FTC Ban on Non-Compete Agreements
Based on its authority to prevent unfair competition, the Federal Trade Commission (FTC) has proposed a new 570 page rule that would effectively put a ban on non-compete agreements across the United States. This proposed rule marks a significant shift in the regulation of these restrictive employment contracts and will require companies to reconsider their existing IP protection strategy.
Non-Compete Agreements
A non-compete agreement is a contract that prohibits an employee from working for a competitor or starting a competing business for a certain period of time after leaving their current employer. The goal of a non-compete is to protect an employer’s trade secrets, customer relationships, and competitive advantage by restricting an employee’s ability to use this information to compete against the former employer. Non-competes are generally controversial and face greater legal scrutiny, as they can be seen as overly restrictive and limiting an individual’s right to work which is generally disfavored.
Estimates suggest nearly 1 in 5 U.S. workers are currently subject to non-compete agreements. Some argue that non-compete agreements harm workers by limiting their ability to seek higher wages and better working conditions, while also harming competition by blocking new businesses from entering the market.
Non-compete agreements and non-disclosure (or confidentiality) agreements are both types of restrictive covenants that are commonly used in employment contracts but they have key differences one is directed to employment, the other is directed to disclosure of confidential information.
Non-Disclosure Agreements
In contrast to non-compete agreements, a non-disclosure agreement (NDA) or confidentiality agreement is a contract that prohibits an employee from sharing or using an employer’s confidential or proprietary information, even after the employment relationship ends. The purpose of an NDA is to safeguard an employer’s sensitive business information, such as trade secrets, formulas, client lists, and other intellectual property. While both types of agreements aim to protect an employer’s interests, the key distinction is that a non-compete restricts an employee’s future employment options, whereas an NDA focuses solely on preventing the disclosure of confidential information.
Background of FTC Rule
The new rule is part of the current administration’s effort to encouraging competition in the marketplace and prevent businesses from using “unfair methods of competition.” As stated during the rule making process, “[t]he freedom to change jobs is core to economic liberty and to a competitive, thriving economy” and that “[n]oncompetes block workers from freely switching jobs, depriving them of higher wages and better working conditions, and depriving businesses of a talent pool that they need to build and expand. By ending this practice, the FTC’s proposed rule would promote greater dynamism, innovation, and healthy competition.”
Private employers and chambers of commerce strongly opposed the new Rule, claiming that the FTC does not have the legal authority to regulate competition in this way and that the proposed rule could allows the government to micromanaging every aspect of a company.
Rule Banning Non-Compete Agreements
The proposed ban on non-compete agreements will impact anyone who works for a for-profit employer, whether paid or unpaid, and to independent contractors. The Rule will not apply to non-profit employers and the Rule allows limited use of non-compete agreements in the case of a franchisee and franchisor relation and in connection with the sale of a business if the worker holds at least a 25% ownership stake in the entity being sold.
Under the proposed ban on non-compete agreements, employers are prohibited from entering into new non-competes with any employee, including senior executives (which is a change from the proposed rule), or representing to any employee or former employee that the employee is subject to a non-compete. The new rule does allow for the continued enforcement of a previously entered into non-compete against a senior executive, as long as senior executive meets certain qualifications.
Employers must also notify all other current and former workers that any existing non-compete agreements are no longer enforceable.
Key Highlights of the Proposed FTC Ban on Non-Compete Agreements:
- The rule would prohibit employers from entering into non-compete agreements with workers, including employees, independent contractors, interns, and volunteers;
- Senior Executive non-competes and other limited cases allow for limited use of non-compete agreements going forward;
- Existing non-compete agreements would be required to be rescinded; and
- Employers must notify workers that these clauses are no longer enforceable.
While the FTC’s proposed rule represents a dramatic shift, it is already facing significant legal challenges in Texas where a tax firm and the U.S. Chamber of Commerce have already brought suit challenging the new rules. Please contact one of our attorneys if you have any questions about the Rules or enforcement of non-compete agreements in general.