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The FTC recently voted to eliminate noncompete agreements. What does it mean for AZ?

The FTC recently voted to eliminate noncompete agreements from employee contracts. When they were enforced, a worker couldn’t switch to a competitor or start a similar business for a certain period of time.

Noncompetes are a binding agreement that keeps workers from joining a competitor when they leave. In Arizona, the rule is estimated to affect over 1.6 million workers and boost total earnings to the tune of over $800 million.

ASU law professor David Franklyn, a business owner himself, said employers are pushing back.

“There are legitimate reasons for some employers to want to protect themselves and their businesses against aggressive departing employees who learn the whole business, take all of that knowledge and all of that investment in them, and use it to destroy their prior employer,” said Franklyn.

Fellow ASU law professor Michael Selmi said the rule is more a response to sneakily or unfairly imposed agreements.

“There are noncompete agreements that are perfectly valid and serve an important purpose,” said Selmi, “but employers were just imposing them in areas where they didn't belong. Babysitters had them, hair salons, all kinds of different things.”

After more eyes turned to workers’ rights and how laws could benefit employees, Selmi said a lot of employers voluntarily moved away from noncompete agreements as they became more controversial.

“With all this movement away from noncompetes, employers have been moving towards these other areas including requiring employees to pay back training costs if they don't stay for a certain period of time,” said Selmi. “There's ways in which some of those restrictions, like nonsolicitation agreements, might be treated as a noncompete agreement, and the rule addresses that. But employers would not be defenseless, especially with respect to trade secrets.”

But Franklyn said the move was too sweeping, and the agency overstepped its power.

“[It] totally changed contract law in 46 states against the will of the state legislatures,” said Franklyn. “That doesn't seem right to me in terms of the separation of powers and the allocation of powers.”

Selmi said that while invalidating all existing agreements makes sense for some, invalidating agreements binding high-level executives more likely to have access to trade secrets and involving individually negotiated agreements was a risk on the FTC’s part. But still, if the matter goes before the Supreme Court, he said he sees the agency’s authority to issue this rule is clear.

“But the authority that they have under the law is really broad,” said Selmi. “This is a traditionally state regulated area that the federal government is now taking over. I think that will be problematic. How will it be problematic? It's not so clear. And the challenges that have been filed are really about the power of agencies, not the power of the FTC, to issue these kinds of rules.”

Even if the rule is enjoined or struck down, he said, similar changes at the state level are likely to follow.

“There's no question that there's a movement away from these agreements at the state level, too,” Selmi said. “So even if the rule is invalidated, we're probably going to get to the same place in 10 years or so through state regulation.”

According to the FTC, the rule is expected to encourage people to start businesses, raise workers’ earning potential, and increase innovation. Franklyn said that despite his skepticism, he values the research and thought behind it.

“It might not help every employer, but it will help the economy by loosening up labor,” said Franklyn. “And that usually, it seems, increases productivity, increases innovation, increases startups, all kinds of things. And that sounds plausible to me.”

This week, a federal judge paused the Chamber of Commerce’s challenge because of another similar case in Texas.

Kirsten Dorman is a field correspondent at KJZZ. Born and raised in New Jersey, Dorman fell in love with audio storytelling as a freshman at the Walter Cronkite School of Journalism and Mass Communication in 2019.