January 17, 2023
As a follow-up to Weston Hurd’s January 9, 2023, news alert regarding the Federal Trade Commission’s (FTC’s) proposed rule which would nullify nearly all non-competition agreements, and as identified in that alert, the U.S. Chamber of Commerce (Chamber) has indicated that it will likely bring suit against the FTC if its proposed ban is adopted.
The Chamber is the country’s largest business trade group and has issued a statement indicating that the proposed ban is “blatantly unlawful.” (https://www.uschamber.com/finance/antitrust/the-ftcs-noncompete-rulemaking-is-blatantly-unlawful) As predicted, the Chamber argues that such a ban would contradict numerous states’ statutory and common laws regarding the interpretation and enforcement of non-compete clauses in employment and independent contractor agreements. The Chamber’s stance is that the FTC does not have authority to promulgate such a rule based on the limited scope of Section 5 of the Federal Trade Commission Act banning unfair methods of competition. The Chamber and some legal observers believe that the proposed rule would exceed the FTC’s mandate and undermine legislative authority by adopting a rule which would act as an enforceable law, a mechanism that is uniquely invested solely within the legislative branch.
Indeed, there is already legislation that has been introduced in the U.S. Senate which would effectively result in a similar ban. Senate Bill 483, dubbed the Workforce Mobility Act of 2021 (https://www.congress.gov/bill/117th-congress/senate-bill/483) would prohibit the use of “non-competition agreements in the context of commercial enterprises except under certain circumstances.” This bill has been introduced but no additional action has been taken on it since then, though that may change in light of the FTC’s newly proposed rule. The bill, like the proposed FTC rule, would carve out an exception for the seller of a business who would agree, as part of that sale, to refrain from competing with the buyer in a similar industry within geographic areas where the business that was sold conducted business prior to the agreement.
It seems inevitable that the FTC’s proposed rule will be contested in court when it is adopted and enforced by the FTC. It is also likely that industry groups other than the Chamber may seek judicial intervention to prohibit the rule’s adoption. However, even should such judicial actions provide relief to the Chamber and other industry groups, there is the possibility that legislation already introduced in Congress may receive additional attention and eventually result in a similar outcome.
While certainly a non-compete ban is likely to be mandated in the immediate future, as it is possible if not likely that a court would stay enforcement of the rule, once adopted, until the validity of the FTC’s authority has been judicially established, the writing is on the wall as to treatment of non-competes at the federal level. This, in and of itself, should put employers on notice that, if they choose to enter into employment agreements or independent contractor agreements, they should ensure that severability clauses are included therein so that, if a non-compete provision is deemed unenforceable, such will not render the entirety of the employment or independent contractor agreement void. Furthermore, the agreements’ non-disclosure and non-solicitation clauses should be reviewed so, should the non-compete terms be voided either through executive or legislative action, those remaining restrictive covenants would remain viable and provide a level of protection to employers’ trade secrets, intellectual property, and other proprietary information which an employee may have access to during his or her term of employment. With those protections in place, even should the employee be free to immediately compete with a previous employer without any geographical or temporal restrictions, the agreement would still preclude the disclosure of protected information acquired with the previous employer and would ensure that the employee could not solicit customers or clients of past employers.
If you are an employer with current employment or independent contractor agreements or wish to seek the protections which such an agreement may offer, do not hesitate to contact Matthew Seeley or any of the employment attorneys at Weston Hurd LLP for further information and assistance in the preparation and review of such agreements.
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.