The FTC Proposes a Ban on Non-Compete Agreements

Author: Tim Williams, Partner at Williams, Knack, & Burrows, P.C., our sister company

Background

The Federal Trade Commission (FTC) issued a proposed rule on January 5, 2023, that would prohibit employers from using non-compete agreements with their workers. The Biden Administration announced early on that it would seek to ban non-compete agreements. The impetus behind this move is the belief and evidence that non-compete agreements prevent employees from seeking better positions with competing employers and stifle wage growth by a significant amount.

What does the proposed rule do?

The proposed rule, if adopted in its current form, would require employers to:

1. Rescind all existing non-compete agreements no later than the rule’s effective date, which is not yet determined; and
2. Provide individual notice to each current and former worker that the worker’s non-compete agreement is no longer in effect. The proposed rule provides model language employers can use to satisfy this notice obligation.

Specific Provisions of the Rule

How does the FTC define “non-compete agreement”? The proposed rule defines a “non-compete agreement” as a contract that blocks an employee or independent contractor from working for a competing employer or starting a competing business within a certain geographic area and period of time after the worker’s engagement with the company ends.

The proposed rule would not strictly prohibit the use of non-solicit agreements, non-appropriation and confidentiality agreements, and employee poaching agreements; however, the use of such agreements or clauses to protect the employer would need to be carefully put together to guard against falling under the non-compete rule to avoid having them found to be de facto non-compete provisions. Carefully drafted non-solicitation, confidentiality and non-appropriation agreements should withstand such scrutiny, enabling employers to protect confidential information and customer relationships, as well as guarding against poaching of employees. Additionally, employers could still rely on the Federal Defend Trade Secrets Act and the Michigan Uniform Trade Secret Act to protect trade secret information.

Exceptions to the Rule

There is one key exception to the rule. The rule would not ban non-compete provisions agreed to in the sale of a business. Non-compete provisions are very often part of the agreements that set forth the terms and conditions of a business sale. This prevents the seller of a business from setting up shop in the same line of business in the same locale as the business they just sold.

Gameplan for Employers

Employers would have 180 days after the date of the rule is published to comply with its terms; however, there are some preliminary steps employers can consider to put their business in the best position, should the final rule take effect:

1. Revisit the company’s restrictive covenants, including non-compete, non-solicitation, non-appropriation and confidentiality agreements.
2. The employer should ask whether the non-compete agreements their company uses are necessary to protect the company’s legitimate business interests. Employers should also consider whether they can protect their interests with a less burdensome agreement, such as a properly-tailored customer non-solicitation or confidentiality provision.
3. Employers should speak up and file a comment with the FTC if they have something to say and support their comments with data, when possible, but be careful not to disclose confidential information. Our clients should coordinate with their Williams, Knack & Burrows, P.C. attorney if they would like guidance on this process.
4. Employers must get their trade secrets house in order. This is, perhaps, more important now than ever. The FTC cites the availability of trade secret protection as a factor that weighs in favor of banning non-competes. Employers should identify their trade secrets and put proper policies and procedures in place and limit trade secret access to a “need to know” basis. Employers should train employees on how to handle trade secrets and protect against theft and implement suitable technological controls. Enforcement of non-disclosure provisions will likely become increasingly more important as well, putting a larger burden on employers to prove breaches of said provisions by former workers, which are less black and white than a determination of a breach of a noncompete provision.