If they did that, the original company could lose those customers, and the employee in question would likely have proprietary information, such as how much their first company charged that client.
Additionally, non-competes are common when a business is sold. If you bought a business, whether it's a small business or something larger, you would not want the seller to turn around and start a competing business, undermining the value of the business you purchased.
Finally, protecting confidential information is another instance where a business might use a non-compete clause to protect such data. For instance, if you knew the secret formula for Coca-Cola (KO +0.43%), you would not be able to share it with a competitor.
Are non-compete clauses going to be banned?
Non-compete clauses are controversial because they can significantly shift the balance of power in the employment relationship toward the employer, and employees often sign up because they feel it's a requirement to land the job.
In early 2023, the Federal Trade Commission (FTC) proposed a new rule that would effectively ban non-compete provisions, which it called "a widespread and exploitative practice that suppresses wages, hampers innovation, and blocks entrepreneurs from starting new business."
The FTC said that banning non-competes could increase wages by almost $300 billion a year. The commission is currently soliciting comments about the new proposal and is expected to vote on it in April.
Four states -- California, Minnesota, North Dakota, and Oklahoma -- have already banned non-compete clauses, another sign of the trend building against them. However, the FTC ban and the state bans are likely to be challenged in court by corporations since they might have a significant impact on the way some companies do business.
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