In early January 2023, the U.S. Federal Trade Commission announced a proposed rule that would bar employers from entering into non-competition agreements with employees and require employers to rescind any existing non-competition agreements. Many sources give the impression that the ban is in place or just around the corner. While this is certainly news worth following, we strongly encourage employers and employees to understand one critical thing: employee non-competition agreements are not dead yet.
Non-competes have been highly contested over the past several years. New sessions of state legislatures have generated draft bills (and media reports) to ban non-competition agreements for various industries or professions, and there are many examples of actual litigation over non-competition agreements. But the list of cases where a court concludes that a particular employee’s non-competition agreement is too broad and, therefore, unenforceable is just as long as courts who have enforced non-competition agreements.
Not all non-competition laws are created equal.
Employee non-competition agreements have been around for decades. In one form or another, they may be enforceable in 47 of the 50 states. We will not try to outline the nuances of each state’s laws here, but that is the point. Employers or employees addressing non-competition agreements in any state should ensure that they (or their legal counsel) have carefully reviewed the contract and the applicable state’s law. Given that the legal standard in many states focuses on what a “reasonable” restriction is, there are rarely easy answers in determining if this employee in this state in this set of circumstances may or may not work for a competitor.
The proposed federal rule might change that, but caution is the best approach until that happens.
What would a federal rule on non-competition agreements mean for my business?
The proposed federal rule would ban non-competition agreements with almost all workers (employees, independent contractors, externs, interns, and volunteers). Employers would also be required to rescind all such agreements and give individualized notices to any current or former employee with a non-competition agreement. A key exception in the proposal would permit non-competitions in agreements for the purchase or sale of a business or a person’s ownership stake in a company.
But again, that only matters if the proposed federal rule takes effect. This proposed administrative rule is going through an extended period for any interested person to submit comments. After the comments are received and considered, revisions may be made before the Federal Trade Commission approves a final version. However, any FTC ruling will almost certainly be followed by litigation to challenge whether the Commission has the authority to undertake this rule-making.
There is no way to predict the final provisions or when they might be put in place. Even if the current version is ultimately adopted, it will not become effective for another 180 days.
What should I do for non-competition agreements for my business?
Many employers and employees have strong opinions about non-competition agreements. Without question, an essential part of administrative rule-making is the opportunity to submit your comments. If you would like guidance on making use of that opportunity, or if you would like to consult with one of our attorneys regarding the enforceability or preparation of a non-competition agreement, please feel free to contact us at 513-852-6000.