NON-COMPETE BAN? NOT SO FAST

Unless you have been unplugged for the past month, you have heard that on January 5, 2023, the Federal Trade Commission (FTC) proposed a new wide-reaching rule that would ban non-compete agreements in the United States and preempt all state laws inconsistent with the rule. If implemented as proposed—and that is a big “if”—employers will be required to rescind all existing non-competes with current and former employees. That’s right—a world without non-competes: Do not panic. The promulgation of federal rules is sausage-making, even when non-controversial, and this agency (the FTC) pushing this proposed rule will be as contentious as anything we have seen, with any meaningful final rule being the subject of numerous legal challenges.

The IIAW has already put on an Issues Briefing led by CEO Matt Banaszynski, an expert on federal rulemaking. If you were not able to watch the Issues Briefing live, I highly recommend viewing the replay through the IIAW. Matt carefully explains the many steps involved in promulgating federal rules, so this column will focus on the high (or low) points of the proposed rule.

What is a Non-Compete?

Express (traditional agreements, e.g., a producer agreement with a non-compete) and de facto noncompetes are prohibited. Defining non-competes broadly to include agreements between an employer and a worker that prevent the worker from seeking or accepting employment with another employer or operating a business, the rule would also ban de facto non-competes. What is a de facto non-compete clause? According to the FTC, any of the following may qualify: a non-disclosure agreement written so broadly that it effectively precludes the worker from working in the same field after leaving the employer; a contractual term requiring an employee to repay the employer for training costs if their 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; and the FTC’s comments also suggest that some customer and employee non-solicitation restrictions can “be so broad in scope that they serve as de facto non-compete clauses.”

The short answer: Just about everyone. The proposed rule covers agreements with employees and independent contractors—and more. The term “worker” includes any person who works (paid or unpaid) for an employer, bringing externs, interns, volunteers and apprentices into its scope. And, it would apply retroactively and prospectively, forcing employers to rescind all noncompetes with current and former employees within 45 days. The proposed rule does include a couple limited exceptions for the sale of a business (with ownership level criteria) and franchisor/franchisee relationships, each of which would still be subject to federal antitrust law.

First off, it will take many months for the rule to wind its way through the rulemaking process, and it will likely face challenges along the way as the rule’s opponents challenge the FTC’s authority to promulgate such a broad-reaching rule. For its part, the U.S. Chamber of Commerce has already announced it is planning to sue the FTC, and it surely will not be alone.

As part of the rulemaking process, the FTC has opened the proposed rule for public comment until March 10, 2023— this is a critical process and one in which the IIAW, other trade associations and industries can and will participate. Your agency can participate too, either through the IIAW or on your own. If you are interested in doing so, please reach out to Matt or me.

Anticipating rancorous opposition, the FTC notice identifies a number of alternatives to the proposed rule, including: (1) a rebuttable presumption of unlawfulness of non-compete agreements, rather than a categorical ban (requiring employers to meet an evidentiary burden to prove that a non-compete is justified); (2) establishing different rules for different categories of employees (e.g., differentiating among low-level earners, job functions, exempt/nonexempt status, etc.); or (3) combinations of the first two approaches. Of course, the FTC’s suggested alternatives are not the limits of possibilities, and the comment period will no doubt yield countless comments and alternatives to be considered. The fact that the FTC preemptively suggested alternatives, indicates that any final rule could look different than this proposal and that the FTC may accept a less drastic approach.

First, as noted above, there is no need to panic. The FTC has only proposed the rule; it is not the law and will not be the law for at least another seven months, likely far longer. Next, at this point, your agency should review its existing non-competes to ensure they are compliant with and enforceable under governing state law. If any changes are needed, do so without regard to the FTC’s proposed rule— even if finalized, it may well be different than currently proposed. Drastic changes to try to preemptively comply with a non-final FTC rule will be inefficient, at best, and, at worst, pointless. Finally, stay tuned to the IIAW and this column and consider getting involved in the comment process.

> Josh Johanningmeier IIAW General Counsel