Today, the Federal Trade Commission (“FTC”) issued a proposed rule that would ban non-compete agreements between employers and workers, including both employees and independent contractors.
What Does the Proposed Rule Say?
The proposed rule states that an employer cannot:
(1) enter into or attempt to enter into a non-compete clause with a worker;
(2) maintain with a worker a non-compete clause; or
(3) represent 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.
All employers must “rescind,” i.e., cancel, any non-compete agreements currently in place, and must communicate to each former and current worker that their non-compete restraints are cancelled. FTC even provides a suggested language that employers should use to notify workers:
A new rule enforced by the Federal Trade Commission makes it unlawful for us to maintain a non-compete clause in your employment contract. As of [DATE 180 DAYS AFTER DATE OF PUBLICATION OF THE FINAL RULE], the non-compete clause in your contract is no longer in effect. This means that once you stop working for [EMPLOYER NAME]:
- You may seek or accept a job with any company or any person—even if they compete with [EMPLOYER NAME].
- You may run your own business—even if it competes with [EMPLOYER NAME].
- You may compete with [EMPLOYER NAME] at any time following your employment with [EMPLOYER NAME].
The rule does not affect non-compete agreements entered as part of the sale of a business.
Once FTC passes the rule, employers will have 180 days to comply with it.
What Happens Next?
FTC has invited the public to submit comments on this proposed rule. The period for commenting will close on March 6, 2023. After the comment period closes, FTC will review the comments and will issue a final rule, which may be different from the proposed one.
Does This Mean That Current Non-Compete Agreements Are No Longer Effective?
No. The rule is just a proposed rule right now. It’s has no legal effect. Once the FTC issues the final rule, it will state when that rule will become effective.
It is very likely that various chambers of commerce, business associations (such as the American Medical Association), and big corporations will file lawsuits challenging the FTC’s legal authority to pass a rule that affects contractual relationships across the country and will seek an injunction stopping FTC from enforcing this rule.
What is the Likelihood of a Total Ban of All Non-Compete Agreements?
While many states have passed laws restricting the use of non-compete agreements, any attempts to pass a federal statue banning non-compete agreements (even just for hourly employees) have failed. Many businesses are opposed to a complete ban on non-compete agreements, and have been able to lobby against such a ban on both state and federal level.
The rule proposed by FTC is much more harsh than any bills that have been presented in the Senate and the House so far. Washington D.C. attempted to ban all non-compete agreements in 2020, but under pressure from businesses, amended the ban to apply only to those who made less than $150,000.
Historically, many of the states that have banned non-competes have done so for workers who earned less than a certain amount. The ban that FTC is proposing, therefore, is unprecedented. I I would not be surprised that, after receiving comments, the final rule will be something less than a complete ban. However, if FTC sticks with a complete ban, it is likely to face a tremendous amount of litigation from the business community all around the country.
What Should Employers Do Now to Prepare for a Possible Change?
It is crucial that employers shore up their employment agreements with customer non-solicitation and confidentiality clauses, improve confidentiality processes and policies, and start implementing additional training on what the company considers to be confidential.
Why Should Employers Make Changes Now?
While it is always a good idea to implement measures that protect company trade secrets, if non-compete agreements are banned or limited, these measures will become of critical importance. Employers who are used to rely on preventing employees from working for their competitors for a certain period of time, will no longer be able to do so. Thus, they will need to make sure that none of their trade secrets or confidential information “walk” with the employees directly to a competitor. The only way to do it will be to have strong confidentiality protections in place.
Leiza Dolghih is the founder of Dolghih Law Group PLLC. She is board certified in labor and employment law and has 16+ years of experience in commercial and employment litigation, including trade secrets and non-compete disputes. You can contact her directly at leiza@dlg-legal.com or (214) 531-2403.