PROPOSED FTC RULE WOULD VOID MOST NON-COMPETITION AGREEMENTS

Many employers utilize non-competition agreements to prevent former employees from using information obtained during their employment with regard to the company’s products, pricing, customers, etc., to disadvantage the company when going to work for a competitor.  In recent years, however, a trend has emerged by which state laws have been put into place limiting, for example, how long a non-compete can be, the categories of workers who can be required to sign a restrictive covenant, or the threshold compensation an individual must receive before they can be asked to sign a non-compete. 

On January 5, 2023, the Federal Trade Commission (FTC) issued a notice of proposed rulemaking that would label most non-competition agreements “unfair competition,” thereby rendering them null and void. 

The sole exception would be non-competes entered into as part of the sale of a business by an individual who owned 25% or more of the business that is being sold. 

This proposed rule would also prohibit “de facto” non-competition agreements which would tend to have the same effect of precluding a former employee from continuing working in the same industry.  Examples provided by the FTC include overly broad confidentiality agreements that would have the effect of precluding the worker from continuing to be employed in the same field, as well as agreements that require employees to repay training or similar costs if they leave the company during a certain specified time frame after the training is conducted. 

This new rule would not only impact non-competition agreements moving forward; it would also require the rescission of all existing non-competes, and employers would be required to provide written notice of rescission to employees in a form prescribed by the FTC. 

This proposed rule would also serve to pre-empt any inconsistent state laws. 

There is a 60-day notice and comment period, after which the FTC can issue a final rule.  We can anticipate that there may be objections to the proposed rule, and there could be challenges to the rule after it is finally implemented. 

Note: the proposed FTC rule does not impact reasonable non-solicitation (of customer or employee) covenants or confidentiality agreements.  Assuming that the new FTC rule is implemented, therefore, employers may want to focus moving forward on restrictive covenants containing these provisions, as opposed to non-competition requirements. 

If you have questions about this Employment Law Alert or wish to discuss the impact of this decision upon your business, please do not hesitate to contact Maury Nicely at Evans Harrison Hackett PLLC, 423/648-7851 or mnicely@ehhlaw.com.