On January 5, 2023, the Federal Trade Commission (FTC) issued Notice of Proposed Rulemaking announcing that it was proposing an administrative rule that would end the use of all noncompetition agreements in employment relationships outside the context of the sale of a business. The proposed rule, among other things, labels the following as unfair methods of competition: “an employer to enter[ing] into or attempt[ing] to enter into a non-compete clause with a worker; maintain[ing] with a worker a non-compete clause; or represent[ing] to a worker that the worker is subject to a non-compete clause where the employer has no good faith basis to believe that the worker is subject to an enforceable non-compete clause.”
In addition to preventing noncompetition agreements from being entered into in the future, all noncompetition agreements in effect at the time of promulgation of the proposed rule would have to be rescinded following a notice period and prior to the compliance date¬—180 days after publishing of a Final Rule. The only instance where a noncompetition agreement would remain effective and enforceable is in the sale of a business. It is noteworthy that the proposed rule states that the rule will supersede all state laws that encompass noncompetition agreements, so regardless of where you conduct business, this rule will impact you. The proposed rule, if passed, would effectively eliminate the enforceability of covenants not to compete nationwide.
Apparently unaffected by the proposed rule are restrictive covenants that prevent post-employment solicitation of customers, employees or vendors as well as confidentiality and nondisclosure provisions so long as they are not so broad as to effectively act as a noncompete precluding an employee from working in a particular industry.
What should employers do now? First, don’t panic. It is unlikely that any final rule published by the FTC will be in the same form as the proposed rule. Any final rule actually published by the FTC will likely be different than the proposed rule and may have carveouts and exceptions (e.g., high level executives, employees of tech or financial services firms and highly compensated employees)
Moreover, it is unlikely that a final rule will be published for months, years or if at all and whether a final rule will survive inevitable court challenges. There is substantial question about whether the FTC has the authority to impose such a marketplace-wide rule.
Second, employers should review their existing noncompetes to ensure that they contain post-employment customer and employee nonsolicitation provisions where appropriate (e.g., sales employees, managers and supervisors of sales employees and executives).
Third, make sure the agreements with employees adequately protect against the disclosure of confidential, proprietary and/or trade secret information. Most well-drafted noncompetition agreements will already contain these protections but its a good exercise to check and confirm.
Finally, if an employer is not currently using noncompetition agreements but believes it has legitimate business reasons for doing so, the employer should consult with its employment counsel to determine if it is prudent to implement the noncompetition obligations prior to publication of any FTC final rule. There is a possibility that any final rule could be limited to noncompetition agreements entered after the effective date of a Final Rule and that existing noncompetes could be grandfathered or exempt from the rule.
A copy of the Proposed Rule published on the FTC’s website is accessible here.