Currently, an estimated 30 million workers in the United States are covered by non-compete agreements. The latest proposal from the Federal Trade Commission (FTC) seeks to alter this element of the employment landscape in one sweeping, unprecedented move. On January 5, 2023, the FTC proposed a new rule that, if enacted, would amount to a nearly complete nationwide ban on employers' use of non-compete agreements.
Refresher: Non-Compete Basics
Non-compete agreements are routinely found in employment contracts and sale of business contracts. In the employment contract context, an employee promises, for a limited period of time, not to engage in conduct that would increase competition for the employer. Typically, employees agree not to divulge trade secrets and other confidential information obtained while working for the employer, or agree to refrain from entering employment with the employer's direct business competitor.
Non-compete agreements help safeguard valuable customer relationships and confidential business information, including trade secrets. Given the protections afforded by restrictive covenants, employers can be more confident that the critical information they impart to their employees, and the crucial customer contacts they develop, will not be used against them later by a competitor.
The Proposed Rule
The FTC's proposed rule contains three key provisions that employers should keep on their radar: (1) a ban on non-compete agreements; (2) a recission requirement for existing non-compete agreements; and (3) a narrow exception for non-compete agreements in the sale of business context.
Ban on Non-Compete Agreements
The FTC's rule, which would supersede all conflicting state laws, effectively prohibits non-compete agreements. The proposed rule declares it to be an "unfair method of competition" for an employer to:
- Enter into or attempt to enter into a non-compete clause with a worker;
- Maintain with a worker a non-compete clause; or
- Represent to a worker that the worker is subject to a non-compete clause where the employer has no good faith basis to believe the worker is subject to an enforceable non-compete clause.
Notably, the proposed rule contains a broad definition of "worker" that would cover even high-level executives. Furthermore, the restriction is not limited to an employer's employees—employers would also lose the ability to enter non-compete agreements with independent contractors, consultants, interns, and volunteers, who are all within the ambit of the FTC's proposed rule.
In addition to barring employers from entering new non-compete agreements, the FTC's proposed rule invalidates existing non-compete agreements as well. The FTC's proposed restriction requires employers to rescind existing agreements and inform workers that such clauses are no longer in effect and will not be enforced against the worker. Specifically, if the proposed rule goes into effect, employers will be required to individually notify employees, such as by email or text, that their non-compete agreement has been rescinded.
Narrow Exception for Sale of Business
Finally, the FTC's proposed rule provides only an incredibly narrow sale-of-business exception. Non-compete agreements are routinely used in the sale-of-business context, in which the seller promises not to enter into a similar type of business within a specified geographic area for a limited time. While existing state law generally provides for such agreements, the FTC's new rule authorizes non-compete agreements in the sale of business context only for sellers that own at least 25% of a company.
Employers should not be pushing the panic button—at least not yet. The FTC's proposed rule still has several procedural hurdles and legal challenges to overcome before being enacted and will be open for public comment until March 20, 2023. Regardless of whether the proposed rule is ultimately enacted, the federal government's increasing hostility toward non-compete agreements should set off alarm bells for employers relying on non-compete agreements. Now is the time to consider alternative avenues for protecting confidential and proprietary information and ensuring that existing agreements are legally enforceable. Employers that have questions about the FTC's proposal to ban non-compete agreements, or the validity of their existing agreements, may contact the authors of this article or any other attorney in Venable's Labor and Employment Group.