US Real Estate Brokers Could See Exit of Noncompetes With FTC's New Ruling

Agency Bans Noncompete Agreements, a Move Businesses Are Expected to Oppose

The Federal Trade Commission issued a final ruling to ban the use of noncompete agreements to prevent some employees from jumping to rival businesses, a move that means a number of U.S. real estate brokers once held back from exiting their place of employment could be able depart for new opportunities.

But it may also be some time before that final ruling takes effect, if it takes effect at all. Businesses are readying their objections to go before federal judges throughout the country, making it likely the federal ruling will remain in flux, said Mike Muskat, a co-founder of Muskat Devine law firm in Houston who specializes in labor and employment law on behalf of companies.

"All it will take is one federal judge, of which there are hundreds around the country, to issue an injunction and say the FTC cannot enforce this rule to effectively be adjourned across the whole country," Muskat told CoStar News. "The business community has prepared their lawsuits, with many ready to go as soon as tomorrow."

The ruling is such a source of contention, Muskat said, he expects the matter could be tied up for years and could head to the Supreme Court. Until the ruling is figured out in the courts, companies will probably ignore the FTC's final ruling for the time being and continue having employees sign noncompete agreements, Muskat said.

Even so, the proposed ban puts the practice that's common practice in the commercial real estate world more in the spotlight.

The use of noncompetes already differs from state to state, with the agreements considered unenforceable in California and increasingly so in New York. But companies in Florida have more often been having employees sign these contracts. Muskat said the issue typically splits down political lines, with Democrat-held states often not using these agreements, while Republican-run states tend to use them.

Objections Expected

The FTC's final ruling will take 120 days after it's published in the federal register before it becomes a national law. Muskat said he's advising his clients to hold off on making any changes for the next few months to see what happens in the courts. Once a federal judge has adjourned the matter, of which Muskat says he has little doubt will happen, business will carry on as if there was no final ruling.

The majority of Americans seem to be in favor of doing away with noncompetes. From the more than 26,000 comments on the FTC's proposed rule offered to the public in January 2023, over 25,000 comments supported the commission's proposed ban on noncompetes. An estimated 30 million workers, or nearly one in five Americans, are subject to these contracts.

FTC Chair Lina Khan, in a statement, said noncompetes keep wages low, suppress new ideas, and "rob the American economy of dynamism. In its ruling, the commission determined it was an unfair method of competition, violating a section within the FTC Act.

The trade commission said it expects the ban of noncompetes to lead to new business formation growth of 2.7% per year, resulting in 8,500 additional new businesses created each year.

The ruling is also expected to result in higher earnings for workers, with estimated earnings to increase by an additional $524 per worker each year, and lower healthcare costs with savings of $194 billion over the next decade, according to the FTC's analysis.

The ban could also lead to an estimated average increase of 17,000 to 29,000 more patents each year for the next 10 years, the commission said.

Change Afoot

If the FTC final ruling becomes law, it may bring even more competition for employees in the commercial real estate industry, said Allison Weiss, founder and CEO of CRE Recruiting, an agency that specializes in recruiting commercial real estate executives.

Weiss, who has been closely tracking the FTC's proceedings, said it was a move toward what she considers to be the inevitable removal of noncompetes from the labor industry. The longtime recruiter said she has seen companies take advantage of young employees entering the workforce into signing these agreements they don't fully understand. She's also seen multiyear noncompetes that force talented employees from the industry without compensation or the ability to support themselves.

Often, she said, there's confusion as to what noncompetes should be used for and what other legal agreements can help protect.

"Noncompetes are often confused by companies seeking a way to control their confidential information," Weiss told CoStar News. "Firms working with attorneys can be specific on what is your information and what is company information. Often, a well-structured confidentiality and non-disclosure agreement can help define that."

Weiss said she believes the FTC's final ruling is encouraging and she's looking forward to seeing what happens in the coming months.

"Changes are coming," she added. "It's an election year and a lot of change tends to happen in an election year. After a year of 'let's wait and see,' we'll see what happens. I think we're going to see the career market loosen up."

Featured on CoStar; written by Candace Carlisle, posted 4/23/2024