FTC’s Proposed Rule on Noncompete Agreements
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Q: Is it true that the federal government has or will ban non-compete agreements?
A: Not yet. The Biden administration is considering restrictions on non-compete agreements, but so far, there are no final rules that would do so. That said, the Federal Trade Commission (“FTC”) has proposed a rule to effectively ban most new and existing non-compete agreements, which could be adopted as early as 2024.
In the employment context, a non-compete provision is a contractual agreement that restricts a former employee from working for another employer, or otherwise being engaged with a business, that competes with the business of the employee’s previous employer. Generally, such restrictions are limited to both a geographic area and a set period after the end of employment. In July 2021, President Biden issued an executive order encouraging the FTC to regulate non-compete clauses and other similar restrictions on employees.
In response, the FTC proposed a broad rule (the “Proposed Rule”) that would effectively prohibit non-competes except in very limited circumstances. The Proposed Rule would apply to all workers—including employees, independent contractors, and volunteers – in both high- and low-level positions. It defines a non-compete clause as a provision that prevents the worker from seeking or accepting employment or operating a business after the worker’s employment with the employer. The Proposed Rule would apply both to clauses that are labeled as “non-competes” and any other provision that would have the same effect. As such, the Proposed Rule also could prohibit non-solicitation and non-disclosure agreements (“NDAs”) if those agreements restrict employment to be tantamount to a non-compete agreement.
One of the most challenging aspects of the Proposed Rule is that, as currently drafted, it would retroactively prohibit non-compete agreements.
In addition to prohibiting any new non-compete clauses, the Proposed Rule would void and make unenforceable any existing non-compete clauses – no matter when the parties signed them or whether they had been provided in return for consideration (e.g., in a separation agreement).
A final federal rule would supersede any state laws concerning non-compete clauses. While many states have laws limiting the use of non-compete clauses in certain circumstances, only five jurisdictions (California, Minnesota, North Dakota, Oklahoma, and Washington, D.C.), have banned non-compete clauses outright. The New York legislature passed a law banning non-compete clauses in June of this year, but it has yet to be signed by the governor.
The FTC received more than 25,000 public comments on the Proposed Rule. It is difficult to predict what changes, if any, the FTC may make to its proposal in response to the comments received. As proposed, it is such a significant departure from current practice that legal challenges are expected and could delay implementation of a final rule. Based in part on the number of comments received, the media has reported that the FTC is unlikely to vote on the Proposed Rule, or a revised version, until April 2024.
It is worth noting that other action has recently been initiated on the federal level to limit or eliminate non-compete clauses. The National Labor Relations Board (“NLRB”) has published a memo, in which it opines that most non-competes violate the National Labor Relations Act. That memo is not binding, but it suggests the NLRB may be increasing its investigations into non-compete clauses. In addition, the U.S. Congress has reintroduced legislation titled the “Workforce Mobility Act of 2023” (previously introduced in 2019 and 2021), which, if adopted, would ban non-competes prospectively in most circumstances.
It is not clear if, or when, the federal government will ban non-compete agreements, or how extensive such a ban would be. Given the possibility of some action, however, all employers, including not-for-profit organizations, should consider taking the following steps:
- Inventory current employment and severance agreements to determine whether they include non-compete clauses. The Proposed Rule would require employers to notify current and former employees subject to such clauses. Advanced planning would help effectuate that process.
- Identify the organization’s confidential information, including trade secrets, and ensure that proper policies and procedures are in place that reasonably protect such information, including limitations on access and training of employees on how to protect against its theft.
- Consider the use of tailored non-solicitation, non-recruitment, and confidentiality clauses as alternatives to potentially unenforceable non-compete clauses where appropriate. Such provisions often are sufficient to protect legitimate business interests.
Edited by Jed Mandel, JD