In the short time since the Federal Trade Commission (FTC) on
January 5, 2023, released its Notice of Proposed Rulemaking (NPRM)
on the Non-Compete Clause Rule,1 much has been written
about it and its potential effects.2
Non-compete provisions span multiple industries, and employers
often incorporate them into their "standard" hiring
forms. In a non-compete clause, an employee agrees not to work for
another competitor company for a specific period of time after
their current employment ends. Non-competes are typically also
bounded by a designated geographic area, and/or industry or field.
They function in part to protect an employer's confidential
information and practices, including trade secrets and know-how,
and to shield such information from flowing to a competitive
company through a former employee. To an employer, such protections
might encourage the free flow of information and, in that sense,
promote innovation for the company, whereas they might in the
alternative curtail such free exchange.
The proposed rule in its current form (1) makes the act of an
employer entering into or attempting to enter into a non-complete
clause with a worker, or maintaining such a non-compete clause, an
unfair method of competition and subject to the FTC's
enforcement powers;3 (2) requires an employer to rescind
a non-compete clause that was entered into with a worker prior to
the compliance date; and (3) requires an employer to provide notice
to the worker that the non-compete clause is no longer in effect
and may not be enforced against the worker, among other
provisions.4
But, going one step further, the proposed rule also prohibits
de facto non-compete clauses by including a functional
test to determine whether a contractual term is a non-compete
clause:
The proposed rule provides two examples of de-facto
non-competes:
"A contractual term between an employer and a worker that requires the worker to pay the employer or a third-party entity for training costs if the worker's employment terminates within a specified time period, where the required payment is not reasonably related to the costs the employer incurred for training the worker."6
Such proposed de facto language is unsettling because it
is subjective and untested. This is particularly so because the
proposed rule unequivocally states that it "shall supersede
any State statute, regulation, order, or interpretation to the
extent that such statute, regulation, order, or interpretation is
inconsistent with" the proposed rule. To date, only a handful
of states effectively ban non-compete clauses (the FTC points to
three—California, North Dakota, and Oklahoma).
So, if the de facto provision becomes a final rule,
employers will need to carefully consider whether any alternative
protections, including an overly broad non-disclosure agreement,
would be considered a non-compete in the eyes of the FTC. Employers
will also need to re-evaluate their employment forms—not just
the non-compete clause, but any clause or agreement that could
arguably be deemed to be a functional or de facto
non-compete. But, one step further, companies may need to adopt
stricter processes for sharing confidential information with
employees, and more carefully vet which employee has access. While
such processes would be a greater administrative burden, this may
start to become the norm if the proposed rule is adopted.
Given the potential widespread effect, it will be worthwhile to
closely track the language of the final rule.
Footnotes
1. https://www.ftc.gov/legal-library/browse/federal-register-notices/non-compete-clause-rulemaking
2. See, e.g., https://www.npr.org/2023/01/13/1148446019/ftc-rule-ban-noncompetes-low-wage-workers-trade-secrets; https://www.nytimes.com/2023/01/05/business/economy/ftc-noncompete.html; https://www.wsj.com/articles/ftc-proposes-banning-noncompete-clauses-for-workers-11672900586; https://www.cnbc.com/2023/01/12/us-chamber-of-commerce-threatens-to-sue-the-ftc-over-proposed-ban-on-noncompete-clauses.html.
3. Pursuant to 15 U.S.C. 45, the FTC is empowered to investigate unfair methods of competition and unfair or deceptive acts or practices "in or affecting commerce."
4. https://www.ftc.gov/legal-library/browse/federal-register-notices/non-compete-clause-rulemaking at Proposed Rule 910.2.
5. Id. at Proposed Rule 910.1(b)(2) (emphasis added).
6. Id. at Proposed Rule 910.1(b)(2).
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