On January 5, 2023 the Federal Trade Commission released a Notice of Proposed Rule that would essentially ban all non-compete agreements between employers and employees. If the proposed rule or a similar rule is adopted by the FTC, it would have a profound impact on all US businesses and particularly those businesses that utilize non-compete agreements to protect their trade secrets and confidential business information. This article provides a summary of the proposed rule and actions you can take to have your opinion heard regarding the likely impacts of the proposed rule on your business.
The proposed rule would ban non-compete agreements between employers and employees for all US private employers regardless of the size of the employer (regardless of number of employees or amount of revenue); the position or title of the employee (general laborers all the way to CEOs); or the business of the employer (sandwich shop, hospitals, insurance brokers, tech firms, etc.). The proposed rule does not apply to franchiser/franchisee relationships, in the sale of a business context (if the seller owns 25% or more of the business), or between two businesses, i.e. contractor/sub-contractor context. However, the rule would not be binding upon any employer who is exempt from the Federal Trade Commission Act (certain banks, savings and loan institutions, federal credit unions, common carriers, air carriers, and foreign air carriers, etc.), non-profits, and state and local government entities.
The proposed rule does not expressly prohibit what is known as non-solicit and/or non-service provisions — those provisions that do not prohibit an employee from working for a competitor but do prohibit that employee from soliciting and/or servicing the employer’s customers on behalf of that competitor. However, bans on these types of restrictions may be included in the final rule.
The proposed rule also specifically states that a non-disclosure agreement would be banned if it is “written so broadly that it effectively precludes the worker from working in the same field after the conclusion of the worker’s employment with the employer.” The FTC specifically references the Defend Trade Secrets Act (DTSA) as a basis to assert that non-competes are not necessary given protections by this law and similar state laws protecting trade secrets and confidential/proprietary information. An analysis of how the FTC rules interact with the DTSA and how or whether it encroaches on the role of Congress and state legislatures will be necessary and will likely lead to legal challenges. From a practical perspective for operating companies, if the FTC rules are enacted, this would cause all employers who utilize non-disclosure agreements to have those agreements reviewed/revised by legal counsel.
The proposed rule is also penal in nature. It does not simply invalidate non-compete agreements. Employers who enter into or attempt to enter into covered agreements with employees could be found to be engaged in unfair competition. Moreover, if an employer entered into a non-compete agreement with an employee in the past, it is obligated to rescind the agreement and individually notify that employee that the non-compete is no longer valid. If it does not, the employer may be found to be engaged in unfair competition. And because non-competes have value to employers, new agreements with employees may need to be re-negotiated, with agreements being reviewed/revised by legal counsel.
If enacted, the proposed rule would supersede all state laws governing non-compete agreements. Fortunately, you have an opportunity to be heard prior to a final rule being issued. The FTC invites the public to submit comments on the proposed rule. The FTC will review the comments and may make changes, in a final rule, based on the comments and on the FTC’s further analysis of this issue. Comments will be due on March 10, 2023. The final version will take effect 180 days after it is published. Affected companies should also use this time to contact their congressional delegations, so that their views are heard and addressed.
There are many, many nuances to the proposed rule and different alternatives (some more restrictive and some less restrictive) that may be enacted, all of which cannot be addressed in this article. If you have specific questions on how this proposed rule may affect your company, please contact the members of the trade secrets and fair competition team Joe Lavigne, Tom Hubert, or P.J. Kee.