FTC’s Ban on Non-Compete Agreements: An Indian Perspective

-Anmol Aggarwal & Ria Bansal (Fourth Year Law Students, Rajiv Gandhi National University of Law)

Introduction

In the previous post, we analyzed the concept of Non-Compete Agreements, and issues pertaining to their enforceability and legality. For the sake of brevity, the same is not repeated here. Historically, prominent economies like the United States (“US”) have upheld the validity of such agreements. However, a groundbreaking decision by the Federal Trade Commission (FTC) on 23 April, 2024, banned non-compete agreements completely under section 5 of the FTC Act, deeming it an unfair mode of competition. This indicates a step towards making the market more unobstructed. In this piece, we argue that while it may be substantial, India should also undertake this legal reform and delegitimize non-compete agreements completely, not merely rendering them non-enforceable. 

FTC’S Stand 

The FTC’s major reasoning hinges upon encouraging free market policies, while promoting innovation and providing impetus to start-ups. Non-compete agreements restrict individuals from starting their own businesses, thereby hampering free market competition and preventing economic growth. The FTC has supported this move with extensive data. They estimate that making non compete agreements illegal will lead to new business growth by 2.7%, and an addition of almost 8500 new startups each year. Further, the estimated earnings of an average worker would increase by $524 per annum, in addition to other health care costs. This move will lead to improvement in the intellectual property segment with an increase of almost 12000 additional patents each year. 

The only possible argument made in favor of non-compete agreements is to protect trade secrets and prevent clients from being poached. However, the above data supports that banning non-compete agreements serves the larger benefit of fostering a free market, encouraging more innovations, and supporting the growth of startups, all of which contribute to economic growth. In our previous post, we discussed how alternatives such as non-disclosure and non-solicitation agreements can address these concerns, demonstrating that there is no need for non-compete agreements to protect trade secrets and clients.

Alternatives

The FTC’s move is also in line with what we argued in our previous post, and cites that “Trade secret laws and non-disclosure agreements (NDAs) both provide employers with well-established means to protect proprietary and other sensitive information. Researchers estimate that over 95% of workers with a noncompete already have an NDA.”  

The US economy is the most bolstered economy in the present times. This move towards a free market should serve as a lesson for the Indian regime to take action regarding the legality of non-compete agreements. Alternatives like non-disclosure and non-solicitation agreements have existed for a long time in India as well and can be used adequately to serve the intellectual property concerns of pre-existing enterprises. Non-compete agreements do not serve any purpose other than the exploitation of workers by employers, and are liable to be struck down as illegal. 

Mere Unenforceability Serves No Purpose 

In India, although the non-compete agreements are not enforceable, they are valid with some exceptions like “reasonability” as held in case of Ozone Spa Private Limited vs Pure Fitness & Ors. As in the previous article, we have discussed how there are contradicting decisions regarding the enforceability of non-compete agreements. The FTC's move teaches us that non-compete agreements are purposeless and hinder the free market and economy. India has always supported a free market model, yet employers continue to exploit workers with non-compete agreements. These agreements, while theoretically unenforceable, are practically upheld due to workers' fear of extensive litigation.

There is a need for India to move towards a free market now and encourage innovation and the proliferation of start-ups. This can only be achieved through a blanket ban on post-employment, non-compete agreements. Mere unenforceability has not deterred employers from including such clauses in employment agreements. A strict move to make them illegal, along with a framework to ensure these agreements are not being made, should be established to make India a true free market and a favorable environment for businesses.