FTC Noncompete Ban Could Further the Channel's Evolution
The landmark ruling comes with exceptions for "senior executives" and M&A.
![Noncompete ban and impact Noncompete ban and impact](https://eu-images.contentstack.com/v3/assets/blt10e444bce2d36aa8/blt14bef807328476e1/656a702e9bac33040a512c96/Businessmen_signing_contract.jpg?width=700&auto=webp&quality=80&disable=upscale)
PanuShot/Shutterstock
The ruling comes with exceptions for noncompete agreements that already exist.
The FTC states that companies won't able to enforce existing noncompetes for non-senior workers, but existing noncompetes will stay intact for "senior executives." The FTC defines senior executives as people who earn more than $151,164 annually and "'are in policy-making positions."
However, future noncompetes are off the table for all workers — senior executives or not.
The FTC won't require employers to remove or edit those agreements but rather inform affected employees that they will not enforce them.
Trade-secret rules and non-disclosure agreements (NDAs) remain untouched. According to the FTC, 95% of workers with a noncompete also have signed an NDA.
A question that arose from the ruling was whether the noncompete applies to people who have sold their businesses. In an era when multiple private equity-backed buyers are buying agent books of business, would those agents see their noncompete agreements disappear?
No, according to the FTC. The ruling does not apply to "noncompetes entered into by a person pursuant to a bona fide sale of a business entity."
The U.S. Chamber of Commerce and two other groups on Wednesday filed a 52-page lawsuit against the FTC and FTC chairperson Lina Khan. The document argues that state governments should handle the challenge of noncompetes without federal involvement. The complaint also states that the FTC has too broadly defined "worker" to include independent contractors. The plaintiffs praised noncompete agreements as a benefit for both the employer and the employee.
"The employer protects its workforce investments and sensitive information, and the worker benefits from increased training, access to more information, and an opportunity to bargain for higher pay," the filing said.
But the FTC is responding in part to a deluge of anecdotes from workers who said noncompete agreements significantly impaired their careers. It also stands on research that says noncompetes demonstrably reduce the number of new businesses and patents that enter the U.S. economy each year.
Ryan Rowland, partner at Adaptiv Advisors and co-founder of the Technology Advisor Alliance, agreed that noncompete agreements can hold back innovation and "exploit or entrap" workers. He added that regulators and businesses need to strike a balance to maintain innovation in the U.S. market in the face of trends like offshoring.
![Adaptiv Advisors' Ryan Rowland Adaptiv Advisors' Ryan Rowland](https://eu-images.contentstack.com/v3/assets/blt10e444bce2d36aa8/blt7d6be603d8baa827/662a6cd2eed339a0b6e137e8/Rowland_Ryan_Adaptiv_Advisors_2024.jpg?width=700&auto=webp&quality=80&disable=upscale)
Adaptiv Advisors' Ryan Rowland
"If corporations feel their services and intellectual property are not safe with the American workforce, it could further accelerate these trends and the American people will bear the cost," he said. "However, if I had to be on corporate protections vs. enabling innovation, I'll bet on innovation all day every day."
Kameron Olsen, president at The Channel Advisors, said he views the ruling positively. But he notes that noncompete agreements had been falling out of favor in the channel prior to this ruling.
![The Channel Advisors' Kameron Olsen The Channel Advisors' Kameron Olsen](https://eu-images.contentstack.com/v3/assets/blt10e444bce2d36aa8/blta569ec2908311b1b/662a6ddaf40149f0c1a0e13e/Olsen_Kameron_The_Channel_Advisors_2024.jpg?width=700&auto=webp&quality=80&disable=upscale)
The Channel Advisors' Kameron Olsen
"I believe the channel was already in the process of pivoting away from a noncompete before this ruling came out. Lately, companies have leaned into things like nondisclosures and stock options to protect their interest in [intellectual property], which included things like relationships and partnerships with the other entities in the channel," Olsen told Channel Futures. "I believe this ruling will challenge companies to provide a better experience for their employees and give them reasons to stay, versus creating handcuffs for them to not be able to leave. Companies that mature their reporting metrics will be able to see who is moving the needle for them. This will allow them to put true value to their work and will be the organizations that succeed in this new business environment."
ScanSource CEO Mike Baur touched on the topic of noncompetes in Intelisys' recent town hall. At 18:10 in the video he notes that neither Intelisys or ScanSource use noncompetes, operating on the philosophy that employees and partners should be able to choose their futures.
Volli Communications marketing director Travis Curnutte said the ruling would create more job mobility for different people and potentially bring more competition into the market. But he pointed to the challenges smaller vendors like Volli face keeping talent. He said providers will need to do more to build loyalty while using other legal vehicles to protect company secrets.
![Volli Communications' Travis Curnutte Volli Communications' Travis Curnutte](https://eu-images.contentstack.com/v3/assets/blt10e444bce2d36aa8/blte4b9d319d1e77de0/662a6efccc81a5312caa9e0f/Curnutte_Travis_Volli_Communications_2024.jpg?width=700&auto=webp&quality=80&disable=upscale)
Volli Communications' Travis Curnutte
Curnutte said he has larger providers with more resources at their disposal make aggressive plays to acquire new customers at the expense of their smaller peers.
"This behavior is often driven by sales professionals motivated by immediate incentives, like SPIFFs. With the proposed FTC noncompete ban, I anticipate this trend might intensify, leading to more aggressive competition for customers," Curnutte told Channel Futures. "
But Curnutte said suppliers may move toward "protection over openness."
