In early January, the Federal Trade Commission (FTC) proposed a new controversial and potentially far-reaching rule that would ban non-compete clauses, except in very limited circumstances. Lina Khan, the FTC Chair, stated that non-compete clauses “block workers from freely switching jobs, depriving them of higher wages and better working conditions, and depriving businesses of a talent pool that they need to build and expand.” The FTC further believes that non-compete clauses are “an unfair method of competition” and, as a result, violate Section 5 of the Federal Trade Commission Act. The FTC also detailed a list of claims that non-compete clauses allegedly prevent new business formation, stifle entrepreneurship, prevent novel innovation, and lower wages for those who are subject to them.

The FTC’s proposed ban would prohibit employers from (1) entering into or attempting to enter into a non-compete with a worker; (2) maintaining a non-compete with a worker; and (3) representing to a worker, under certain circumstances, that the worker is subject to a non-compete. From an employer’s perspective, the proposed rule would fortunately not apply to other types of employment restrictions, such as non-solicitation, confidentiality, and non-disclosure agreements. 

While this is not the first FTC’s attempt to rein in the use of non-competes, this has undoubtedly been one of the most well-orchestrated with the FTC sharing the abusive use of broad non-competes against fast food workers, construction workers, and other hourly and relatively lower paid workers. The FTC efforts also come on the heels of several states, including California, North Dakota, and Oklahoma, to limit the use of non-competes within their respective states. While the FTC solicitation of comments on its proposed rulemaking has closed, you can be certain that any efforts by the FTC to impose broad limitations on employers’ use of non-competes will be subject to both legislative and judicial scrutiny.   There has also been bipartisan legislation proposed in both houses of the U.S. Congress to prohibit or limit the use of non-competes.  So, it is likely that there will be some federal legislation or rule on this topic and, if not, states will likely continue to push to limit the use and scope of non-competes.

What Should An Employer Do ?

Since the FTC rule is only proposed right now, there is no immediate and mandatory action required.  However, it is a good time to review your non-competes to ensure compliance with existing state laws.  Regardless of how the FTC’s examination of non-competes is resolved, employers should consider taking these commonsense steps in order to maximize the probability of non-competes being determined to be enforceable –

  • Carefully select which employees are asked to sign non-compete agreements.  Generally, in the absence of extenuating circumstances, only employees in key positions should be asked to sign non-competes. 
  • The terms and conditions of each non-compete should be narrowly tailored to the position. For example, the non-compete clauses should be tailored to the specific employees’ duties (e.g., there is no need for a restriction on the entire state if the employee’s sales territory is one county).
  • Consider developing separate non-compete agreements and confidentiality agreements. In the alternative, consider carefully separating the confidentiality and non-compete obligations of the employee in any non-compete agreement.
  • Include a provision authorizing any court to “blue-line” the agreement in order to strike any clauses that the court determines are unenforceable for whatever reason, including being overly broad or violative of public policy, while allowing the court to permit the enforcement of the remaining portions of the non-compete agreement to the fullest extent permitted by law.
  • Also, be sure to have up-to-date corporate confidentiality policies and practices that a company actively enforces to protect its most valuable confidential information and trade secrets. 

While it is not possible to predict what action that FTC may ultimately take regarding non-competes, it is safe to predict that the FTC’s initial focus will be on eliminating or significantly restricting the use of non-competes with hourly employees and employees that the employer can demonstrate possess highly specialized knowledge or confidential information. Employers who adopt the guidance outlined above are less likely to see the FTC prohibit the company’s non-competes in their entirety.

If you have questions about your company’s non-compete policies or agreements, an experienced Stall Legal lawyer will be happy to help you review your policies in order to maximize the likelihood that such agreements will remain enforceable.