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FTC Proposes Banning Many (Perhaps Most) Non-Compete Agreements

Updated: Feb 15

On January 5, 2023, the Federal Trade Commission ("FTC," responsible for enforcing antitrust and consumer protection rules) announced a proposed rule banning many non-compete agreements. According to its press release, the FTC estimates that some 30 million American workers are subject to a non-compete agreement in their employment contracts. Because these restrict the ability of workers to seek employment elsewhere, many workers stay with employers they would otherwise leave.


What is a non-compete agreement?


At its most basic, a non-compete agreement or clause (also called a covenant not to compete) is an employment contract in which the employee agrees not to work for a competitor of their employer. They are routinely used in employment agreements. Employers like them because they discourage employees from leaving, and they discourage employees from joining competitors.


The FTC defines it in this new rule as " non-compete clause is a contractual term between an employer and a worker that blocks the worker from working for a competing employer, or starting a competing business, typically within a certain geographic area and period of time after the worker’s employment ends."


What are the benefits of a non-compete agreement?


Training employees takes time and resources. Businesses sometimes invest a significant amount of time training employees. For example, Company A spends weeks or months training an employee. Then, after that investment in the employee, the employee goes to work for Company B.


Moreover, non-compete agreements help employers retain customers. If an employee works directly with customers, those customers might feel that their relationship is with the employee more so than the employer. So if the employee leaves, customers might follow.

There is an argument to be made that they aid in job creation. If an employee can just leave at any time, an employer (especially a smaller business) might not make the investment in that job at all.


And employers use these as an added protection of their trade secrets (i.e., if the employee can't leave, then the company's trade secrets have added protection).


What are the downsides of non-compete agreements?


The primary downside is that they restrict the flow of labor. If an employee believes that another job pays more, offers better benefits, or simply offers a better quality of life, that employee might still feel bound by a non-compete agreement (whether it is enforceable or not, see below).


On the aggregate, it may mean a less content, lower paid workforce (in contract to the possibility that it aids in job creation).


And non-competes can make your business less attractive to potential employees.


Are they enforceable?


Yes, in some cases. Different states have different laws regarding non-compete agreements. For example, in California they are generally unenforceable, but with important exceptions (for example, if you own a business and you decide to sell it, the buyer can request a non-compete) and with important restrictions (for example, they have to be limited by geography and length of time). Texas is more permissive than California, but is similar in context. I'll explain these more fully in a future post.


What is the FTC's new rule?


Similar to California law, the FTC rule would ban all non-compete agreements (as defined above, meaning after the conclusion of the employment) except those involving the sale of all or substantially all of the would-be employee's business.


But the FTC goes further. It includes "de facto non-compete clauses," which it defines to include (rather than limit to) (1) broadly-worded non-disclosure agreements that "effectively precludes" the employee from working in the same field, and (2) a clause requiring the employee to reimburse the employer for training. See proposed Rule 910(b)(2).


The proposed rule also makes it an "unfair method of competition" to try to get an employee to sign a non-compete, or to maintain a non-compete (meaning employers will be required to rescind or amend contracts with such clauses). The consequence is, in part, that it triggers potential enforcement by the FTC.


Who supports and opposes the proposed rule?


Several employee-focused organizations are in favor of the rule. For example, the National Employment Law Project supports the rule, as does the Open Markets Institute. And the US Chamber of Commerce back in 2021 stated its intent to challenge such a rule if it were implemented. It is early days yet, and as the comment period goes on, we will hear about other organizations taking firm stances on the rule. It is possible we will see a general trend toward employee groups supporting and employer groups opposing.


One notable opponent is FTC Commissioner Christine S. Wilson. Commissioner Wilson released a dissent from the proposed rule. In her 14-page dissent, she argued, among other things, that the rule constitutes a radical departure from the current framework, that it should be more fact-specific, and that there are legitimate business purposes for non-competes.


Will it face constitutional challenges?


Almost certainly, and the US Chamber of Commerce expressed as much in its statement, linked above.


Conclusion


The FTC has proposed a rule that generally bans non-compete agreements. The FTC is currently accepting comments on that rule, and there will no doubt be substantial support and opposition. If the rule goes into effect, we can anticipate serious (and perhaps well-funded) constitutional challenges to it. Employers and employees should be aware of the potential new change, and take this opportunity to make sure their existing employment agreements are consistent with their jurisdictions' now-existing rules and regulations.

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