Federal Trade Commission Proposes Ban on Non-Competition Agreements

The Federal Trade Commission (“FTC”) has promulgated a Rule banning non-competition agreements, which will go into effect 120 days following publication of the rule in the Federal Register. While generally prohibiting such agreements, the Rule contains certain carve-outs as to applicability.

First, the Rule distinguishes between “senior executives” and “workers other than senior executives.” “Senior executives” are defined as those in a “policy-making position” and earning at least $151,164 on an annual basis. “Workers other than senior executives” are everyone else.

For senior executives, the Rule prohibits the entering into or enforcement of a non-compete after the effective date of the Rule, unless the non-compete was entered into before the effective date. For workers other than senior executives, the Rule prohibits the entering into or enforcement of any non-compete clause including existing non-compete clauses.

Second. while people often refer to all restrictive covenants as “noncompetes,” the proposed Rule only applies to “true’ non-competition agreements, namely those that prohibit subsequent employment at a competitor, whether new or existing, and however that term is defined. The Rule does not purport to address nondisclosure agreements or non-solicitation agreements, which by their nature do not actually prohibit employment with a competitor. Further, there are various other legal protections, such as the Uniform Trade Secrets Act, which prohibit the disclosure of an employer’s confidential and proprietary business information without regard to whether there is an explicit restrictive covenant in place.

While non-competition agreements originated with C-Suite executives, they have grown exponentially in popularity – and now govern an estimated 30 million employees — many of whom are lower- skilled and lower- wage employees. Critics of non-competition agreements contend that they are now overused to prevent defections from an employer rather than protect any confidential business information. On the other hand, proponents of such agreements counter that they are absolutely necessary for an employer’s protection, and courts considering their enforcement can always determine whether enforcement is unnecessary or not in the public interest.

A few additional takeaways about the proposed rule should be noted.

The Rule expressly does not pertain to the sales of businesses. That distinction is significant for businesses engaging in mergers, acquisitions, or similar transactions and the rationale is more compelling there because such parties are presumably negotiating the details of how a business and its goodwill will be transferred.

Second, the proposed Rule will not affect non-solicitation clauses, which prohibit employees from soliciting customers or clients from their former employer. Those clauses serve to protect businesses from unfair competition and enforcement of such provisions does not necessarily hamper an employee ‘s efforts to obtain subsequent employment. Likewise, the proposed rule will not impact or supersede nondisclosure provisions based on state or federal trade secret laws.

The proposed Rule requires employers to notify all employees except senior executives that they are no longer subject to any non-compete entered into before the effective date of the Rule.

Some observers have questioned the authority of the FTC to legislate in this area and legal challenges are highly likely. Such litigation likely will curtail enforcement action until such challenges are resolved. In any event, employers should review their current noncompetition policies and consult with employment counsel to keep abreast of developments in this in this fast-changing area.