FTC Proposes New Rule for Non-Compete Agreements
It has been an exciting week and we have a bit of news in the business and corporate law space. If you’re familiar with employment contracts or HR matters in the business and corporate world, you’ve probably come across the terms “non-compete” and “non-competition agreement”. On January 5th, 2023, the Federal Trade Commission (FTC) proposed a new rule that would in effect ban non-compete agreements between employers and employees in most circumstances. The second component of this proposal, if passed, would require employers to rescind any existing Non-Compete Agreements with both current and former workers. This announcement occurs just one day after the Federal Trade Commission filed several lawsuits alleging that three different employers had non-compete agreements in place that violate the Federal Trade Commission Act.
What Does the Federal Trade Commission Have to do with Non-Compete Agreements?
Essentially, the Federal Trade Commission is charged with policing or trying to ensure that companies don’t participate in unfair methods of competition. The premise of this new proposed law is groundbreaking and is especially striking in the legal space. Most states have laws, statutes, and case law on the books that permit a framework and a structure for non-competition agreements to be used by employers.
Now, the Federal Trade Commission, under the current administration, is seeking to redefine or better articulate the unfairness around non-compete agreements. According to the Federal Trade Commission’s website and the article regarding the lawsuits that the Federal Trade Commission has filed, Chair Lina M. Khan believes that these cases, “highlight how non-competes can block workers from securing higher wages and prevent businesses from being able to compete.” The Federal Trade Commission is taking the position that they are “committed to ensuring that workers have the freedom to seek higher wages and better working conditions without unfair restrictions by employers.”
How Will This Impact My Business?
Typically, when an employer or company institutes a non-competition agreement, it is the employee has had access to certain sensitive information of the company, leading the company to seek to protect itself against potential exposure. By signing a non-competition agreement, the employee is agreeing effectively to leave those things behind upon exiting the company. Companies view this as a protective element for their businesses, maintaining the integrity of their proprietary information, their client information, etc. The Federal Trade Commission is taking the position that these are unreasonable restraints on trade, unfair methods of competition, and are things that stifle competition. Currently, the proposed rule is very broad in the proposed elimination and banning of all non-competition agreements.
What Does the Future Look Like for This Proposal?
There are several alternatives to a non-competition agreement that can be implemented should this new proposal be passed. First, we will need to see how this proceeds in the courts and how this proposal may be negotiated; for example, there could be wage limitations on the non-competition agreements, meaning the agreements would only be used for employees earning below a certain threshold per year ($100,000). There may be additional qualifying categories that could develop during the negotiations.
This is still a fairly new proposal and is continuing to be developed. We don’t yet have a firm handle on when the rule would go into effect, but right now this is a first step. Comments on the proposed rule are due 60 days from the introduction date on January 5th (early March). Afterwards, the Federal Trade Commission can finalize that proposed rule based on input from the public.
There is not currently a clear timeline as to how long it will take to finalize that rule, but it’s currently drafted in such a way that seems to clearly indicate that there will be a 180 day (six months) compliance window after the rule is finalized. In other words, the Federal Trade Commission, upon finalizing and publishing the proposed rule, would set a date by which companies have to comply. We anticipate a window of about another 240 days total, which would include the time to collect final comments from the public, and then the time put the new rule into effect for compliance.
How Will the FTC’s Lawsuits Impact This Proposal?
There may be appeal rights from either party. Depending on how negotiations and appeals progress, appealing a case like this up to the United States Supreme Court could be a possibility as this becomes potentially a federal question. It will be interesting to see how the current panel of justices rule on this as historically, non-compete laws (and restrictive covenants generally) have been fairly “friendly” towards the employers for quite some time. I am not sure that the current court is well-positioned to rule in favor of the employees, so it would be interesting to see how the current panel of SCOTUS would interpret this new broad sweeping restriction by the FTC.
Where Can I Find Up to Date Information on This?
We’ll keep updating this as we get more information, and as more commentary comes out around the proposed rule and around those lawsuits that the FTC has brought to try to strike down what they call unfair or overly restrictive non-competes. If this law were to go into effect, it would have repercussions across virtually every industry, unless there are exceptions or curtailments made in comments to the rule before the rule becomes final. So, we have a lot to digest, a lot to think through, and a lot to read through and work through in the coming days and weeks. We will keep an eye on this and be available to discuss this topic further on future videos and content that we’ll put out. We are also available to discuss this issue with you one-on-one as desired.
If you would like to discuss the impacts to your business as this develops, please don’t hesitate to reach out to my office at 919-900-4720 or [email protected]
Stay Tuned!
