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FTC Bans Non-Compete Agreements to Foster Innovation and Talent Mobility

Zeba Shuja (pseudonym), as a senior executive of a large factory, was once required to compensate for all his salary income plus stocks in the past two years just because he signed a special agreement.

The magical thing is that after joining the new company, he changed his mobile phone number, used a pseudonym, and was always wary of being followed. Even when the core middle and high-level team of his new company held meetings, half of the dozen or so people used pseudonyms.

This special agreement that kept him awake and alert day and night was called a “non-compete agreement”, which was used by companies to restrict employees from working with competitors.

But such a clause has since become history in the United States on the other side of the ocean.

On April 23, the U.S. Federal Trade Commission (FTC) announced that it would ban all employees (including senior managers) from signing new non-compete agreements nationwide.

So why is the United States suddenly banning non-compete agreements? Can China follow the United States and impose a complete ban?

Judging from the purpose, the non-compete agreement is to prevent employees from taking away business secrets and plays a protective role; secondly, it is to prevent other companies from “free riding” and prevent competitors from obtaining innovative results without investing much in research and development costs.

Nowadays, non-compete agreements have withdrawn from the stage of American history, largely because they have begun to gradually hinder the innovation of American companies.

The true intention of prohibiting non-compete agreements in the United States

Let’s study this rule first.

After the new regulations take effect, existing non-compete agreements for employees other than senior executives will be invalid; while senior executives’ existing non-competition agreements will still be in effect, but they will no longer be allowed to sign new non-compete agreements.

The foreseeable direct impacts are: more new companies, more patents, and higher employee income.

Among them, the impact on enterprises, that is, the increase in the number of new enterprises and the increase in the number of patents, can be summarized as “encouraging innovation in small and medium-sized enterprises.”

Why does the United States encourage small and medium-sized enterprises to innovate? This reason may be glimpsed from the series of actions taken by US President Biden after he took office.

In 2019, the U.S. Patent and Trademark Office established the “Extended Innovation Center” to relax patent innovation; subsequently, the U.S. Department of Justice launched an antitrust investigation into the four major technology giants Google, Facebook, Apple, and Amazon; and in 2023, the U.S. Federal Trade The commission announced a nationwide ban on non-compete agreements.

To sum up these actions, it happens to be “limiting the big and letting the small” – anti-monopoly giants, allowing the free flow of talents locked in “competition agreements” and promoting the growth and innovation of small and medium-sized enterprises.

Looking back at the historical background of non-compete agreements in the United States, we can also find relevant basis.

Prior to the promulgation of this regulation, there was no unified legislation at the federal level in the United States regarding non-competition, and each state had to legislate on its own.

Previously, most of the 50 states in the United States recognized and enforced non-compete agreements.

For example, Delaware, the second smallest state in the United States, recognizes non-competition agreements and has the most corporate-friendly corporate laws, attracting more than half of US listed companies and Fortune 500 companies to register their headquarters in the state.

The opposite of Delaware is California. California Business and Professions Code Section 16600 states: “Any contract that restricts a person from engaging in a lawful profession, trade, or business of any kind is void to this extent.”

Silicon Valley, which has incubated countless technology companies, was born in California, which prohibits non-compete agreements, and has become the center of American technology innovation. This phenomenon has also been named the “California effect.”

It seems that for the United States, “Delaware”ization will help existing large companies maintain their technological advantages; while “California”ization will be conducive to the growth of innovative companies.

In the end, the United States chose to “California”, completely banning non-compete agreements and breaking the shackles on the free flow of talents.

According to FTC predictions, this move will bring about 8,500 new companies and 17,000-29,000 patents every year.

The use of non-competition agreements in China

The fluctuations on the other side of the ocean have also spread to China, giving many migrant workers hope: Can our non-compete agreements be relaxed or even cancelled?

Judging from the current situation, the initial purpose of my country’s non-competition agreements was to prevent the company’s trade secrets from being leaked. However, as competition intensifies, the chill of “non-competition” has gradually begun to sink and become more widespread.

Article 24 of the “Labor Contract Law” clearly stipulates that it is “limited to senior managers, senior technical personnel and other personnel with confidentiality obligations of the employer”, commonly known as “two highs and one secret”.

Among them, the “secret” in “two highs and one secret” – “other personnel with confidentiality obligations” has become a large network that catches many grassroots employees.

