January 12, 2023 • Anne-Marie Mizel
Category: Legal Updates
The Federal Trade Commission issued a proposed rule on January 5, 2023, that would ban the use of so-called “non-compete” agreements, which are often used in certain industries to protect intellectual property and the companies’ investment in training their employees. According to the FTC, approximately 30 million employees are bound by such agreements, and because they decrease competition for workers, they lower wages across the board. “Non-compete clauses also prevent new businesses from forming, stifling entrepreneurship, and prevent novel innovation which would otherwise occur when workers are able to broadly share their ideas.” The FTC estimates that its proposed rule would increase American workers’ earnings “between $250 billion and $296 billion per year.”
The proposed rule would also prohibit broad non-disclosure agreements that could effectively prohibit the employee from seeking employment in the same field, as well as contractual terms that would require reimbursement of the company’s training costs, “where the required payment is not reasonably related to the costs the employer incurred for training the worker.” The proposed rule as currently drafted will require rescission of any current non-compete agreements to which an employer is party by the compliance date (180 days after date of publication of the final rule), and would require notice of same to any affected workers. An exception would be created to allow non-compete agreements for a business owner or founder who then goes on to sell the business.
The proposed rule would supersede state laws, but the fact is that many states already restrict the effectiveness of non-compete clauses, limiting geographical scope, time period, and other factors that tie into the reasonableness of such agreements. Because they are so limited and difficult to enforce, it is often more reasonable for employers simply to adopt more easily enforceable agreements, such as confidentiality agreements with respect to specifically proprietary information and prohibitions on poaching employees or clients. This is especially true for companies that do business in multiple states, because the enforceability of non-compete clauses currently vary greatly from state to state, whereas confidentiality agreements and no-poaching rules are more universally enforceable. Stokes Wagner has wide experience with such agreements and can help companies draft effective and enforceable contracts that will protect the companies’ interests without imposing an unfair burden on employees.
The FTC’s proposed rule can be found on the FTC’s website at https://www.ftc.gov/legal-library/browse/federal-register-notices/non-compete-clause-rulemaking, and the FTC is currently accepting comments and proposed alternatives through March 10, 2023, at https://www.regulations.gov/docket/FTC-2023-0007/document.
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