Sometimes when a new employment-related law or regulation is proposed, I swear that I can hear a collective “YAAAWWWN” emanate from the employers of America.
“Fine, we’ll put up another poster in the breakroom that no one will ever look at.”
However, this was definitely not the case on January 5, 2023, when the Federal Trade Commission (“FTC”) announced a proposed rule that would effectively ban all non-competition agreements, affectionately known as non-competes, with employees. In fact, when this was announced, I think I might have felt a slight earthquake from all HR managers bolting upright in their chairs.
Simply put, the FTC’s proposal is a very big deal and, IF it takes effect, it will send shockwaves throughout the business world. In this case, the “IF” is critical, and there are many reasons to doubt that the proposed rule will ever take effect. But before we get to that, let’s talk about the proposal and non-competition agreements generally.
At present, non-competition restrictions are generally governed by state law, and each state has its own, often complicated, criteria for determining whether a restriction is enforceable. For example, in many states, like New York, courts use a multi-factor test, looking at things like an employer’s “legitimate interest” and the “reasonableness” of the geographic and temporal scope. As you can imagine, these multi-factor tests often lead to protracted litigation. In contrast, California and some other states expressly prohibit almost all employment-related non-competes.
According to FTC Chair Lina M. Kahn, non-compete restrictions are patently unfair because they “block workers from freely switching jobs, depriving them of higher wages and better working conditions, and depriving businesses of a talent pool that they need to build and expand.”
To address the perceived “unfairness,” the FTC’s proposed rule would effectively prohibit all employers from using non-compete clauses for any of their workers (including employees, independent contractors, interns, etc.). Specifically, the FTC’s new rule would make it illegal for an employer to:
- enter into or attempt to enter into a non-compete with a worker;
- maintain a non-compete with a worker (and would require employers to provide written notice to current workers with non-competes that the restrictions are now void); or
- represent to a worker, under certain circumstances, that the worker is subject to a non-compete.
Note that there are no exceptions for any specific industries or classes of employees. The only exception addressed in the proposed rule is in connection with the sale of a business (e.g., to keep a store owner from selling the store and then immediately opening a competing business next door).
The FTC has provided the public with 60 days to comment on the proposed rule. After reviewing the comments, the FTC will likely issue a final rule, which would take effect 180 days after publication and may or may not include revisions based on the public comments.
As I mentioned above, if this rule were to become final, it would likely create significant disruption in almost every industry. I can’t imagine a single employer who wouldn’t be impacted in some way. Essential employees who have access to a company’s most important secrets and clients might bolt to a competitor the next day. Potential hires who were once off limits may now be available. Even if your company has never used non-competes, this rule change, if it takes effect, will still likely impact your business in both expected and unexpected ways.
Now let’s address the “IF” that keeps appearing in this column. I cannot predict the future, but I have a gut feeling that the FTC’s proposed rule is unlikely to ever take effect, especially in its current form.
According to the FTC, it has the authority to issue this rule because the Federal Trade Commission Act, the law under which the FTC was established, declares that “unfair methods of competition” are unlawful and directs the FTC take action, including by making rules and regulations, “to prevent persons, partnerships, or corporations . . . from using unfair methods of competition in or affecting commerce.” In the FTC’s mind, it’s simply doing the job it was assigned to do.
Others disagree. They believe that the FTC has overreached its authority and is interfering in an area that has always been governed by state law. For better or for worse, I predict that these “others” will likely include at least one United States District Court judge who will enjoin the rule before it can ever take effect and that the U.S. Supreme Court will eventually have the final say. Needless to say, the U.S. Supreme Court, with its current makeup, is very suspicious of alleged regulatory “overreach.”
In fact, in a dissenting statement, FTC Commissioner Christine S. Wilson, the sole vote against the proposed rule (which passed 3-1 on partisan lines) said something similar: “In short, today’s proposed rule will lead to protracted litigation in which the Commission is unlikely to prevail.”
If you’ve made it this far in the column, you may now be wondering, “Gee, why did Ben spend so much time writing about a proposed rule that he doesn’t think will ever take effect?”
Even if the rule doesn’t survive, I think that this proposal serves as writing on the wall that many non-competes, especially in “blue” states are not long for this world. Even in states where non-competes are legal, litigation over them is often protracted, expensive and unpredictable. New state laws prohibiting non-competes are proposed on a regular basis.
If your business uses non-competes or is considering doing so, I do not believe that the FTC’s proposed rule should force you to make immediate and significant changes. However, it does serve as an important reminder to closely review your use (or non-use) of non-competes and other restrictive covenants (non-solicitation, confidentiality, IP assignment) and think hard, with legal counsel of course, about whether your needs are being met and whether you should consider any adjustments.
And if I’m wrong and the rule ends up taking effect, well, hold on tight for the earthquake that is coming.