of non-competes could affect intellectual property protections, but Kromidas said companies have other ways to protect themselves. Startups may make employees sign nondisclosure agreements regarding intellectual property, or spend more time filing patents. Rather than blocking an employee’s future employment, such options prevent them from using a previous employer’s intellectual property knowledge in their new jobs.

Startup employees may not see much change for two other reasons, Wan said: Non-compete agreements were already very difficult to enforce, and they were falling out of vogue among startups anyway. Some states, including startup-heavy California, have existing state laws that prohibit them. However, he said that any of his customers who can afford to use them generally do, despite the low rate of them actually coming into use.

“Even without this restriction, it’s actually very hard to enforce non-competes in almost every court in America, unless you have theft of confidential information, soliciting customers before they leave, trying to set up a competing business. Like some bad facts are involved.'” Vann said. “I would never go to litigation unless I had that kind of evidence or evidence of misappropriation of trade secrets.”

Given all this, noncompetes are becoming less common, according to company data from Hunt Club. Whereas five years ago 90% of offers coming through Hunt Club’s platform included a non-compete agreement, the figure is now around 40%. However, Kromidas said he would no doubt see them re-emerging in hot areas like AI where intellectual property is important and the war for talent is high.

So what should startup CEOs do if they currently use non-compete agreements with their employees? Absolutely nothing, according to Wan, who questions whether the ban will actually remain in place. Several lawsuits have already been filed against this decision, including one US Chamber of Commerce and second from tax service firm Ryan LLC,

Wan thinks this potential ban could be struck down by several courts. If it clears these legal hurdles, startups that want to hire someone who has signed existing non-compete agreements can circumvent them incredibly easily.

“What’s even worse is that if you’re a startup and hire someone with a non-compete, you just have to issue a notice saying your non-compete is unenforceable,” Wan said. Is.” “I’ll keep it at status quo for now and monitor what’s happening.”