FTC Proposes New Rule To Ban Non-Compete Agreements
On January 5, 2022 the Federal Trade Commission (“FTC”) published a notice of a proposed rulemaking that categorically deems all non-compete agreements “unfair methods of competition” and requires that all existing non-compete agreements be rescinded. If the proposed rule becomes final, all employers would be prohibited from enforcing non-compete agreements against all employees and “workers” without regard to any business justification, reasonableness or amount of consideration paid in exchange for a promise to not compete.
The proposed rule would prohibit any contractual term that prevents a worker from seeking or accepting employment or operating a business after separating from an employer. The rule applies to all employees and also to all “workers,” broadly defined as independent contractors, externs, interns, volunteers, apprentices and sole proprietors who provide a service to a customer or client.
Significantly, the proposed rule would not “grandfather” in existing non-compete agreements. Rather, in the event the proposed rule becomes final, employers would be required to rescind all non-compete provisions and inform workers in writing that the agreement is no longer in effect and will not be enforced.
While the proposed rule states that it does not prohibit non-disclosure or customer non-solicitation agreements, it nevertheless states that broad non-disclosure agreements or similar covenants that amount to de facto non-compete agreements would also be banned. The proposed rule does not specifically address non-solicitation agreements.
There is only one exception in the proposed rule - - non-compete agreements entered into in connection with the sale of a business. However, this exception applies only for those individuals who hold a 25% or greater ownership interest in the business being sold.
If the proposed rule, or a similar rule to that proposed, becomes final after the 60 day comment period, there is certain to be immediate litigation filed in court challenging the FTC’s statutory authority to promulgate this or a similar rule. Therefore, it is unlikely that any final rule banning non-compete agreements will be enforced within the next 6 months or so.
The FTC’s proposed rule is yet one more instance of the federal government’s continuing efforts to end the use of non-competes. Courts here in Ohio and elsewhere are also increasingly hesitant to fully enforce non-compete agreements.
Going forward, companies that utilize non-competes must carefully consider whether a non-compete provision is necessary and, if yes, to fully document the reasons, limit the duration to no more than one year, limit the geographic restriction to a radius where the employee provides services and limit the prohibited activities to only those directly related to and competitive with the former employer.
For more information on this topic or if you want to re-examine your existing agreements and policies related thereto, please contact your attorney at RBS.