Last month, the Federal Trade Commission (“FTC”) proposed a new rule that would ban nearly all noncompete agreements.
Specifically, the proposed rule would supersede all state laws and render it illegal to enter into or maintain any noncompete agreement, thus requiring employers to rescind current noncompete clauses and notify relevant employees of the same. Thus, employers would be required to review all existing employment agreements for non-compete clauses and notify any affected current or former employees that such clauses are being rescinded. Simultaneously, the employee would retain all other benefits of the agreement which contained the noncompete language.
The restrictions apply to current and former employees as well as independent contractors, interns, and volunteers. The preclusion even extends to companies that operate as independent contractors to businesses – including service providers and consulting firms.
The narrow exception to this ban applies in situations where an owner of or partner in a business is selling their business or their interest in it; provided, however that such interest in the business is 25% or more. Thus, a departing partner in a long-standing business would be allowed to immediately compete with her prior company on a buyout as long as she held less than 25% of the equity in the same. Serious concerns remain about the adverse outcome this change will have on the value of such a minority interest, and the willingness of any company to buy out a partner without the ability to preclude the partner from competing immediately after the buyout.
Furthermore, concerns remain about the enforceability of non-solicitation, confidentiality and other types of provisions that may be found to be the functional equivalent of a non-compete clause. Broad language could be subject to challenge in the future.
From the FTC’s perspective, it proposed the rule because it believes noncompete clauses hamper competition and innovation. It specifically noted that nearly 20% of U.S. workers are currently covered by one and estimated that the proposed rule may increase wages by $300 billion per year, while also leading to consumer spending of an additional $150 billion annually.
At this point, it remains to be seen whether this proposed rule will survive the myriad of procedural hurdles it faces at the FTC. Even if it ultimately becomes law, we believe the issue will be ripe for the courts to determine. For example, we believe the courts, including the Supreme Court, would scrutinize the application of the ban on preexisting agreements that take away the benefit of the bargain from the employer while leaving the employee in the same position. The next step in this process is for the FTC to obtain public comments on the rule through March 10, 2023.
The Wagoner Firm will continue to follow these developments and our clients and friends apprised. We remain available to discuss any specific questions or concerns you may have and can assist with drafting and reviewing employment agreements and noncompete language at your convenience. Please do not hesitate to contact us!