FTC Proposes Nationwide Noncompete Ban

By Jill Kahn Marshall and Alice Jump

On January 5, 2023, the Federal Trade Commission (FTC) announced that it was proposing a rule to ban noncompete clauses from all employee contracts throughout the country. These noncompetes, FTC Commissioner Lina Khan argued, “block workers from freely switching jobs, depriving them of higher wages and better working conditions and depriving businesses of a talent pool that they need to build and expand.” If implemented, the rule would upend the common business practice, in which employers require workers to agree not to join a competing enterprise for a matter of months or years after their employment with the company ends. In addition to employees, the ban would apply to agreements with independent contractors and interns as well. The most significant exception to the proposed rule is that noncompetes would still be lawful when applied to a person selling their interest in a business. The proposal has already seen a great deal of push back from the business community, including the US Chamber of Commerce, which says that the FTC is exceeding the scope of its authority in promulgating this rule.

Proponents of noncompete agreements argue that these arrangements encourage companies to invest in employee training and in building the careers of their employees, who are more likely to stay with the same company if subject to a noncompete. They also argue that alternatives to noncompetes like confidentiality agreements and non-solicitation agreements do not go far enough, because employees generally can’t hide when they go to work for a competitor, but may be able to stealthily disclose confidential trade secrets or client information once reemployed.

While noncompetes were initially conceived of as a way to prevent high level executives from jumping ship to assist with or start a competing business using their prior employer’s confidential information or trade secrets, their use has expanded to the point that many low wage workers, like fast food workers or security guards, are also being asked to sign such agreements as a condition of employment.  And while high level executives may bargain for so-called “garden leave,” or salary continuation payments, during the noncompete period, low wage workers are unlikely to get such a payout. There has therefore been a push in recent years to ban noncompetes with respect to low wage workers in particular, based on the theory that these workers have the least bargaining power to push back against such restrictions, and are also unlikely to gain access to confidential company information or trade secrets that they could bring to a competitor. In recent years, 11 states have enacted such bans, but the FTC’s proposal would go much further.

In the majority of states currently, including New York, noncompetes are already unenforceable if they are overly broad, which typically means too long in duration, too wide in geographic scope, or covering too broad of an industry. However, many employers utilize overbroad noncompetes at any rate, which intimidate workers who do not want to be in the position of defending themselves in a legal battle, even if they are likely to ultimately succeed. For this reason, the proposed rule would apply to noncompete agreements entered into prior to its enactment, and companies would be required to proactively inform their employees that these provisions are no longer enforceable. This aspect of the rule will surely be subject to legal challenges, where businesses argue that these agreements were already bargained for and employees provided with incentives that cannot be clawed back, or that sensitive information has already been disclosed in reliance on these agreements. Perhaps instructively, however, legislation enacted in March 2022 banning the use of mandatory arbitration clauses in certain employment agreements also applies to agreements entered into before the law went into effect as long as the claim accrued after the law was passed, and this aspect of the law has yet to be overturned.

Like many areas of employment law, the use of noncompetes is currently governed by a patchwork of state laws. For example, noncompetes in New York are examined by the courts on a case-by-case basis and will be upheld if narrowly tailored to meet a legitimate business need. Massachusetts passed a law in 2018 which requires, among other restrictions, that noncompetes be offered only in exchange for garden leave or other consideration. California has banned the practice altogether. A national rule may help businesses with workers in multiple states (increasingly common with the rise of remote work) by providing uniform regulation of this area. The FTC has invited the public to submit comments on the proposed rule through March 10, 2023, after which the FTC may make changes before issuing a final rule. Many believe that the rule will ultimately be narrowed from the broad ban that the Commission has initially proposed, and no matter what rule the FTC finally implements, it is likely to be challenged in court. Employers and employees alike should follow these developments as the final rule may have a large impact on businesses’ ability to utilize noncompete agreements.

This article is intended as a general discussion of these issues only and is not to be considered legal advice or relied upon. For more information, please contact RPJ Partner Jill Kahn Marshall, who counsels individuals and corporations in the areas of employment law, litigation and dispute resolution, and healthcare. Ms. Marshall is admitted to practice law in New York and Massachusetts, as well as the District Courts for Massachusetts and the Southern and Eastern Districts of New York.