Non-competes debate must be ‘balanced’, argue lawyers

The case for a ban on non-compete provisions may not stack up, a BigLaw partner and Sydney-based silk have suggested.

In April, the US Federal Trade Commission (FTC) effectively banned almost all non-compete clauses, which prevent workers from seeking or accepting new employment within an industry following termination of their employment.

There are some exceptions in the FTC ruling for executives who earn over a specific threshold amount and for certain commercial contexts, and in most circumstances, the ruling will have a retrospective effect.

It has been suggested that the FTC prohibition could embolden the federal government to implement similar restraints in Australia, particularly following the publication of Treasury’s issues paper. In a judgment handed down a few months ago, the Fair Work Commission questioned the usefulness of such restraints.

Later in April, Treasury released an issues paper – Non-competes and other restraints: understanding the impacts on jobs, businesses and productivity – regarding the use of non-competes and other restraints of trade, which identified concerns about the “chilling effect” of restraint clauses on worker mobility, the high cost of litigation, and economic consequences of “potentially inefficient allocation of labour and information”, which the paper said could impede productivity growth and innovation.

Should non-competes be banned or restricted Down Under, there could be “far-reaching” implications for businesses, stretching to law firms and in-house teams.

In the wake of the issuance of the issues paper, Melbourne-based Seyfarth Shaw partner Michael Tamvakologos and Sydney barrister Ian Neil SC have opined, in a white paper titled, Non-compete restraints in Australia: Analysing the case for reform, that the federal government should “hasten slowly” in moving to regulate such restraints of trade.

The pair referred to the growing momentum to regulate such restraints as the “zeitgeist of the moment”, following the ban in the US, but argue that proponents for banning non-compete provisions have failed to make their case.

“The case for reform … paints a distorted picture of the operation of non-competes and other types of restraints in Australia,” the pair said in their white paper.

“A fair examination of the available research and other material indicates that the identified problems that non-competes are said to create either do not, in fact, exist or, if they do, they are not as acute or widespread as asserted.”

“If regulatory change is to be driven by the facts rather than purely political considerations, the case for change is likely much narrower,” Tamvakologos and Neil wrote.

The recognised benefits of non-compete provisions, the pair suggested, should not be ignored.

“These benefits explain why the common law has not previously been altered by statute in Australia except on one occasion where New South Wales legislation was made to make restraints easier to enforce,” the pair said.

Legitimate benefits of the provisions, Tamvakologos and Neil outlined, include incentives for employers to confidently invest in research and development and staff training; protection of trade secrets and confidential information; and provision of a broader protection than an employer will have under the implied duty of confidentiality, the equitable duty of confidence or even an express confidentiality clause.

Elsewhere, the pair said that criticism of the reasonableness test for causing uncertainty and confusion is “overstated”.

“Although it is accurate to say that the interests protected by restraints have expanded, in decades, the interests have expanded by only one category – an employer’s legitimate interest in maintaining a stable, trained workforce.

“Finally, whether non-competes reduce competition and job mobility and, if so, to what extent, depends largely on their effect and the accuracy of the problems identified,” Tamvakologos and Neil said.

“There is credible evidence to suggest that the net economic effect of non-competes (when the positives and negatives are all considered) is debatable and arguably positive rather than negative”.

Ultimately, Tamvakologos and Neil argued that a “balanced approach” is required to determine the best path forward.

Such an approach, they opined, “will recognise that there are benefits to non-competes and other restraints; to businesses, individuals, and the economy as a whole, together with some disadvantages that must be properly assessed to identify what intervention, if any, is necessary”.