During court proceedings, as long as the company has signed a “Confidentiality, Non-Competition and Intellectual Property Ownership Agreement” with the enterprise, it will be easily identified as a “person with confidentiality obligations.”

During the non-competition period, the company will give employees a minimum half-month salary as financial compensation every month. However, once the employee violates the non-competition restrictions, he or she will need to pay the company compensation up to two years’ salary level, and the period of employment ban will generally be The upper limit is two years.

Zhao Jun (pseudonym) works for an Internet company that does live broadcasting. In his non-competition agreement, the non-competition period is two years, and the monthly non-competition compensation is 30% of the monthly salary. For employees at level 1, non-competition compensation may be 80% of the monthly salary.

In the several-page non-competition agreement he signed, the scope of non-competition companies “covers almost all companies that can be named on the Internet.”

The most unreasonable thing is that his position only belongs to the most basic and ordinary operations. “Everyone signs it when they come on board,” he said.

Therefore, non-compete agreements have become a shackles for some companies to abuse and restrict employees’ labor freedom, and have triggered public controversy.

This brings up another question. Why do employees like Zhao Jun, who seems to be only working in grass-roots positions and not have many opportunities to come into contact with trade secrets, need to sign a non-competition agreement?

“The salary of an employee or whether the position is at the grassroots level has no direct relationship with whether he or she has access to business secrets.” Zhang Ting, a lawyer at Jindao Law Firm who often handles labor dispute cases, believes. According to Caixin, the court’s actual precedents mainly consider two aspects: first, the employer has specific technology or business secrets; second, the employee may have access to trade secrets.

As for Zhao Jun’s non-competition agreement, which covers almost all Internet companies’ non-competition clauses, lawyer Zhang Ting believes that there is no need to worry too much. “Setting the scope of competition too broadly is a unilateral act of the company, and it ultimately needs to be determined by the court to be legal.”

Zhao Jun also explained: “Although everyone must sign a non-competition agreement, the ones that can really be mobilized are high-ranking management or some very sensitive jobs.”

It can be seen that even if low-level employees sign a non-compete agreement, they may not be out-competed.

In addition, executives who are most subject to non-compete competition are not easily subject to non-competition.

“The essence of a non-competition (agreement) is something that the strong can initiate against the weak.” Zeba Shuja, an executive at a large factory, said, “Often the executives who deserve the most competition will not be competed against. They have greater authority in the industry. Many resources are destructive to the company’s brand and business, so the company will negotiate with them when they leave.”

How to view and balance a non-competition agreement?

Since China has disputes over the use of non-competition agreements, and the United States has begun to ban non-competition agreements, can we just “copy the rules”?

“There are prerequisites for the comprehensive ban on non-competition in some states in the United States and even across the country, and that is that the United States has a relatively complete legal system for the protection of intellectual property rights, especially trade secrets.” Guo Zongjie, deputy dean of Jinan University Law School, told Southern People Weekly ” said during the interview.

In the United States, the use of trade secrets such as patents, codes, and drawings is a crime and will result in severe penalties of several years in prison. Therefore, even if non-compete agreements are prohibited, there are laws to protect corporate trade secrets.

“my country’s current legal system for the protection of trade secrets is still in the process of continuous improvement. The existing relevant laws and regulations are not enough to fully protect the employer’s trade secrets. For example, the standard for civil filing of trade secret protection cases is too high.” Guo Zongjie said.

Insufficient protection of trade secrets has also become one of the reasons for the high cost of corporate rights protection.

Guo Zongjie mentioned: “When we investigated companies, we learned that if companies want to protect trade secrets through civil means, the burden of proof is very high and the evidence rules are very strict.”

In other words, domestic companies are not naturally “doing evil.” Having a large number of employees sign non-competition agreements is exactly making up for the lack of legal protection of trade secrets.

“In addition to the deterrent effect, many companies’ considerations for initiating competition are because employees have violated non-competition agreements. Trade secrets are the core assets of these companies, and these secrets can determine how long they can maintain the competitiveness of the industry. .” Lawyer Zhang Ting explained.

“The court is trying to strike a balance in protecting the rights and interests of workers and companies.” Lawyer Zhang Ting added.

Therefore, whether it is the party being competed in the country or the party initiating the competition, they themselves are victims of deficiencies in intellectual property laws.

The internal friction caused by everyone fighting against each other is more harmful than the non-compete agreement itself.

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