FTC Proposes Rule Limiting Non-competes

Many of the employment-related agreements we write for our clients include non-compete language. This FTC ruling could affect any current agreements as well as the new employment-related agreements we write for our clients.

In recent years, non-compete agreements have become a hot topic in the United States. These documents, which prevent employees from working for a competitor after leaving their current employer, have been criticized for limiting job mobility and innovation. As a result, the Federal Trade Commission (FTC) has proposed a rule to ban them.

In this blog post, we will explore the status of the FTC proposal and the potential positive and negative implications of eliminating non-compete agreements.

Employers have used non-compete agreements for decades to protect their trade secrets and intellectual property. However, in recent years, they have started to use them broadly, even requiring them for low-wage workers like sandwich makers, hair stylists and even camp counselors. This has led to criticism that non-compete agreements unfairly limit workers’ ability to find new employment and advance in their careers.

The FTC’s proposed rule, which was announced in July 2021, seeks to ban non-compete agreements for most workers in the United States. The proposed rule would apply to both employees and independent contractors. It would prohibit employers from using non-compete agreements except in limited circumstances.

Specifically, they would only be allowed in cases where an employee has access to trade secrets or other sensitive information, or where the employee can make significant business decisions on behalf of the employer.

Worker’s side of non-competes:
The FTC’s proposed rule has received mixed reactions from various stakeholders. Supporters of the rule argue that non-compete agreements restrict job mobility and make it difficult for workers to find new employment or start their own businesses. They also argue that non-compete agreements can stifle innovation by preventing talented workers from moving to companies where they can better utilize their skills.

Companies’ side of non-competes:
Opponents of the rule argue that non-compete agreements are necessary to protect their trade secrets and other confidential information. They also argue that non-compete agreements can help employers retain valuable employees and prevent those employees from taking their skills and knowledge to competitors.

Some opponents of the rule also argue that the FTC does not have the authority to regulate non-compete agreements because they are typically regulated at the state level.

The latest update:
As of February 2023, the FTC has not yet finalized its proposed rule. The agency is currently reviewing public comments that were submitted in response to it. The comment period closed on September 14, 2021; the FTC has received over 80 comments from a variety of stakeholders, including businesses, employees, trade organizations and academics.

It’s worth noting that several states have already taken steps to limit or ban non-compete agreements. For example, in 2019, the state of Washington passed a law that prohibits them for employees who earn less than $100,000 per year. Other states, such as California, North Dakota and Oklahoma, have banned them altogether.

The status of the FTC proposal is still uncertain, but it bears watching – whether from the perspective of an employee who may be subject to such limitations or from that of a business owner, who may want to safeguard certain proprietary information or processes from competitors.

Wondering how this FTC ruling could affect your employment-related agreements?

Effective Date: March 1, 2023. This post was derived from sources that we believe to be accurate as of the Effective Date. Notwithstanding that, we do not guarantee the accuracy of the information provided. Further, circumstances after the Effective Date may change and such changed circumstances are obviously not considered in this posting. No action should be taken based on the information provided in this post without first discussing this topic with your appropriate advisors. Not for commercial reprint.