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  • Writer's pictureAndre Watson

Here's What Proposed FTC Ban on Noncompete Clauses Could Mean for Real Estate Brokers

Potential Agency Move Seen Adding Innovation, Paving New Career Paths

The Federal Trade Commission's proposed rule would ban employers from imposing noncompete agreements on their workers. (Getty Images)

For most U.S. real estate brokers, job hopping is part of a successful career where executives can negotiate bigger paychecks — and a more important-sounding title — at a new company once they have proven themselves to the industry. But sometimes they have to wait for their noncompete contract to expire, a process regulators are looking at changing.

Real estate brokers can expect to get more protection in switching jobs, allowing them to bring more innovation to the industry, if the Federal Trade Commission's proposed ban on noncompete clauses in employment contracts takes effect, lawyers and recruiters say. The proposal, unveiled this month, could increase wages by nearly $300 billion per year and expand career opportunities for 30 million U.S. workers, according to the agency.

The FTC's proposal includes requiring companies to rescind existing noncompete clauses and actively inform workers that those restrictions are no longer in effect. If the proposal is implemented, it has the potential to be a "radical change" that could "unshackle" workers from legal documents an employee often signs without much thought of the legal consequences in real estate and other industries, said Ashish Mahendru, the founder of Houston-based commercial litigation law firm Mahendru PC.

"This would completely upend the industry," Mahendru told CoStar News.

For most employees, noncompete agreements aren't negotiated and workers don't understand their legal rights, said Mahendru, who has decades of experience practicing employment law.

"That shroud of uncertainty and fear is what the FTC wants to eradicate," Mahendru added. "The FTC wants to open up the economy and open up the ability for employees to be as productive, entrepreneurial or move in the stream of commerce as they want."

Noncompete contracts, regulated at the state level, are often used by companies to protect valuable proprietary information, which could otherwise fall into the hands of a competitor that hired a rival's employee. The FTC says that in practice noncompete agreements have led to suppressed wages, hampered innovation and have blocked entrepreneurs from starting new businesses.

But there are obstacles to eliminating noncompete agreements. While the FTC's proposed ban — if it goes into effect — is seen by some as spurring innovation and creating new businesses in the real estate industry, the initial upending of the current process could eventually be curbed as some companies use other legal maneuvers in place of noncompetes, lawyers say. In addition, the proposed ban is expected to be hard to implement with opposition so strong.

Flood of Comments

The FTC is seeking public comment on the proposal until March 10. As of early Tuesday, the agency had received more than 5,400 comments. If a ban is enacted, attorneys expect trade groups and organizations to challenge the rule in favorable courts, such as Texas, dragging out the process.

Ashish Mahendru, the founder of commercial litigation firm Mahendru P.C., said the proposed ban of noncompete agreements would be a radical change to the law. (Mahendru P.C.)

As a result of the challenges, government regulators find it's a lot easier to propose a rule rather than going through the process of implementation, said Chad Ruback, a Dallas appellate lawyer, who is familiar with the lengthy procedures.

"I'd be surprised if the FTC's proposed rule ever takes effect as written," Ruback told CoStar News. "I'm confident that there will be no shortage of comments, which might prompt the FTC to amend the proposed rule. Regardless of whether the FTC chooses to amend the proposed rule after the comment period, the FTC must publish a final version of the proposed rule. It could not go into effect until 180 days after publication of the final version."

During that process, which could go on for more than eight months, Ruback said he expects challenges to the proposed ban in the courts with a "good chance that Congress will step in," which could further delay any implementation.

"It is too early in this process to predict the future of noncompetes," Ruback said.

Meanwhile, companies could use other methods like nondisclosure agreements instead of noncompetes if the FTC's ban does go into effect.

"This thing is just so nascent," Mahendru said. "For employers, the way the rule is proposed, there's ways to wire around it in a different way. Having trade secret obligations and protecting intellectual property may become the de facto way to restrain an employee from taking certain steps to harm an ex-employer's business."

If the rule goes into effect, it is expected to further open up what is already an entrepreneurial commercial real estate industry for even more innovation.

Changing Employee Attitudes

Employees shackled to toxic workplaces might feel they can leave if they can stay in the industry and provide what might be considered a competitive product or service, said Allison Weiss, founder and CEO of CRE Recruiting, an agency that specializes in recruiting commercial real estate executives. And for employees who may have recently been laid off but are still bound by a noncompete agreement, it makes them employable to rival firms, she said.

"This is a potential sea change," Weiss told CoStar News. "In an industry that aggressively hires in the high times and lays off in downturns, it's a move to support and protect people rather than a company, which often has the upper hand."

Allison Weiss is the CEO and founder of CRE Recruiting. (CRE Recruiting)

This proposed rule by the FTC could help pave the way for brokers looking to financially make the most out of their careers, Weiss said. Even though noncompete agreements are unenforceable in certain states like California, the national proposal could have a meaningful impact on the real estate industry, she said.

"Employees subject to noncompete or nonsolicitation agreements can affect the employability of a person, especially if one company is known for being litigious," Weiss told CoStar News. "It could put off another company thinking about the legal exposure. It's hard to quantify the financial impact of what that could be. It's almost a priceless thing not to have the psychological barrier or fear of being taken to court for switching jobs."

Mike McDonald, a high-profile real estate broker who is in ongoing litigation with his former employer Cushman & Wakefield, said the noncompete agreements the FTC is proposing to ban are "antiquated" and "do not satisfy the needs of employees and employers today" and need reform.

"In our industry, typically the clients hire the people, not the company," McDonald added. "My intellectual property is in my head, having 30 years in the business. Everything in my head I didn't learn at Cushman & Wakefield."

McDonald and his longtime colleague Jonathan Napper left Cushman & Wakefield to join rival brokerage firm JLL last year. Shortly after making the move, they were sued by their former employer for breach of contract involving the issue of not competing.

McDonald and Napper signed a five-year employment contract in 2018 with Cushman & Wakefield in exchange for an eight-figure payment, according to court documents. The contract included certain noncompetition and nonsolicitation provisions in the United States that protected Cushman & Wakefield's "highly valuable confidential information," according to the lawsuit. McDonald has told CoStar News he plans to work overseas and follow the terms of those provisions.

"We did not breach any of our restrictive covenants," McDonald told CoStar News.

Cushman & Wakefield and JLL did not immediately respond to an emailed interview request from CoStar News.

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