Last week, the Federal Trade Commission (“FTC”) proposed sweeping changes to the rule defining unfair methods of competition that would upend decades of common business and employment practices. The proposed rule is a near complete ban on noncompete agreements between employers and employees, both new and existing in most circumstances. The proposed rule also requires employers to not only rescind existing noncompete agreements, but to provide notice of such rescission to its employees. The FTC estimates that 30 million American workers are subject to some form of a noncompete agreement.
Background
In brief, noncompete agreements protect employers from unfair competition by preventing employees from accepting employment with a competitor, who would then use skills and knowledge learned from the old employer to help the competitor. Noncompete agreements are currently governed across the country at the state level through a mixture of statutory and common law rules. While most states, such as Michigan, allow noncompete agreements that protect an employer’s “reasonable” business interests, there is a growing trend of states that severely limit or outright restrict noncompete agreements (see, e.g., Massachusetts, Illinois, and California, among others).
Proposed Action
The proposed FTC rule is a gamechanger for employers. The proposed rule would do the following:
- Ban all noncompete agreements that prevent a worker from accepting employment or operating a competing business after separation.
- Require all employers with existing noncompete clauses to rescind those agreements and provide notice to workers of the rescission.
The proposed rule is agnostic to whether the subject agreement actually refers to itself as a noncompete agreement. Rather, the crucial inquiry is whether the agreement has a chilling effect on competition. Thus, the following additional types of agreements are in the FTC’s crosshairs:
- nondisclosure agreements that are so broad as to preclude the worker from working in the same field as the prior employer after separation; and
- agreements to repay training costs if the worker’s employment terminates in a specified time when the payment is not reasonably related to the costs incurred from training.
The Proposed Rule Has Far Reaching Implications
The proposed FTC rule supersedes all state laws regarding noncompete agreements, except those more restrictive than the proposed rule. In other words, even as some states limit noncompete agreements to certain workers or salary thresholds, this proposed FTC rule goes further. The FTC rule is indifferent to the salary offered to an employee (some states permit noncompete agreements, but only if the target employee has a certain income threshold). Likewise, the rule’s definition of “worker” covers a paid employee, volunteer, intern, and independent contractors, meaning that any category of worker cannot be subject to a noncompete agreement, providing even more protection.
Exceptions and Alternative Avenues for Protection
The proposed rule is silent on nonsolicitation agreements. A nonsolicitation agreement prevents a worker from soliciting or contacting his former employer’s clients or employees with the intent of steering the clients or employees away from the former employer. This means a worker cannot leave one job and take all of his colleagues and clients with him to a competitor. Nonsolicitation agreements thus may be an area where employers can protect their business interests, but the final rule is far from certain. Employers should nevertheless remain vigilant as some states, such as California, severely limit the enforceability of nonsolicitation agreements.
Likewise, employers might consider reliance upon robust confidentiality and nondisclosure agreements to protect their confidential and trade secret information. Employers, however, should be mindful of the text of the FTC’s proposed rule, which reaches nondisclosure agreements that are so broad as to preclude the worker from working in the same field as the prior employer after separation. This proposed ban has not been tested and so it is difficult to say what may or may not be enforceable.
Finally, the proposed ban on noncompete agreements does not apply with respect to the sale of a business. In other words, if a business sells all or substantially all of its equity or assets, the buyer may continue to restrict the seller from reentering the marketplace for a period of time to complete the transfer of goodwill.
Next Steps
The FTC’s proposed action is open to public comment through March 10, 2023. Thereafter, it will take effect 180 days after publication of the final rule, meaning it could have the force of law as soon as September 2023. But the situation is still unclear. It remains possible that the rule could change based on public feedback. Likewise, it is widely expected that the final version of the rule will face legal challenges—not the least of which being the FTC’s claimed authority to promulgate such a sweeping rule.
The employment attorneys and counselors at Young Basile will continue to monitor the situation as it develops. As strategic advisors to the world’s most innovative companies, Young Basile has deep experience drafting, negotiating, and litigating noncompete, nonsolicit, and confidentiality agreements in high stakes situations relative to mission-critical employees, knowledge, and technologies. If you have any questions about this proposed rule, its status, or how it could affect your existing employment documentation, please contact the employment attorneys and counselors at Young Basile.
See https://www.ftc.gov/legal-library/browse/federal-register-notices/non-compete-clause-rulemaking