FTC proposes to ban non-compete clauses

Employment lawyer explains what HR leaders need to know

FTC proposes to ban non-compete clauses

The Federal Trade Commission (FTC) has proposed a new rule that would ban employers from imposing non-compete clauses on their employees.

A non-compete clause, as defined by the FTC, is a contractual term between an employer and a worker that prevents the latter blocks 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.

Traditionally, employers include these clauses in employment agreements and employees don’t even realize they exist until they give their two weeks’ notice. Then, it’s the HR leader’s duty to inform employees that they can’t work for a competitor for a specific amount of time (usually anywhere from six months to two years).

Approximately 30 million American workers are bound by a non-compete clause, according to the FTC, which estimates the proposed rule would increase workers’ earnings between $250 billion and $296 billion per year.

The proposed rule essentially prohibits all non-compete agreements except those entered as part of the sale of a business and requires employers to rescind all non-compete agreements currently in place, and to do so within 180 days of the date of the final rule publication. Written notification of the rescission must be sent to all employees who were subject to non-compete agreements, according to employment lawyer Robert T. Quackenboss, partner at international law firm Hunton Andrews Kurth LLP, which has offices in Los Angeles and San Francisco.

“Philosophically, the current FTC places greater value on an employee’s freedom of mobility than on an employer’s right to protect its confidential business information and intellectual property,” Quackenboss told HRD. “The FTC sees non-compete agreements as an ‘unfair method of competition’ because they prevent competitor entities from hiring the most qualified individuals. In this way, the FTC perceives non-compete agreements as stifling innovation.”

However, Quackenboss argues that non-compete agreements have been very effective when carefully drafted and deployed in the proper circumstances. Their purposes include protecting an employer’s business secrets and confidential information, especially if an employee who obtained that info wants to move to a direct competitor.

“Businesses make significant investments in innovation, which is valuable because competitors don’t have the same products, know-how or intellectual property,” Quackenboss says. “Non-competes are a reasonable and effective means of protecting the confidentiality of that information from competitors. They also protect an employer’s investment in specialized employee training. For an employee to receive such training, and then depart to use those skills to benefit a competitor, is a loss that an employer should rightfully be permitted to protect against.”

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Is it time to ditch non-compete clauses, anyway?

While some non-compete agreements are ineffective because they’re drafted poorly or impose more restrictions than are necessary, Quackenboss says, state laws and courts already guard against such overreach. In addition to the courts, state governments, particularly those on the Democrat side, are making it tougher to enforce non-competes.

For example, a Colorado law went into effect last August that voids all non-compete agreements that aren’t entered into with a worker making at least the cap for “highly compensated” workers (in 2022, the threshold was $101,250); aren’t designed to protect trade secrets; or are broader than necessary to protect the employer’s “legitimate interest in protecting trade secrets.”

Despite the federal government’s sentiment and recent legislation, Quackenboss believes it’s “too early” for HR leaders to toss aside non-compete agreements. After all, the terms of the final rule may change, and some of the FTC’s commentary suggests that the agency may be open to making further “carve outs” to the ban, such as for C-suite level executives or higher-wage employees.

In addition, the proposal (and final rule) will almost certainly invite prompt litigation and review by the courts, which may also impact the scope of the final rule. Quackenboss says there are valid arguments that the FTC has exceeded its authority by issuing this rule under any terms. 

“Employers who currently rely on non-compete agreements may be best served by planning an alternative program in the event it will be needed,” Quackenboss says. “If non-compete agreements become disallowed, what additional tools can the employer deploy or strengthen to try to compensate? Non-disclosure agreements, non-solicitation of customer agreements, physical and electronic security measures, among other tools, may be useful. It’s not too early for employers, in consultation with legal counsel, to begin envisioning what those tools will look like.”

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