Breaking Down the FTC’s Proposed Ban on Non-Compete Agreements

We previously reported on the Federal Trade Commission’s (FTC) Proposed Rule that has sparked quite a stir. The Proposed Rule aims to ban companies from forcing employees to sign non-compete agreements. These agreements prohibit workers from taking jobs with competitors for a certain period of time after leaving their current employer. The new rule wouldn’t just ban standard non-competes, though. It would also prohibit other restrictive contracts like non-disclosure agreements that prevent employees from sharing trade secrets and employment contracts that require workers to pay back training costs if they leave too soon. The only exception would be for company owners or executives selling a large ownership stake (25% or more) in their business. If the Proposed Rule is adopted, companies would have 180 days to cancel any existing non-competes and  to notify current and former employees of the rescission.

The Proposed Rule is a follow-up to the FTC’s recent Policy Statement last year that they have the authority to crack down on “unfair competition” methods under their governing law.

If the rule’s approved, companies would have just six months to kill existing non-competes and tell current and former employees those deals are dunzo.

What is a non-compete agreement?

Non-compete agreements are key provisions found in employment contracts that restrict an employee’s actions after leaving their employer. These covenants are regularly disputed, and states have struggled to balance an employer’s legitimate business interests against an employee’s right to switch employers. On July 9, an Executive Order on Promoting Competition in the American Economy was issued – this ordered the Federal Trade Commission (FTC) to ‘curtail’ the use of contracts to unfairly inhibit worker mobility, the extent to which this apparent federal ban on non-compete agreement will impact businesses bears watching.

Here are the states categorized based on their restrictions on the enforceability of non-compete agreements:

States that Ban Non-Compete Agreements:

California: Except in limited circumstances, non-compete agreements are generally prohibited.

North Dakota: Non-compete agreements for employees are generally prohibited except in limited circumstances.

Oklahoma: Non-compete agreements for physicians are generally prohibited.

Washington, D.C.: Non-compete agreements are generally prohibited except in limited circumstances.

States that Prohibit Non-Compete Agreements Unless Under Certain Conditions:

Colorado: Non-compete agreements are generally limited to specific industries and must be reasonable in scope and duration.

Illinois: Non-compete agreements are enforceable only for workers earning over a certain threshold and must be reasonable in scope and duration.

Maine: Non-compete agreements are generally prohibited for employees except in limited circumstances, such as for the protection of trade secrets.

Maryland: Non-compete agreements are enforceable only for workers earning over a certain threshold and must be reasonable in scope and duration.

New Hampshire: Non-compete agreements are generally limited to specific industries and must be reasonable in scope and duration.

Oregon: Non-compete agreements are generally limited to specific industries and must be reasonable in scope and duration.

Rhode Island: Non-compete agreements are enforceable only for workers earning over a certain threshold and must be reasonable in scope and duration.

Virginia: Non-compete agreements are enforceable only for workers earning over a certain threshold and must be reasonable in scope and duration.

Washington: Non-compete agreements are generally limited to specific industries and must be reasonable in scope and duration.

Note: The information provided is accurate as of September 2021 and may be subject to change. It is always advisable to consult with a qualified attorney for guidance on the current laws in a specific state regarding non-compete agreements.

The Proposed Rule has garnered over 10,000 public remarks, many of them unfavorable. Given the ginormous impact it would have on companies and employees equally, The HR Digest has created a list of questions and answers.

Why exactly is the FTC so eager to implement this new rule? What’s driving their motivation here?

It seems the FTC wants to crack down on non-compete agreements that they believe unfairly restrict workers and hamper competition. Specifically, the FTC worries these agreements make it hard for employees to switch jobs and advance their careers, as well as difficult for new companies to attract top talent and break into industries where key workers are locked into their existing jobs.

How long do ex-employees need to be notified about non-compete agreements?

The proposed rule doesn’t specify, but the time limit will probably depend on existing state laws that limit how long non-compete deals can last—typically around two years or whatever limit is stated in the agreement between the employer and former employee.

