On Jan. 5, 2021, the Federal Trade Commission (FTC) proposed prohibiting non-compete agreements among employers that could impede employee mobility and reduce competition. The proposed rule has caused some concern among employers and attorneys as it may impact their ability to retain employees or protect intellectual property. Let's take a closer look at what this proposal means for employers and workers.
FTC Rationale
The FTC opines that approximately one in five American workers, which is estimated to be around 30 million people, are bound by non-compete clauses. A non-compete clause is a contractual term between an employer and a worker that prevents 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.
The FTC further argues that because non-compete clauses prevent workers from leaving jobs and decrease competition, they lower wages for all workers. Finally, the FTC argues that non-compete clauses prevent new businesses from forming, stifling entrepreneurship and preventing innovation, "which would otherwise occur when workers are able to broadly share their ideas."
Proposed Rule
The Federal Trade Commission proposes preventing employers from entering into non-compete clauses with workers and requiring employers to rescind existing non-compete clauses. The Commission estimates that the proposed rule would increase American workers' earnings between $250 billion and $296 billion per year.
Under the proposal, employers could not ask paid or unpaid employees, independent contractors, interns, volunteers, or apprentices to sign a non-compete agreement. Simply stated, the proposal seeks to eliminate all non-compete agreements and restrictions with limited exceptions.
The rule would also apply retroactively, meaning employers would have 45 days upon implementation of the rule to notify existing and former employees that any existing non-compete agreements have been rescinded. These changes could open up more opportunities for workers who may have previously been bound by such contracts, allowing them to pursue other opportunities without fear of legal repercussions from their former employers.
Business Transaction Exception
The proposal contains an exclusion for business sales. More specifically, the ban on non-competes shall not apply to a non-compete clause that is entered into by a person who is "selling a business entity or otherwise disposing of all of the person's ownership interest in the business entity, or by a person who is selling all or substantially all of a business entity's operating assets, when the person restricted by the non-compete clause is a substantial owner of, or substantial member or substantial partner in, the business entity at the time the person enters into the non-compete clause." Non-compete clauses covered by this exception would remain subject to Federal antitrust law as well as all other applicable laws.
The FTC described non-competes as "a widespread and often exploitative practice that suppresses wages, hampers innovation, and blocks entrepreneurs from starting new businesses. By stopping this practice, the agency estimates that the new proposed rule could increase wages by nearly $300 billion per year and expand career opportunities for about 30 million Americans.
State Laws
Some states, including, California, Colorado, Illinois, Maine, Maryland, New Hampshire, North, Dakota, Oklahoma, Oregon, Rhode Island, Virginia and Washington have already restricted or banned the use of noncompete agreements, but the FTC proposal would make the ban a nationwide policy.
Implications for Employers
If implemented, the proposed rule would significantly impact the way employers manage their employees, especially with respect to retaining key personnel or protecting their intellectual property from competitors. Employers should be aware of how this proposal could affect their retention efforts or ability to protect trade secrets.
Alternative Strategies for Protection
Many employers rely on non-compete agreements to protect trade secrets from competitors or ensure key personnel remain loyal and do not leave a company abruptly after being trained in valuable skillsets or processes. Going forward, if this ban is enacted, many employers will have to consider alternative methods of protection when structuring employment contracts with new hires or current employees. Some possible strategies include using confidentiality agreements or having former employees sign nondisclosure agreements that state they will not share any confidential information with anyone outside the company during or after their employment period ends. These measures can help protect sensitive data and prevent competitors from gaining an unfair advantage over your business operations.
Public Comments
The public and employers can submit comments on the proposal within 60 days after the Federal Register publishes the proposed rule. The rule would take effect 180 days after the final version is published.
Conclusion
The proposed rule is still in the comment period, and it remains to be seen whether it will be adopted as final. Employers and attorneys should monitor the situation and be prepared to make changes to their non-compete agreements if necessary. Have you been following the proposed FTC rule changes? What do you think about them? Share your thoughts in the comments below.
If you would like more information about this proposed rule or would like to discuss your employment agreements and/or policies, please do not hesitate to contact us.
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