FTC Prohibits the Use of Non-Competition Agreements 

The Federal Trade Commission (FTC) recently proposed a new rule that would prohibit the use of non-competition agreements and clauses in almost all instances. This unprecedented rule will be a drastic departure from the current legal framework. As one FTC Commissioner acknowledged when concurring in the extension of the public comment period for the rule: “[T]he proposed rule is a departure from hundreds of years of precedent and would prohibit conduct that 47 states allow.…” Nevertheless, it is the FTC’s position that the current legal framework has allowed for the prevalent use of non-competes with negative consequences—the use of non-competes “has negatively affected competition in labor markets, resulting in reduced wages for workers across the labor force—including workers not bound by non-compete clauses…by suppressing labor mobility, non-compete clauses have negatively affected competition in product and service markets in several ways.” This blog provides an overview of the proposed rule, as well as a discussion of its effects and how employers can still legally protect their businesses. The operative portion of the rule provides: “It is an unfair method of competition for an employer to enter into or attempt to enter into a non-compete clause with a worker; maintain with a worker a non-compete clause; or represent to a worker that the worker is subject to a non-compete clause where the employer has no good faith basis to believe that the worker is subject to an enforceable non-compete clause.” The term “worker” is defined broadly to mean “a natural person who works, whether paid or unpaid, for an employer. The term includes, without limitation, an employee, individual classified as an independent contractor, extern, intern, volunteer, apprentice, or sole proprietor who provides a service to a client or customer.” A few of the limited exceptions to the rule are (1) a franchisee in a franchisee-franchisor relationship; (2) the sale of a business, whether it is a sale of the ownership interest in the business entity or the sale of all or substantially all of a business’s assets. The former, however, is only applicable to substantial owners of the business, which are persons with at least 25% ownership interest. Now that the comment period for the rule has closed, employers must prepare to comply when it goes into effect. Importantly, the rule will apply both prospectively, as well as retroactively to non-competes previously entered with current and former workers. While it is generally best practice for employers to retain an up-to-date record of each worker subject to a non-compete, the worker’s contact information, and the terms of the non-compete, such records will be vital in complying with this rule. Employers must provide individualized notice to all workers subject to non-competes to inform them that their non-competes are no longer in effect and cannot be enforced by the employer. For many businesses, particularly small businesses, this will result in significant time and expense to the owners and could be the most burdensome and difficult part of compliance. However, the FTC recognizes that employers may not have current contact information for all former workers, and consequently, require notice only if the worker’s contact information is readily available. Employers may wonder what they can do to protect their legitimate business interests without running afoul of the rule. Employers may still use, and the FTC encourages employers to use, alternative means such as confidentiality/non-disclosure agreements and non-solicitation of clients, customers, and other workers. However, the FTC makes clear that these alternatives must be less-restrictive and tailored to individual workers, such that they are not overbroad to the point they operate as non-competes themselves. In addition, employers will want to make sure that they actually protect their legitimate business interests and confidential or proprietary information, as well as that such protections are necessary for each worker on an individual basis, not simply requiring the same thing for all workers. Finally, if they are not doing so already, employers must take advantage of and use the various protections afforded to them by state and federal law, such as intellectual property laws. Some intellectual property protections may arise automatically upon creation, but it is always best practice to register trademarks, patents, and copyrights. With respect to trade secrets, which are not registered, employers must continue to implement safeguards and procedures to ensure such information is secured and protected. These types of laws will not be affected by the FTC rule and apply to everyone, not just workers. Regardless of the size of your business and whether you are starting a new business or have been operating a business for years, the new FTC rule is a perfect example that all business owners must stay up to date with current laws.  Like most issues that arise in the life cycle of a business, an attorney should be consulted to determine what actions are necessary for compliance. Starr Law Firm, P.C. and its attorneys are able to discuss this matter, as well as other matters that may be affecting your business.