Non-Compete Agreements – To Ban or not to ban? That is the Question.
Recent Trends in Non-Compete Agreements
Are non-compete agreements (colloquially referred to as “non-competes”) on their way out? Over the past year, more states are either prohibiting the enforce ability of non-competes or greatly restricting their use, hinting at a growing trend away from non-competes. The Federal Trade Commission (“FTC”), which is always on the hunt for antitrust and anti competitive behavior, has picked up the scent of this growing movement, and has proposed a new rule banning non-compete clauses in all employment contracts. Are you an employer who normally includes non-compete clauses in employment contracts or requires employees to sign a non-compete agreement? Are you an employee who is sick and tired of worrying if working for “X” employer may put you in violation of your non- compete obligation with your former employer? Below we will discuss non-competes in general, look at state and national trends, and provide recommendations to employers for navigating these issues.
What are non-competes?
A non-compete agreement imposes post-employment restrictions on the employee. Often, non-competes take the form of a contractual clause in an employment agreement or as a separate legal agreement. These restrictions typically prohibit employees from either working for a competitive employer or starting a competitive business within a specific geographic area and for a specific period of time. Non-competes have traditionally been associated with high salaried, high skilled jobs or for executive-level employees. Recently, however, non-competes can be found in employment agreements for hourly, low-wage workers. Given their restrictive nature and potential harm to competition in a free-trade society, non-competes have been hotly debated amongst policymakers, economists, and employers for years. The main benefit of having a non-compete agreement is to protect a company’s intellectual property, resources, and confidential and proprietary information from being used by a competitor. Usually, employees with access to a company’s intellectual property, confidential information or trade secrets would be required to enter a non-compete. Opponents to the wide use of non-competes argue that non-competes are being used far more broadly, and their overuse suppresses wages and restricts competition.
Non-competes vary in their enforce ability from state to state. Few states, such as California, prohibit all non compete agreements. Eleven states impose limitations and restrictions on non-competes. For instance, D.C., Virginia, and Maryland prohibit non-competes for low-wage employees, while permitting non-competes for those receiving compensation above a certain threshold. Most states prohibit or limit non-competes for specific professions such as physicians.
On January 5, 2023, the FTC proposed a new rule banning non-competes from employment contracts on the basis that the non compete clauses are an unfair method of competition. Relying on recent research to support the proposed rule, the FTC has observed that non-compete clauses have negatively affected competition “in labor markets” which has resulted “in reduced wages for workers across the labor force—including workers not bound by non-compete clauses.” 88 Fed. Reg. 3482 (Jan. 19, 2023). The FTC, tasked with rooting out anti-competitive behavior by the Federal Trade Commission Act (“FTC ACT”), wants to establish a rule that the use of non-competes by employers is an unfair method of competition and anti competitive. Under such a rule, any employer attempting to enter into a non-compete with a worker or represent to a worker that the worker is subject to a non compete will be in violation of Section 5 of the FTC Act and subject to civil penalties, including fines. The proposed FTC rule also requires employers to rescind any existing non-compete clauses and provide notice to employees that they are no longer subject to any non-compete obligations. If the FTC issues this non-compete ban as a final rule, employers would be prohibited from enforcing existing non-competes from the rule’s date of compliance. The FTC has broadly defined “employer” as “any natural person, partnership, corporation association, or other legal entity, including any person acting under color or authority of state law, that hires or contracts with a worker to work for the person.” Employers will have to provide notice to their employees about this new non-compete ban. The federal ban would supersede any existing state statute, regulation, or interpretation of non-competes that conflict with FTC’s proposed regulation, unless the state regulation offers the worker greater protection.
Call for Comments
The current FTC position is that a categorical ban on non-competes would achieve the best result of remedying “the adverse effects of non-compete on compete clauses on competition in labor markets and product and service markets.” 88 Fed. Reg. at 3513. However, the FTC is open to alternatives to the broad ban that would achieve similar goals, such as “including different standards for senior executives.” Id. Therefore, the FTC has made a call for comments from any and all interested persons or businesses regarding this proposed rule. Comments must be received by April 19, 2023 and can be filed online at https://www.ftc.gov/legal- library/browse/federal-register notices/non-compete-clause-rulemaking or sent by mail to the FTC.
Recommendations for Employers
Employers should review existing employment contracts to see if they have any non- compete clauses or language restricting an employee from working in a similar field or within a specific geographic location. While employers do not need to rescind any (currently enforceable) non-competes, they should be considering other methods, such as garden leave, as the nationwide trend is clearly turning against non-competes.
If you have any questions about how this proposed rule making may affect your business, or any other employment issues, please do not hesitate to contact us.