The recent US Federal Trade Commission (“FTC”) proposal to ban employers from imposing non-competition clauses (“non-competes”) on their workers has sparked lively debate. Support comes from those who believe the proposed rule would encourage entrepreneurship and innovation and ultimately accelerate economic growth.[1] On the other hand, critics of the proposed rule argue that non-competes are necessary to protect confidential information, such as marketing strategies or pricing plans,[2] although much of the opposition is focused on whether the FTC has the legal authority to pass the rule.
It is difficult to predict whether the proposed rule will actually come to pass, but it received close to twenty-seven thousand public comments. It may be instructive to consider the treatment of non-competes in other common law jurisdictions like the United Kingdom (“UK”) and Singapore, where competing interests between the right of an employer to protect its confidential information, retain employees, and reduce competition are balanced against employees’ rights to market mobility, sometimes in slightly different ways and with different outcomes.
This article will attempt to briefly summarize the employment landscape in each jurisdiction with respect to non-compete agreements; highlight some differences between them; and in turn demonstrate the nuances between the jurisdictions, and their reputations as pro-employer or pro-employee jurisdictions.
I: Overview of New York’s Employment Landscape
In New York, restrictive covenants are “disfavored.”[3] However, they are generally enforceable if narrowly tailored to protect legitimate business interests such as trade secrets, confidential information, or customer goodwill and if they do not unreasonably restrict an employee’s right to earn a living. The duration and geographical scope of the non-compete must also be “reasonably limited.”
In the seminal case of BDO Seidman v. Hirshber, [4] the New York Court of Appeals held that a non-compete agreement that prevented an accountant from working for any client of his former employer for eighteen months, even if he had never worked on that client’s account, was overly broad and unenforceable. The court noted that such a restriction would effectively prevent the employee from working in his chosen profession, and was unnecessary to protect the employer’s legitimate interests.
The FTC proposal seeks to place a broad ban on non-competes, claiming that non-competes affect more than thirty million people in the private sector and if banned, would increase American workers’ earnings by $250 to $296 billion.
It is submitted that the new FTC rule would arguably produce limited practical changes in litigation outcomes in New York, whereas the potential practical impact of the rule in other arguably more pro-employer states like Maryland could be more significant.[5]
II: Overview of the UK’s Employment Landscape
Across the Atlantic, the enforceability of non-compete agreements is subject to common law principles and statutory regulations. Generally, non-compete clauses are enforceable only to the extent that they are reasonable and necessary to protect the employer’s legitimate business interests. The case of Tillman v Egon Zehnder Ltd[6] clarified the law on restrictive covenants and represents a good illustration of how the UK courts balance competing interests in this area. There, the Supreme Court held that the non-compete clause was unenforceable as it was too wide and prevented Tillman from holding even a minor shareholding in a competing business.
In Marathon Asset Management LLP v Seddon,[7] Seddon was sued for breaching his six-month non-compete clause. The Court of Appeal held that the non-compete clause was too wide and therefore unenforceable, as it prevented Seddon from working for any competing company, regardless of whether it was a direct competitor.
These cases demonstrate the UK’s increasingly strict approach to non-competes, where reasonableness and necessity are scrutinized and overly broad or restrictive clauses can be deemed unenforceable by the courts.
III: Overview of Singapore’s Employment Landscape
In Singapore, non-compete agreements are enforceable to the extent that they protect an employer’s legitimate business interests and are reasonable in scope, duration, and geographical coverage. Singapore is known as an employer-friendly jurisdiction, but its courts do strike down clauses that they deem overly restrictive or unreasonable. Indeed, in some respects, Singapore may be said to police the reasonableness of certain aspects of non-competes, for the benefit of employees, more strictly than New York.
For example, New York courts generally regard the use of non-competes to protect confidential information as legitimate. However, in Singapore, if the protection of confidential information is already addressed by another clause in the contract (e.g., a confidentiality clause), the Singapore courts have held that the employer must demonstrate that the non-compete clause covers a legitimate proprietary interest over and above the protection of confidential information or trade secrets, in order not to be regarded as an unenforceable restraint of trade.[8]
IV. Same but different
While the legal tests in each jurisdiction are very similar, their application to broadly similar facts can sometimes result in divergent outcomes, reflecting the public policy considerations of the respective jurisdictions. In the UK, courts have taken a relatively strict approach to the enforceability of non-compete clauses due to the country’s public policy of promoting competition and preventing the restriction of trade. As such, non-compete clauses must be narrowly tailored to protect the legitimate interests of the employer without unduly restricting the employee’s ability to work.
In Singapore, non-compete agreements are generally viewed as a legitimate means for businesses to protect their proprietary interests, within certain boundaries related to the duration, scope, and nature of the restrictions.
Given the substantial and often negative influence of large corporations on “labor market fluidity” in the US, with non-competes common even for fast-food workers, clerks, and low-level hospital employees, the FTC’s proposed rule should be welcomed by workers. Whether or not the rule is implemented, employers in the US would be well advised to start exploring alternative contractual, technological, and practical mechanisms to protect their confidential information, trade secrets, and goodwill.
This article originally appeared in International Law News, the quarterly magazine of the ABA International Law Section, in the Spring 2023 issue (Volume 50, Issue 3). Join the International Law Section to read the full issue and access other resources regarding international law.
FTC Proposes Rule to Ban Noncompete Clauses, Which Hurt Workers and Harm Competition, Federal Trade Commission, January 5, 2023. ↑
Ken Klippenstein, Lee Fang, and Jon Schwarz, “Big Business’ Plan to Block Biden’s Ban on Noncompete Agreements,” The Intercept, February 3, 2023. ↑
The scope of this short article is limited to New York when discussing non-competes in the US context. ↑
712 N.E.2d 1220 (1999). ↑
Title 3 of Maryland’s Code Annotated for Labor and Employment, Section 3-716 only prohibits employers from requiring non-competes when the employee is earning equal to or less than $15 per hour. ↑
[2019] UKSC 32. ↑
[2017] EWHC 300 (Comm). ↑
Smile Inc Dental Surgeons Pte Ltd v. Lui Andrew Stewart [2011] SGHC 266. ↑
