The fight for talent at the top of the commercial real estate industry is a fierce and sometimes litigious battle. Turnover can be high among brokers as they switch from firm to firm in a game of musical chairs. One broker once told me that all the top commercial real estate firms are pretty much the same, which gave me the impression that most brokers think of themselves as essentially free agents that use the company brand while continuing to climb higher.
The one thing that has helped brokerages like JLL and CBRE in this competitive environment is non-compete clauses, which restrict employees from benefitting rival brokerages by switching jobs, usually for a defined period or within a specific geographic location. When brokers do change jobs, legal battles sometimes ensue. For example, Cushman & Wakefield sued two former capital markets brokers last October after they left for JLL. Cushman claimed a breach of a five-year employment contract signed by Mike McDonald and Jonathan Napper in October 2018. Cushman was granted a temporary restraining order against the employees and is seeking monetary relief of up to $1 million.
The brokers’ contracts came with non-compete clauses, and Cushman & Wakefield claims they took five other brokers and two executives to JLL with them, along with confidential business information and several clients. It was a big L for Cushman, who claimed they suffered several canceled deals because of the move. McDonald and Napper have worked together for eight years and sold more than $5 billion in real estate in Atlanta.
The lawsuit over the brokers’ alleged non-compete clause breach is still playing out, but it’s far from the only recent example in commercial real estate. Newmark sued three former multifamily sales brokers in 2021 who left for CBRE. CBRE sued two former brokers in 2018 who switched to rival firm Hughes Marino. That case was later settled, and the brokers agreed to cover CBRE’s attorney fees. WeWork was forced to release 1,400 workers from overly broad non-competes and to reduce restrictions on another 1,800 employees after New York, and Illinois attorneys general sued the company in 2018.
These lawsuits are so common because non-compete agreements are the norm throughout the business world and in commercial real estate in particular. It’s estimated that between 40 to 50 million Americans are covered by a non-compete, about one in five workers. A proposed Federal Trade Commission rule would change this, banning non-competes across the board in employment contracts, which could create a tremendous wave of change. Real estate companies rely on the clauses to retain top producers and protect client rolls and trade secrets. The FTC’s rule would potentially make changing jobs to a company’s rivals much easier. It’s hard to overstate how impactful the ban would be, and it undoubtedly has real estate brokerages scrambling.
An uneven playing field?
The FTC’s proposal is still months from going into effect. The agency is seeking comments through March 10th as part of the rulemaking process, and it could still adjust the rule before releasing a final version. The FTC estimates it would help 30 million Americans have better career opportunities and increase overall wages by about $300 billion annually. The rule would also be retroactive, meaning existing non-compete agreements would be canceled, and companies would have to inform current and former workers they’ve been voided.
Non-compete clauses typically restrict former employees from accepting a job with a competitor of their former company for a specific period. These clauses differ from non-solicits, which prohibit former employees from taking customers or prospective customers to a new job. Non-competes are also distinct from non-poach clauses and confidentiality agreements. Non-poach clauses prohibit soliciting a company’s employees for hire, or in other words, a broker taking a team of brokers with him. Confidentiality agreements protect a company’s information and trade secrets. FTC’s proposed rule only addresses non-compete clauses, which state law currently governs. The rule would make most non-compete clauses unenforceable, a serious change.
Non-competes didn’t used to be as popular in commercial real estate, but they’ve become pervasive in recent decades. They were originally intended to protect trade secrets, but some argue there are less intrusive ways to achieve this, such as non-disclosure agreements. Using non-competes sometimes results in an uneven playing field for employees, especially lower-level workers who may not even be aware they signed one until they take a new job.
Some real estate firms have all workers sign non-competes, though they are usually more onerous for executives. For commercial brokers, many think of the clauses as a nuisance but accept them as the industry norm. Your clients become the company’s clients, and if you take another job, you can’t take your clients with you in most cases. This can be frustrating, as brokers do most of the work to secure the deals and develop the relationships. When brokers start a new job, they essentially must start from scratch. The periods covered in the agreements can also be burdensome for employees. If leaving for a rival firm, brokers may have to wait up to one year to work again, which is a severe financial challenge for a mid-level employee who’s not wealthy.
Many executives typically get around strict non-competes by taking “garden leave,” not working in the industry, and/or waiting out the obligation before starting with a new, rival firm. Lower-level workers don’t have the same luxury in most cases. Executives may have stricter clauses, but they can also typically afford a good lawyer to negotiate the agreements. The effects of the clauses could be some workers leaving the industry altogether instead of risking legal trouble by switching to a rival real estate firm. Some states, such as California, don’t enforce non-compete clauses. But some employers will still have workers sign them, which can psychologically keep employees in their place.
Into the great unknown
The ban’s effect on real estate employees has been likened to “the handcuffs being taken off.” It would undoubtedly make it easier for brokers to jump ship, but the more big-picture effects of the ban are largely unknown. The proposed ban would have significant downsides for companies, but there could also be some drawbacks for workers. Without non-competes, workers could leave for a direct competitor and take valuable information with them. Employers would likely rely on other restrictive clauses, such as confidentiality agreements, to protect business interests. But these agreements wouldn’t stop a former employee from working for a competitor and possibly bringing inside information with them.
A non-compete ban would obviously impact companies’ retention, but this could backfire on workers. Some companies may be less likely to invest as much in skilled employees, knowing they could depart easily. Another counterproductive effect could be the possibility of the ban driving wages down, despite what the FTC claims. Companies that don’t have to negotiate non-competes could negotiate more favorable terms elsewhere. Not having to pay workers for something of value in return for the restrictive clause could bring down compensation plans.
The proposed ban will undoubtedly face legal challenges, one of which may be coming soon. The U.S. Chamber of Commerce has already said it’s prepared to sue the FTC over the rule. The Chamber of Commerce is America’s most prominent business trade group and spent nearly $60 million lobbying lawmakers during the first three quarters of 2022. They and several other business groups will throw their weight around to get the rule shelved or at least watered down. The Chamber says the rule is “blatantly unlawful” and ignores state laws that already govern non-compete agreements.
A ban on non-competes would dramatically alter the business landscape in the U.S., though the exact effects are uncertain. It would seemingly be a win for workers like real estate brokers, enabling them to progress in their careers without fear of running afoul of a restrictive agreement. But the ban could also have counter-intuitive effects that will only be realized once it’s set into motion. There is likely some internal scrambling among top real estate companies right now over the FTC’s proposal as they figure out ways to fight it and maintain power. Banning non-competes could be like removing the handcuffs from top employees, and in an industry as competitive as real estate, it could make the jockeying for top talent even more fierce.