Though a Texas judge has granted a partial and temporary injunction against enforcement, the Federal Trade Commission's (FTC) rule banning noncompete clauses in employment agreements is still scheduled for enactment in less than a month. How would the ban shift employment law, and what far-reaching implications will it have across various industries, particularly those driven by innovation and skilled talent?
The final rule is set to take effect on September 4, although Judge Ada Brown of the U.S. District Court for the Northern District of Texas agreed with plaintiffs that the FTC lacks the authority to mandate the ban and that a sweeping ban on all noncompetes is arbitrary and overly broad. Brown plans to rule on the case's merits before the ban's effective date. Plaintiffs are expected to ask her at that hearing and in a similar case in Pennsylvania to block the rule's implementation nationwide.
But with the effective date impending, video game development companies and other Web3 businesses must evaluate how they will comply with and compensate for the rule.
The FTC aims to eliminate all existing noncompete obligations for employees and independent contractors, except for a few cases involving senior executives, as well as future noncompete clauses from all contracts, including those with senior executives, will be prohibited.
The benefit to workers across all levels seems clear, with the FTC estimating the provision would increase average wages by $524 per year. Entrepreneurs stand to gain as well; the commission estimates innovators will create 8,500 new start-up businesses.
Some existing businesses, however, believe the ban would hurt their ability to compete in the market, hence the federal lawsuits in Pennsylvania and Texas challenging the FTC's authority to enforce such a comprehensive ban on post-employment noncompete agreements.
Ban Implications
Noncompete clauses are contractual provisions that restrict employees from working for competitors or starting competing businesses for a specified period after leaving a job. Employers have historically used these provisions to protect trade secrets, maintain client relationships, and safeguard their investments in employee training and development — all significant considerations for video games, metaverse, AI, and other businesses. Proponents of the new rule argue that such clauses suppress wages, hinder innovation, and unfairly limit workers' career opportunities. The FTC seems to agree, as the ban would prohibit these clauses and forbid them from implying workers are under such restrictions. The proposed ban is wide-ranging:
- Broad Definition of Workers: The rule would apply not only to full-time employees but also to independent contractors, interns, volunteers, apprentices, and sole proprietors providing services to clients or customers.
- Few Exceptions: The proposed rule allows noncompetes when an owner sells a business entity. Allowing noncompete clauses in these situations acknowledges the legitimate interest in protecting the value of the company being sold.
- Law of the Land: The FTC's rule would supersede any state laws that permit or authorize noncompete clauses. However, it would not preempt state laws that provide even greater protections against noncompete clauses than those in the new federal rule.
Impact on Video Game and Web3 Industries
The video game and Web3 industries are characterized by rapid innovation, fierce competition for talent, and the central role played by intellectual property. These sectors could experience profound changes if the FTC's proposed ban on noncompete clauses is implemented.
Depriving video game studios, known for their creativity and technical prowess, of noncompete clauses could lead to increased talent mobility. This might enable increased innovation and foster the dynamic flow of ideas, techniques, and best practices. However, it could intensify competition for top talent, driving labor costs and making proprietary game mechanics and designs more difficult to protect.
The downside could be equally significant for blockchain businesses, cryptocurrency exchanges, decentralized finance service providers, and other Web3 concerns. On the positive side, however, the ban could facilitate greater collaboration between developers and entrepreneurs, potentially accelerating advancements in blockchain technology and decentralized applications. It might also make it easier for Web3 companies to attract talent from other industries, bringing fresh perspectives to this rapidly evolving sector.
As the industry moves closer to a reality free of noncompete clauses, Web3 businesses would benefit from discussing their options with an attorney experienced in the space. These companies need to answer several questions to protect their assets, shield themselves from liability, and remain compliant and competitive:
- What are effective ways to adapt compensation and talent retention strategies in the absence of noncompete clauses?
- What alternative and added measures can be employed to protect intellectual property and trade secrets?
- Where can increased talent mobility be leveraged to expose the organization to the rapid diffusion of innovation?
- How can the shift in dynamics between employers and employees be re-established, particularly for highly skilled?
- What unintended consequences might arise from the ban, and how can they be planned for and possibly even used to the company's advantage?
Skirmish Mode: Reacting Within the Law
Designers, animators, coders, and other video game workers have long expressed anguish over noncompete agreements. Gaming companies may have seen the writing on the wall and expected the FCC's decision for some time. Game Developer notes that even game company employees working for studios based in California, where noncompetes have been banned for 150 years, expressed anger at how their employers tried to restrict their ability to work on side projects or claim ownership over the final product of such side projects.
With the new rule, video game companies should consider hiring a Web3 attorney to redraft their employment agreements. They must ensure that the contracts avoid any restrictive covenants akin to noncompetes. At the same time, an attorney can ensure employers retain as much control over their proprietary processes and information as possible. Video game companies may be allowed to include other forms of restrictive covenants, such as nonsolicitation, confidentiality, and nondisclosure provisions, as long as they don't serve the same purpose as a noncompete clause. For example, if a nondisclosure clause is so broad that it prevents a worker from seeking or accepting other work or starting a business after leaving their job, courts probably would construe it as a noncompete clause.
The new rule also will exert an indirect but tangible influence on how video game companies will protect their intellectual property. Under the new reality, only a thin line separates the work employees perform during office hours and the tasks they undertake on their own time. How can businesses ensure the code and IP developed on company time don't find their way into side hustles or competing products when an employee is hired away? Video game attorneys can draft new intellectual property policies or standalone intellectual property agreements that comply with the new rule while legally defining IP ownership.
Conclusion
The FTC's proposed ban on noncompete clauses represents a significant shift in employment law, particularly affecting innovation-driven industries like video games and Web3. While the rule aims to enhance worker mobility and spur economic growth, it also poses considerable challenges for businesses seeking to protect their IP and maintain a competitive edge. By engaging experienced attorneys to review and revise their employment agreements, companies can effectively manage this transition, ensuring compliance and minimizing risks. The evolving regulatory landscape demands proactive and strategic responses, making legal expertise an invaluable asset in this period of change.
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