January 9, 2023
On January 5, 2023, the Federal Trade Commission issued a proposed rule which would, in effect, nullify all non-competition agreements (non-competes) between businesses and their employees or independent contractors based on the determination that non-competes constitute unfair methods of competition. See Non-Compete Clause Rulemaking | Federal Trade Commission (ftc.gov). If adopted in its current form, this rule will create a massively destabilizing event for the many employers which utilize non-competes in order to stay in business.
The proposed rule would be a seismic shift for employers who rely on non-competes to protect their investments through training employees/contractors and providing them proprietary and sensitive business information. It would also impose on employers specific notice obligations to both current and past employees/contractors of recission of the non-compete and require that such notice be made through written or digital methods within 45 days of recission of the existing non-competition clause. The proposed rule also recommends specific language that should be included in that notice.
Expectedly, the sole exception to this mandatory recission is where the non-compete is correlative to the sale of a business, where the seller agrees not to form a competing business after he has received compensation from the sale of that business. This exception has long been held enforceable in almost every state; however, this is the only exception specifically set out in the proposed rule.
It should be noted that the proposed rule does not apply to non-disclosure or non-solicitation clauses included in employment/contractor agreements that also contain non-compete agreements. However, the proposed rule specifically states that if a non-disclosure agreement is overly broad, it shall be treated as a non-compete agreement and therefore be rendered unenforceable.
Legal challenges to the FTC’s proposed rule are seemingly inevitable. Certainly, it is anticipated that many chambers of commerce and other industry associations and councils will fight adoption of the proposed rule vigorously. The argument from these groups will likely be that the FTC does not have the authority to take this action; that such action can be mandated only through congressional legislation. As such, if the rule is implemented, it will likely not take effect immediately or in its current form.
Nonetheless, employers who utilize non-compete agreements must be vigilant as if the rule is adopted and remains effective during any legal challenges. The employer must be in compliance with the rule’s very specific language requirements and, as importantly, immediately revise their employment and independent contractor agreements to remove non-compete clauses and to bolster and strengthen non-disclosure/non-solicitation clauses as strongly as possible in order to protect their interests, especially as they relate to proprietary information, intellectual property and trade secrets.
For more information regarding this proposed rule, and how to avoid legal pitfalls for non-compliance, please do not hesitate to contact me or one of the other employment law attorneys at Weston Hurd LLP.
Matthew K. Seeley is a partner at Weston Hurd LLP who focuses his practice on business, commercial litigation and labor and employment matters. He can be reached at firstname.lastname@example.org or 216-687-3291.