The Rise and Fall of Noncompete Clauses, Explained


This week, the US Federal Trade Commission issued a sweeping ruling that severely curtails the use of noncompete agreements, dealing a major blow to what has become a key way many fashion companies retain talent.

Initially, noncompete clauses, which bar former employees from working for a rival for a set period, were reserved for the fashion industry’s highest-level hires, such as creative directors and senior executives with “unique skills” and access to proprietary information, said Elizabeth Kurpis, a New York-based fashion lawyer.

However, over time, the use of noncompetes began to expand. Fashion began extending these restrictions to less senior employees who pose “minimal to no competitive risk,” according to Kurpis. That mimicked a trend seen in many industries – famously, sandwich makers at the fast-food chain Jimmy Johns were bound by noncompetes up until the restaurant agreed to end the practice as part of settlement in cases filed by attorney generals in New York and Illinois in 2016. (It’s rare for fashion store employees to be subject to them, recruiters and employment attorneys say.)

Still, rather than being used to protect company’s trade secrets and other creative properties, noncompete agreements became “a retention tool,” meant to keep employees at all levels from seeking out new work, said Caroline Pill, partner at executive search consultancy Heidrick & Struggles in London.

Critics say that broader usage can suppress wages and hinder career growth. Noncompetes have generated pushback from employees, as well as scrutiny from regulators and lawmakers. Before the FTC’s ruling, around 30 states had laws limiting noncompetes based on factors like salary, industry and duration of employment. California outright bans them.

Here, BoF explains how the ban would affect fashion companies and employees.

What did the FTC do?

The FTC this week issued a “final rule” barring companies from making new noncompete agreements or enforcing existing ones for all workers. The rule won’t void existing noncompete agreements for senior executives (which the FTC says accounts for less than 1 percent of all workers) in “policy-making positions” making at least $151,164 a year.

The rule is expected to take effect in August, or 120 days after it’s published in the Federal Register, a process that could be delayed amid legal blowback from business groups and individual companies. In the days since the ruling, the regulatory agency has already been hit with at least two lawsuits, including one filed by the US Chamber of Commerce this week challenging the agency’s authority to impose such a ban.

For its part, the FTC estimates its new ban would free up career opportunities for roughly 30 million workers in the US who are subject to noncompetes.

In some ways, the rule is catching up to gradual changes in the corporate and legal landscapes; many noncompetes exist purely on paper, and would be difficult, if not impossible, to enforce legally.

The tight post-pandemic labour market has also given employees more power to push back against noncompete clauses. Employers also worry about being perceived as impeding career growth if their employment contracts are overly restrictive.

How common are noncompete agreements in fashion and how do they work?

These agreements have long been a standard practice embedded in contracts at fashion houses and luxury conglomerates, as well as at mass-market retailers and athletic brands, according to Kurpis.

In the athletic space, where brands like Nike, Adidas and Under Armour rely heavily on proprietary innovations (such as Nike’s “flyease” and Adidas’ “primacool” technology in some sneaker designs) and maintain top-secret celebrity and professional athlete contracts and endorsements, keeping executives bound to noncompete agreements (and similar nondisclosure agreements or NDAs) are integral to their business operations, Kurpis said.

Typically, these agreements don’t outright forbid individuals from ever joining a rival company. Instead, they mandate a break between employers, usually lasting from three months to a year.

At luxury brands, that period is crucial for creative directors and executives “so that you’re not going to a competitor knowing what’s coming down the runway,” said Paula Reid, president of the executive search firm Reid & Co.

Though rare, there are instances where noncompetes have benefited fashion designers.

In some cases, an employer may agree to provide compensation during this cooling off period. In 2016, Hedi Slimane successfully sued Kering, hoping to have his noncompete enforced — arguing that he was owed $13 million after leaving Saint Laurent as long as he didn’t work at another label for a set period). But such accommodations are not guaranteed, and are less likely to be available to mid-level or junior workers.

How would the ban affect fashion’s workforce?

For workers in mid level positions and below, the noncompete ban could open up their career prospects and allow them to pursue opportunities — including higher wages, more attractive job titles and a more amenable working environment — that noncompetes (even when not actively enforced) may have prevented, Reid said.

The existence of a noncompete alone had long been enough to prevent many fashion workers from pursuing employment at rival companies where their skills and passions are most likely to be a fit.

“People would sometimes say ‘these noncompetes aren’t going to be enforced,’” Reid said. “But, the problem is that every time someone looks for another job, accepts an offer or gives notice, they’re holding their breath.”

For companies, the very insinuation that someone may have signed a noncompete clause is often enough to nix a job offer or take an employee out of the running for even an interview, Pill said.

How can companies adjust to the ban?

The FTC outlined several alternatives it said employers can use to help protect sensitive or proprietary information. Among them are trade secret laws and non-disclosure agreements. Roughly 95 percent of workers in the US with a noncompete already have an NDA, the FTC said.

It’s important to note that the FTC’s noncompete ban would only apply to individuals classified as “workers” or employees of a company in the US. In other words, noncompetes will still be in effect, at least for now, in certain sectors of the fashion industry such as manufacturing and distribution deals, Kurpis said. For example, a factory may be prohibited from producing competing products with the company it currently manufactures for, both during their collaboration and after their partnership ends, she said.

Eventually, the US ruling could have an impact on how Europe “considers their noncompete clauses,” Pill said.

“Obviously, every country is different and some countries are more favourable to the employees or the employers depending where you are, but it’s a welcome change for sure,” she said.

In its comments on the ban, the FTC said it believed the ruling would encourage companies to compete to retain workers on the merits of their working conditions.

“This is a good thing … that the onus comes on employers to know that they’re challenging and empowering and developing their talent, and that they continue to grow and they don’t have to go someplace else to do it,” Reid said.

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