"While this defensive approach might safeguard their interests short-term, it could potentially stifle innovation, as companies become more focused on shielding their assets rather than exploring new ideas and collaborations," he said.
Staff retention is a key topic for owners of technology advisor (agent) firms, who are increasingly surrounding themselves with a team. Forty-two percent of agents in Channel Futures' latest partner survey said they've increased their staff counts. The hires work in a variety of roles, including sales, customer support and back office.
Hiring requires creativity on the part of the agencies, whose recurring revenue model doesn't always afford them a deep pile of upfront cash. After the hire, agent owners know that a vendor or distributor could swoop in with a higher salary offer. And it is common for agent sales personnel to move to start their own agency.
Mejeticks CEO Rob DeVita said the FTC noncompete ban will cause companies in the channel to emphasize company culture and competitive salaries more.
![Mejeticks' Robert DeVita Mejeticks' Robert DeVita](https://eu-images.contentstack.com/v3/assets/blt10e444bce2d36aa8/blt6559c3a39f438a41/6552a9e886c97f040abdd42a/DeVita_Robert_Mejeticks_135x180_2023.jpg?width=700&auto=webp&quality=80&disable=upscale)
Mejeticks' Robert DeVita
"I don’t think you are going to see anything like the college sports portal. I do think you may see a change in how agent reps are compensated and move toward a residual commission model for reps at agencies if they don’t already have one. Giving them equity in their book of business should alleviate much of the movement from agency to agency. This is definitely an empowering time for employees with noncompetes," DeVita told Channel Futures.
Staff retention is a key topic for owners of technology advisor (agent) firms, who are increasingly surrounding themselves with a team. Forty-two percent of agents in Channel Futures' latest partner survey said they've increased their staff counts. The hires work in a variety of roles, including sales, customer support and back office.
Hiring requires creativity on the part of the agencies, whose recurring revenue model doesn't always afford them a deep pile of upfront cash. After the hire, agent owners know that a vendor or distributor could swoop in with a higher salary offer. And it is common for agent sales personnel to move to start their own agency.
Mejeticks CEO Rob DeVita said the FTC noncompete ban will cause companies in the channel to emphasize company culture and competitive salaries more.
![Mejeticks' Robert DeVita Mejeticks' Robert DeVita](https://eu-images.contentstack.com/v3/assets/blt10e444bce2d36aa8/blt6559c3a39f438a41/6552a9e886c97f040abdd42a/DeVita_Robert_Mejeticks_135x180_2023.jpg?width=700&auto=webp&quality=80&disable=upscale)
Mejeticks' Robert DeVita
"I don’t think you are going to see anything like the college sports portal. I do think you may see a change in how agent reps are compensated and move toward a residual commission model for reps at agencies if they don’t already have one. Giving them equity in their book of business should alleviate much of the movement from agency to agency. This is definitely an empowering time for employees with noncompetes," DeVita told Channel Futures.
The Federal Trade Commission this week sent ripples through the business world with its prohibition of noncompete agreements.
The ruling, which passed on a 3-2 vote on Tuesday, will immediately make most noncompete agreements unenforceable, and it will ban future noncompetes.
The FTC estimates that the ruling affects some 30 million U.S. workers, and the channel contains many of them. Suppliers, distributors and partners alike all historically have leveraged noncompete agreements to some extent, and the FTC's ruling could require them to rethink their talent retention practices.
![Brooker-Eric.jpg Brooker-Eric.jpg](https://eu-images.contentstack.com/v3/assets/blt10e444bce2d36aa8/blte3cae6c8ed565c8d/662a690769247f61a44b39ec/Brooker-Eric-e1674081905998.jpg?width=700&auto=webp&quality=80&disable=upscale)
Eric Brooker
"This is good news for the industry and the business world at large," said Eric Brooker, chief experience officer at The Channel Advisors. "This will force the channel community (suppliers, TSDs and trusted advisors) to focus on building strong cultures with good leaders and a focus on their products and well-being of their employees. Employee retention will be based on the employees' experience and not the fear of leaving tied to a legal document."
According to the FTC, about 18% of U.S. workers have a noncompete.
Why the Noncompete Ban?
The FTC in a 570-page document outlined the research and feedback it gathered since proposing the rule change in January 2023. The regulatory body amassed more than 26,000 public comments, with the overwhelming majority urging for a ban.
The FTC cites the work of researchers who have demonstrated that noncompete agreements "harm competitive conditions in labor, product, and service markets."
Moreover, the FTC pointed to anecdotes of workers who suffered harm to their careers from noncompete agreements. Many resided in low-income brackets.
"Workers came forward to recount how − by blocking them from taking a better job or starting their own business, and subjecting them to threats and litigation from their employers − noncompetes derailed their careers, destroyed their finances and upended their lives," the document reads.
The FTC said it expects the ban to lead to 8,500 new businesses and up to 29,000 new patents each year.
The rule will go into effect four months from when it officially publishes in the Federal Register. But first the FTC can fend off an onslaught of legal resistance from different corporate interests. The U.S. Chamber of Commerce plans to file a lawsuit against the FTC noncompete ban.
Different people in the channel expressed mixed feelings about how the ruling could impact smaller partners and vendors, who already struggle to keep talent.
In the slideshow above, different members of the channel discuss how the noncompete ban will impact suppliers, distributors and partners, as well as how it will impact people who have sold their businesses.
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