In January, the Federal Trade Commission (“FTC”) issued a Notice of Proposed Rulemaking (the “Proposed Rule”) that would upend the status quo and bar manufacturers and other employers from using non-compete clauses to protect their trade secrets and confidential information as well as jeopardizing the historical investments made by companies in training their executives, engineers, and sales teams. The Proposed Rule also puts at risk the valuable good will employers possess with existing customers and vendors. The FTC’s proposal constitutes an unprecedented expansion of the FTC’s authority to regulate employer/worker contractual terms as unfair methods of competition under Section 5 of the FTC Act. The FTC, however, is still soliciting comments to its ill-advised Proposed Rule.
The Proposed Rule Bans All Non-Compete Agreements
The Proposed Rule would ban all existing and future agreements that prevent a worker from seeking or accepting employment, or operating a business, after the conclusion of the worker’s employment with the employer. The Proposed Rule generally extends to any contract terms written “so broadly” that they “effectively preclude the worker from working in the same field”—even if those limitations are reasonable in scope (i.e., the activity, duration and geography of the prohibited conduct). That means the FTC’s Proposed Rule will almost certainly also impair the ability to enforce non-disclosure agreements, non-solicitation agreements, and intellectual property agreements. The Proposed Rule would affect not only W-2 employees, but independent contractors, and would also bar training repayment agreements if they are not sufficiently tied to the employer’s cost of training an employee.
Generally, the only exceptions recognized by the Proposed Rule are non-compete clauses in franchisor/franchisee agreements and those related to transactions for the sale of a business. Those will still be reviewed for reasonability under antitrust laws.
Concerned Businesses Must Submit Public Comments by March 10, 2023
The public comment period on the Proposed Rule concludes in early March 2023, and the Proposed Rule may be finalized as soon as the end of 2023. Once the Proposed Rule is finalized, affected businesses would have 180 days to rescind or renegotiate all contracts containing “non-compete” clauses or to notify all workers that there is no restriction on them taking work with a competitor or starting a competing business.
The FTC has requested feedback on several issues of concern to employers, including the competitive impact of the Proposed Rule, the cost of compliance, and four more narrow proposed “Alternatives” which nonetheless introduce significant concerns about FTC line-drawing and enforcement. Bowman and Brooke’s Commercial Litigation team is available to assist you in addressing questions you may have regarding the Proposed Rule and in preparing comments to submit to the FTC.
The Proposed Rule Potentially Creates Free Agency for Top Executives, Engineers, Researchers, and Sales Teams
One of the primary purposes of non-compete agreements is to prophylactically protect a company from workers with access to trade secrets or confidential information (e.g., technical, research, or financial information) being hired away by competitors or starting competing businesses using information learned in the course of their current employment. The Proposed Rule explicitly outlaws these affirmative proactive precautions and relegates manufacturers and other businesses to suing for damages once their trade secrets and confidential information are in use by competitors. The FTC’s Proposed Rule (if adopted) may result in non-competes being replaced with an increase in litigation seeking injunctive relief to prevent use of trade secrets and confidential information by former employees and their new employers.
The Proposed Rule Overturns the Legal Framework of 47 States and the District of Columbia
Currently, only three states (California, North Dakota, and Oklahoma) have a general prohibition generally barring employers from entering into non-competes. The remaining states and territories generally enforce non-competes only to the extent they are supported by a legitimate business reason or need and reasonable considering the scope of prohibited activities, geographical scope of the non-compete and its duration. The Proposed Rule expressly preempts these legal regimes, causing uncertainty and additional expense for employers.
The Proposed Rule will Entail Significant Costs of Compliance
Approximately one in five workers in the United States (nearly 30 million) have signed non-compete agreements with their employers. Each of these agreements would need to be evaluated, re-negotiated, or rescinded within 180 days if the Proposed Rule is implemented. Accordingly, the Proposed Rule may be associated with significant, immediate, and necessary activities within a company’s legal and human resources departments if it is adopted. Bowman and Brooke LLP’s Commercial Litigation team is available to assist clients with compliance efforts if the Proposed Rule goes into effect.
Significantly, the FTC underestimated costs of implementing the Proposed Rule by employers. The FTC estimated a cost of less than $10 per company in human resources costs (representing 20 minutes of work) to communicate to all workers that their non-compete clauses are no longer in effect. It also estimated the cost of legal counsel during this process at less than $500 per business, using an assumed $61.54 hourly rate for attorneys that fails to reflect true market rates. These additional costs associated with the FTC’s Proposed Rule provide further grounds for employers to consider offering input to the FTC.
The Proposed Rule Faces Likely Legal Challenges, Creating Additional Uncertainty for Businesses
The Proposed Rule was adopted by a 3-1 vote, and Commissioner Christine Wilson’s dissenting statement provides a potential roadmap for the legal challenges to follow. First, she notes the FTC has not historically viewed non-compete clauses to be unfair methods of competition, and second, that Congress likely did not grant the FTC rulemaking authority in this area. She noted three specific legal concerns:
- Congress did not intend to grant the FTC authority to promulgate substantive competition rules under the statutes it cites as authority for the Proposed Rule.
- The Proposed Rule may exceed the limitations imposed by the Supreme Court in the Major Questions Doctrine, which applies when an agency seeks to regulate much of the economy or intrude in an area traditionally reserved to state law.
- The Proposed Rule may violate the non-delegation doctrine, which prohibits agencies from using unauthorized methods to accomplish statutory goals.
Bowman and Brooke’s Attorneys are Available to Assist
Substantial additional legal and economic grounds also exist for opposing and providing useful comments to the FTC concerning its Proposed Rule.
If you have questions or concerns regarding the Proposed Rule’s affect on your business’s ability to protect your customer lists, trade secrets, confidential information, or investment in employee training, the attorneys at Bowman and Brooke LLP are available to assist. We are experienced in preparing effective comments to proposed rulemaking by state and federal officials, and have deep experience evaluating, negotiating, and litigating restrictive employment agreements. Comments are currently due on March 10, 2023.