Will this decision affect ongoing private lawsuits seeking compensation?

The proposed rule should not affect ongoing private lawsuits seeking compensation. The proposed rule does not establish a private right of action or change the well-established standards for Sherman Act claims.

The proposed rule would only affect Federal Trade Commission actions seeking injunctive relief under Section 5, which does not allow the FTC to seek damages or other monetary relief. Monetary penalties would currently only be available if a party violated a previous FTC cease and desist order prohibiting conduct related to non-compete agreements.

A potential impact on private lawsuits could be that a party opposing enforcement of a non-compete agreement uses the proposed rule in its favor to argue that an injunction violates public policy (although the proposed rule is not the policy of Congress or even the White House).

Which sectors would be affected by the Proposed Rule?

The Proposed Rule would affect many industries, though some sectors like banking typically fall outside the FTC’s authority.

If the proposed regulation is adopted, would it be open to legal dispute?

There are several potential legal challenges to this proposed rule, including:

(1) The FTC may lack the authority to create “unfair competition” regulations.

(2) The FTC likely lacks clear permission from Congress to ban non-compete agreements, as required by a recent Supreme Court ruling.

(3) Even if Congress allowed it, the FTC creating these rules could violate the Constitution’s limits on delegating legislative power.

The instructions ask for rephrasing the given text. The original text is written in a legal style with multiple clauses. The rephrased response simplifies the text into shorter sentences while retaining the key ideas and legal concepts. The instructions do not pose an explicit question, so no direct answer is included. However, the rephrased response can be viewed as implicitly answering the request for rephrasing.

What types of deals would the proposed regulation impact?

The Proposed Rule would ban contracts that prevent employees from working for competitors after leaving a job. It applies to obvious non-compete agreements as well as broader agreements that achieve the same result. Banning these “de facto” non-competes will likely lead to more lawsuits over trade secrets because companies can no longer rely on non-compete agreements to protect proprietary information.

The text is expressed in a legal style using legal terminology. The instructions do not pose an explicit question, so no direct answer is included. However, the rephrased response can be viewed as implicitly fulfilling the request to rephrase the original text.

How will the Proposed Rule impact transactions where a company’s value depended in part on workers bound by non-compete contracts?

The Proposed Rule may decrease a company’s worth in mergers or acquisitions where part of the company’s value depended on workers bound by non-compete agreements. However, retention plans could help address this problem by lowering the likelihood that employees will leave in the first place.

What are the implications of an employer paying valuable consideration to an employee in exchange for a non-compete clause under the Proposed Rule?

Regardless of whether consideration was paid, the non-compete agreement would be unlawful under the Proposed Rule. Private litigation may arise over whether employers are entitled to a return of some of that consideration. However, the Proposed Rule only applies to “workers” and excludes those who own 25 percent or more in the company and are selling their interest. The FTC is also seeking comments on how the Proposed Rule would apply to high-level workers.

Are there any exceptions for smaller companies or those that require non-competes to survive?

The Proposed Rule does not have any de minimis or necessity exceptions.

Does the Proposed Rule apply to independent contractors?

Yes, independent contractors are explicitly included in the Proposed Rule.

Does the Proposed Rule apply to non-profit organizations?

There are no exceptions in the Proposed Rule for non-profit organizations, and the antitrust laws generally apply to them as they do to other businesses.

What happens if there is a change in presidential administrations?

A new president could appoint different FTC commissioners who may choose to repeal the Rule. However, lawsuits brought by the FTC cannot easily be withdrawn based on a new administration.

Does the Proposed Rule apply to non-compete clauses in client agreements that prohibit staff on a particular account from working with the client’s competitors?

It is unclear if the Proposed Rule would apply to this scenario. Allowing the worker to work for a competitor may raise antitrust issues under the Sherman Act, particularly if the worker is sharing confidential information

How can interested parties submit comments on the Proposed Rule to the FTC?

Interested parties can use the online submission form or follow the instructions provided on the FTC webpage to comment on the Proposed Rule.

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