24 March 2023

Should Employers Freak Out About The FTC's Recent Attention On "Noncompetes"?

Stanton Law


"Noncompete agreements" (among other restrictive covenants such as customer nonsoliciation, employee nonraiding, and confidentiality agreements) have been a growing trend in the U.S. employment sector for years.
United States Employment and HR
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Should Employers Freak out About the FTC's Recent Attention on "Noncompetes"?

Short answer: nope.

"Noncompete agreements" (among other restrictive covenants such as customer nonsoliciation, employee nonraiding, and confidentiality agreements) have been a growing trend in the U.S. employment sector for years. In short, noncompetes seek to prevent workers from leaving for a competitor or starting a competing business for a specific time within a certain geographic area. Opponents of noncompetes argue restrictive covenants are exploitative and hamper wage growth and innovation. Proponents, on the other hand, support that noncompetes encourage business investment and appropriately protect companies from (what they describe as) "unfair" competition. Heretofore, noncompetes (and other restrictive covenants) have generally been the domain of state regulation and whether a particular noncompete could be enforced depended upon the applicable state law.

Just a few days into 2023, though, the Federal Trade Commission (FTC) proposed a new rule that would effectively federalize noncompetes and ban employers and employees from entering noncompete agreements. The proposed rule suggests, moreover, companies may be required to also set aside existing noncompetes and inform workers they are no longer legally enforceable. Some estimates put close to 30 million employees as being currently under a noncompete agreement, whether they know it or not. The FTC, under recent direction from President Biden, seems ready to make some substantial changes to the landscape in this controversial area of law.

As a business owner, should you be worried? Not yet.

First, the proposal is just that - proposed. It's not final and certainly not "the law". The public has sixty days to comment, and a final rule will be issued, if at all, at some indefinite point in the future. Any rule would become effective at least 180 days after the publication - and even then, it will inevitably face legal challenge. In other words, it will be many months before it is clear what the direct impact on an employer will be.

Second, even the proposed rule would generally not affect other forms of restrictive covenants such as nondisclosure, nonraiding, and nonsolicitation agreements. Employers can continue to engage these less imposing, but still very effective, tools to protect their interests and mitigate unfair competition. In most instances, properly and intentionally drafted confidentiality, nonraiding, and nonsolicitation provisions can adequately address an employer's concerns, yet still allow an appropriately competitive market to flourish. Companies' resources, in our opinion, would be better allocated to shoring up other covenants rather than trying to divine what the FTC may or may not allow regarding noncompetes.

Finally, viewed through the lens of a future business-planning decision, very little of this should impact your day-to-day operations. Indeed, the circumstances are so narrow in which it makes business sense to (try to) enforce a noncompete that even in the absence of the new rule, losing the option to litigate is practically inconsequential. In other words, prudent companies would never want to sue over a noncompete anyway because (among other reasons) doing so could cost hundreds of thousands of dollars. Instead of buying their lawyer a new boat, it's likely a smarter business decision to invest those resources in ways that will directly grow your business, not your lawyer's profits. As Stanton Law often advises, don't create legal problems out of business issues.

If you currently use noncompete provisions as part of your business operations, whether the FTC rule becomes effective or not, it's a good idea to consult an employment lawyer to discuss the efficacy of these restrictive covenants and the protection they may (or may not) actually provide to your company.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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