Highlights
- The Federal Trade Commission (FTC) has proposed a rule to ban non-competition clauses in employment agreements.
- The final rule may be different than the proposed rule in material respects.
- Employers should stay tuned for more information, but should plan on the possibility of changing their approaches to protecting confidential information, customer relationships and goodwill.
The Federal Trade Commission (FTC) proposed a rule on Jan. 5, 2023, prohibiting non-competition clauses ("non-competes") in employment agreements. For purposes of the rule, non-compete provisions include explicit and de facto non-compete agreements; this includes non-disclosure agreements written so broadly as to effectively ban working in the same field post-employment, as well as clauses that require paying unreasonable "training costs" if the employment terminates within a specified period. The stated intention behind the proposal is to benefit workers and encourage competition, as per FTC Chair Lina Khan. About one in five Americans today is bound by a non-compete, with the figure soaring in certain industries (e.g., up to 45 percent in tech). Any change to existing law would have broad and sweeping business impacts.
Who Does It Affect?
Every company that has non-competes with employee(s), with the exception of companies that want to prevent an owner or partner who is selling a business from immediately reentering the field, which would be exempt under the proposed rule.
Why Does This Matter to My Business?
The proposal, if implemented as proposed, would bar employers from entering into or enforcing non-competes with employees (or independent contractors) while also requiring companies to nullify any existing non-competes within six months. Adoption of the rule could have wide-ranging consequences, from fueling more trade-secret litigation to altering the dynamics of pay negotiations for top executives and key employees.
When Will the Rule Change Take Effect?
For now, this is only a proposed rule. The FTC may issue a final rule after the 60-day public comment period ends and after its own deliberation period, which could take some time, especially if there are a lot of objections. Whenever the FTC issues a new rule, it will include a compliance period, which will give companies some (but likely not much) time to comply with the new guidance. Further, there is a possibility that litigation will ensue regarding the FTC's authority to enact the rule in the first place.
What Should Employers Do Now?
First, you can sign onto a public comment opposing this proposed rule. The FTC is accepting public comments through March 20, 2023.
Second, after the rule is issued, you could launch a legal challenge to it.
Third, in the meantime, companies should revisit and ensure enforceability of their other restrictive covenants, including confidentiality provisions and non-solicitation covenants. Even if non-competes are banned, companies can still include strict confidentiality and other protective clauses into employment contracts that protect legitimate business interests.
Fourth, companies should consider aligning their existing non-compete and enforcement practices to comply with the purpose of the FTC's proposed rule, i.e., ensuring that non-competes are not targeting low-wage workers and enforcement is limited to protect legitimate business interests such as trade secrets and other proprietary and confidential information.
Fifth, companies should also work to have a plan in place before the ruling comes out, in case there is a broad rule and/or tight deadline that would make it difficult to comply by the required time.
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