By now, you may have heard the news from the Federal Trade Commission (“FTC”) just after the start of the new year (January 5, 2023) about the prospective nationwide ban on the use of non-compete agreements.
Specifically, the FTC’s new rule would make it illegal for a business owner to:
enter into or attempt to enter into a noncompete with a worker;
maintain a noncompete with a worker; or
represent to a worker, under certain circumstances, that the worker is subject to a noncompete.
The rule would also require business owners to rescind their existing non-competes and actively inform workers that such agreements are no longer valid. In fact, the FTC has already provided model language to use to notify workers of the rescission.
This federal rule would also replace any state law in place which permits non-competes and the lone exception to this rule is that non-competes could still be used in the event of a sale of a business. In other words, if you reside in a state that currently permits non-compete agreements (and many states do), once enacted, this federal rule will overrule the state law and essentially be the law of the land.
That doesn’t mean if you have a non-compete in place, as of January 5, it is suddenly invalid and you are free to compete. What it means is the government has proposed a rule, is taking comments on that proposed rule through March 10, 2023, and once finalized, published, and put into effect 180 days later, it is expected that the final version of the rule will invalidate the vast majority of non-compete agreements for workers in the United States.
So yes, this is major news, but this news does not change anything until the rule is actually in effect.
For those unfamiliar with the use of non-competition agreements, such agreements are generally used by business owners to restrict workers from starting a competitive operation or from joining a competitive company within a defined period of time after the working arrangement ends.
Non-compete agreements are also used in buy/sell agreements following the sale of a business to restrict the seller from opening a competing operation which would potentially devalue the business itself.
From the perspective of the business owner, the logic behind non-compete agreements is that business owners spend time and money developing their own proprietary business processes and methods on how they operate their business, how they sell their products or services, how they market their products or services, how they train their workforce, their client, vendor and lead lists, etc., and they want to be able to legally restrict workers who have gained knowledge of such information from utilizing this same information in connection with a competitive operation which would harm business.
Likewise, during negotiations involving the sale of a business, the purchaser wants assurances that it will have the cooperation and assistance from the seller in transitioning the business over to the buyer and not having the seller compete for a period of time as such competition could diminish the value of the business itself. Notably, as stated above, the prospective rule from the FTC would not apply to non-competes used in the purchase/sale of a business.
Each state has its own rules on restrictive covenants (including non-competes) and the federal government has been mostly deferential to states to govern the enforceability of restrictive covenants through statutes and the court systems—although now through its press release, it appears the FTC wants to “reinvigorate” and remind people of Section 5 of the FTC Act which bans “unfair methods of competition.”
From a worker standpoint, non-competes restrict a worker’s ability to freely work at any job and utilize the knowledge and skill he or she has learned in a particular line of business. The restrictions also wind up resulting in lasting periods of unemployment, workers taking less in pay in their next jobs, or possibly dealing with expensive lawsuits. While not given significant attention, it should be noted that workers are almost always at a financial disadvantage to defend themselves through the legal process against enforcement of a non-compete (whether the agreement is valid or not) or to properly challenge the misuse of a non-compete. Companies can and do regularly outspend ex-employees in litigation and often force them into submission.
Furthermore, there are some (or many, depending on who you ask) companies who overuse non-competes, scenarios where such agreements simply do not make sense (e.g. where a worker did not have access to trade secrets or anything proprietary), or situations where restrictions interfere with the ability of patients or customers to decide where they can purchase products or services.
I’ve personally commented on the distinction between the enforceability of non-competes for lawyers versus physicians in the State of Florida and discussed how non-competes could potentially impair patient care for physicians in the article entitled, “Physician Non-Compete Agreements: A Necessary Protection or an Unnecessary Restriction and Impairment on Patient Care” (South Florida Hospital News, April 1, 2022).
It is my belief that any restrictions between business owners and their workers should never get in the way of a customer/patient/consumer’s decision on whom they would like to work with or buy products or services from.
The concerns on the worker side were studied and acknowledged by the FTC when it succinctly stated in the opening line of its press release that non competes are a “widespread and often exploitative practice that suppresses wages, hampers innovation, and blocks entrepreneurs from starting new businesses.”
Indeed, the FTC ended its press release noting, “The Federal Trade Commission works to promote competition, and protect and educate consumers.” (emphasis added).
Thus, the intention by the government with this rule is to open up opportunities for workers (that they wouldn’t ordinarily have due to being restricted) and the FTC believes that the result will be an increase in nearly $300 billion per year in wages and expanded career opportunities for about 30 million American workers.
Certainly the government would benefit by this rule as more workers, more wages = more contributors to FICA and the economy. However, what people need to know about this rule is that once the final rule is published, business owners would have 180 days to comply. The 180 days will be following the end of the comment period which ends March 10, 2023. So it is possible this rule comes into effect towards the end of 2023 or beginning of 2024.
In the meantime, I expect pushback from employers and business owners who want to maintain the freedom to contract as they so please with their workers and to take the means necessary to protect their proprietary information, trade secrets and client relationships. I also expect to see legal challenges to the FTC’s ability to even institute and enforce such a nationwide rule (similar to the legal challenges we saw when the government through OSHA enacted a mandatory COVID-19 vaccination).
While this rule remains pending, business owners should stay abreast of the potential enactment of the final version of the rule, be in regular contact with their employment and labor law counsel, and be prepared to make changes to their existing agreements and to send out appropriate notifications to their ex-workers.
Business owners should consider how to protect their proprietary information and trade secrets through other means. Additionally, nothing prevents a business owner from today deciding it wants to abolish non-competes before the government mandates it. Some people believe that having fewer worker restrictions in place for workers will result in better employment retention.
Workers should review their own agreements to see whether they have a non-compete in place and also stay in touch with legal counsel and/or monitor if/when this law becomes effective to potentially notify their existing or former employer of its obligations to rescind the non-compete.
Needless to say, 2023 is off to an interesting start in the area of workplace law and I expect this to be just the beginning of many changes ahead. Stay tuned.
Adam Kemper, is the managing partner of The Workplace Law Firm. Adam can be reached at akemper@theworkplacelawfirm.com
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