Earlier this month, the Federal Trade Commission (“FTC”), in a sweeping and controversial move, issued a Proposed Rule (“Proposal”) that would bar and require the recission of almost all employment non-compete agreements. The Proposal is subject to a 60-day comment period, after which the FTC can prepare and announce the final rule. Any final rule will likely face significant hurdles before implementation, such as whether it exceeds the FTC’s rulemaking authority or conflicts with existing case law allowing non-competes.
Summary of Proposal
The Proposal would broadly prohibit employers from (i) entering into or attempting to enter into a non-compete agreement with a worker; (ii) maintaining a non-compete agreement with a worker; or (iii) representing to a worker that they are subject to a non-compete without a good faith basis to believe that the worker is subject to an enforceable non-compete. The Proposal would apply the ban on the maintenance or enforcement of non-compete agreements to employees, independent contractors, and any other worker category, whether paid or unpaid.
The Proposal explains that it would prohibit a de facto non-compete clause, defined as a contractual provision prohibiting a worker from seeking or accepting employment with another employer. It provides two examples: (i) a non-disclosure agreement written in such a way that effectively precludes a worker from working in the same field after ending employment with an employer; and (ii) a contractual term that requires a worker to pay the employer for training cost if the worker’s employment is terminated within a specified period. The lone exception to the Proposal applies to individuals selling a business entity, ownership interest in a business entity, or all of a business entity’s operating assets where the individual restricted by a non-compete was a substantial owner, member, or partner in the business entity as they agreed to the non-compete.
The Proposal would require employers that maintain non-competes with their workers to rescind those agreements no later than the compliance date (180 days after the final rule is published in the Federal Register). That process would require employers to provide current and former workers with individualized paper or digital communication within 45 days of rescinding the non-compete clause.
Current Non-Compete Laws
State law has historically been the authority governing the enforceability of non-compete clauses. A non-compete clause is a contractual term between an employer and a worker that purports to prevent the worker from accepting employment with a competitor or operating a competing business after the worker’s employment with the employer. A typical non-compete clause limits the worker from performing particular categories of work for a competitor in specified geographic areas for a fixed time period after a worker’s employment ends. Breaches of those agreements can give rise to claims for monetary damages and injunctive relief by the employer. As a general rule, courts subject non-competition restrictions to more exacting scrutiny than other contractual terms because they are considered a restraint of trade and out of concern that they are the product of unequal bargaining power. A few states, like California, Oklahoma, and North Dakota, completely bar non-compete clauses in employment agreements, while others place various limitations on them. Most states, including Ohio, generally enforce them so long as they are reasonable in time, scope, and geography and protect an employer’s legitimate business interests.
Reasons Cited for Proposal
Two FTC Commissioners released a statement supporting the Proposal. They stated that non-compete clauses reduce competition in labor markets, suppressing earnings and opportunity even for workers who are not directly subject to a non-compete. In their view, when workers subject to non-compete clauses are blocked from switching to jobs in which they would be better paid and more productive, unconstrained workers in that market are simultaneously denied the opportunity to replace them. This decline in job mobility means fewer job offers and an overall drop in wages. Firms have less incentive to compete for workers by offering higher pay, better benefits, greater say over scheduling or more favorable conditions. Further, the Commissioners contend that evidence indicates that non-compete clauses reduce innovation and competition in product and service markets. A third FTC Commissioner dissented and described the Proposal as a “radical departure from hundreds of years of legal precedent,” undertaken with little enforcement experience on non-competes.
Employers are not required to take any action at this time. Numerous employers and other groups will undoubtedly submit comments to the FTC before a final rule is developed and published in the Federal Register. The FTC also indicated it could be open to considering other alternatives raised during the comment process. Meanwhile, employers should take steps to identify and review existing policies, procedures, and agreements that may be impacted if the Proposal becomes final and to explore the development of policies and agreements that protect confidential and proprietary information and other legitimate business interests without acting as a de facto non-compete agreement.
If you have any questions or need additional information concerning non-compete agreements, don’t hesitate to get in touch with Matt Stokely at email@example.com or 937-223-1130.