Joe Pettygrove and Aaron Williamson (photos provided)

On Jan. 5, the Federal Trade Commission published a Notice of Proposed Rulemaking, or NPRM. In non-legalese, that means a federal government agency announced plans to impose a new regulation. Specifically, the FTC announced its intent to broadly prohibit non-competition agreements, which are contracts in which an employee promises not to compete with their employer after they leave. There is a “notice and comment” period during which anyone can submit feedback supporting or opposing the proposed rule. In its current form, the FTC’s Non-Compete Rule:

  • Prohibits non-competes;
  • Prohibits employers from suggesting to workers that they are subject to non-competition restrictions;
  • Requires employers to tell those already subject to non-competes that those restrictions are no longer in effect;
  • Applies to all employers and all workers (whether classified as employees, independent contractors, interns, or otherwise); and
  • Recognizes a limited exception under which certain sellers may be subject to non-compete obligations in connection with the sale of the their business.

Other commonly used “restrictive covenants” – such as those limiting customer solicitation or employee poaching or prohibiting disclosure of confidential information – are not prohibited by the proposed Non-Compete Rule unless those alternative agreements  are drafted such that they effectively function as a non-compete.

The comment period for the Non-Compete Rule ends on March 6, 2023.  Assuming FTC does not withdraw the proposed rule, it would then issue a final rule. That final rule would be effective 60 days after publication, and employers would have 180 days after publication to come into compliance.

Why is FTC doing this?

It depends on who you ask. FTC says (in very short summary) that it has looked into the way U.S. businesses use non-compete agreements and concluded that employers too often abuse them in ways that prevent workers from being able to earn a living and stifle free market competition. Most employers would counter that it’s equally unfair for an employee to gain access to customers, goodwill, business strategy, training, etc. only to be able to turn around and immediately use their former employer’s investments in competition against them. Historically, each state has sought to balance employees’ and employers’ interests in their own different ways (legislatively or through case law). However, President Biden has long said he planned to explore  FTC’s authority in this arena and specifically instructed the agency to consider banning or limiting non-competes as far back as July of 2021. The FTC hasn’t previously taken much action in this area, and the scope of its power is a matter of debate.

How big a deal is this, and what happens next? 

This is a pretty big deal. Non-compete agreements are common across all types of businesses. Employers and employees alike frequently seek legal counsel to determine whether a new job complies with the individual’s non-compete, whether the non-compete is enforceable as written, and how to approach negotiation and litigation strategies to maintain or terminate subsequent employment. A federal prohibition on non-competes going forward – not to mention invalidating existing agreements – would be a seismic shift in the U.S. employment landscape.

This major move by a federal agency not typically active in this regulatory space is similar in many ways to the COVID-19 vaccine mandates promulgated over the last few years by OSHA, OFCCP, and DHS.  Like those mandates, the exact shape and scope of the Non-Compete rule may change at the agency level during the comment period, and employers interested in trying to impact the form of the final rule should consider submitting written comments to FTC.

Regardless of how the final rule “looks,” it may change further once the seemingly inevitable lawsuits challenging the final rule make their way through the courts. Also like the vaccine mandates, those impacted by the litigation process can do little but sit and wait (and watch) while the battle plays out. For many, it will make little sense to proactively cease using non-competes before the final rule is issued (or upheld). But for most, it will be worthwhile to examine whether existing non-compete practices are truly necessary and whether less restrictive alternatives can be prepared in the event the Non-Compete Rule survives.

Much can be done to protect a business using non-disclosure and non-solicitation agreements, as well as “non-contractual” strategies like controlling physical and electronic access to sensitive information, solid recruiting and hiring practices, and creatively identifying other ways to incentivize employees to stick around. Prudent employers will use the time during which the regulatory and litigation processes play out to examine the full range of tools at their disposal to prevent employees from wanting to leave in the first place.

Joe Pettygrove and Aaron Williamson are Employment Law Attorneys at Indianapolis-based Kroger, Garis & Regas, LLP. Opinions are for general information only and not legal advice.

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