Sweeping FTC noncompete rule: ‘More questions than answers’

The Federal Trade Commission recently announced a sweeping rule to ban noncompete agreements for all U.S. employees, with limited exceptions. This unprecedented move could reshape how HR leaders approach hiring and talent management processes. 

In short, the FTC voted 3-2 along party lines last week that noncompetes are “an unfair method of competition” and, therefore, a violation of Section 5 of the FTC Act. The measure is scheduled to take effect this summer.

Lina M. Khan, FTC chair, noncompete agreements
FTC Chair Lina M. Khan

“Noncompete clauses keep wages low, suppress new ideas and rob the American economy of dynamism, including from the more than 8,500 new start-ups that would be created a year once noncompetes are banned,” said FTC Chair Lina M. Khan in a statement. “The FTC’s final rule to ban noncompetes will ensure Americans have the freedom to pursue a new job, start a new business or bring a new idea to market.”

The FTC noncompete rule will not apply to senior executives with existing noncompete agreements and those on so-called “garden leave”—when an employee is still on the organization’s payroll, says Katherine Perrelli, a partner with the Seyfarth law firm. Nonprofits and situations involving a bona fide sale of a business will also not be affected.

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“Such a seismic shift in the workplace has been rarely seen in generations,” Perrelli says. However, while the highly anticipated release of the FTC noncompete rule is making waves among HR and business leaders, she notes, the stark reality is the measure will be heavily litigated in the coming months.

Uncertain future for the FTC noncompete rule

Already, the rule is being challenged in two courts in Texas and one in Pennsylvania, with the FTC’s authority and the scope of the rule being questioned. In one of the Texas cases, the U.S. Chamber of Commerce and other plaintiffs are requesting a stay or injunction until the case is litigated, which will “almost certainly” delay implementation, says Kevin Roberts, a labor and employment attorney at Barnes & Thornburg.

Given that uncertainty, Roberts says employers will largely respond to the new rule in a number of ways. 

“They can wait and see what happens with the legal challenges, rewrite contracts to remove noncompetes or sit on the fence by retaining noncompetes only for high-level executives,” he says.

Seyfath’s Perrelli and Michael Wexler, a Seyfarth partner, add that, even if employers opt for the “wait-and-see approach,” they can consider a few strategies to remain prepared. 

For instance, leaders can compile a list of employees subject to noncompetes, with addresses, so notices are ready to send if and when the rule goes into effect. Employers may want to review existing noncompete, confidentiality and non-solicit agreements to ensure they are compliant with state law and educate employees that these agreements are still in effect and subject to state law requirements, not yet the FTC rule. 

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While some employers may want to stay the course and continue to have new hires sign noncompete agreements, others may consider other forms of contractual protections, such as garden leave, severance periods with pay and term agreements for specified periods of work. 

Perrelli and Wexler add that leaders can also turn to the “carrot rather than the stick” strategy by investing in more competitive salaries, benefits and bonuses to entice employees to stay. 

Enhancing security, strategy

If and when the FTC noncompete rule comes to fruition, employers will want to be confident trade secrets are protected. Perrelli and Wexler say this work can start now by ensuring limited access to confidential information, relying on password technology systems and implementing confidentiality legends on information.

Jeannil Boji, a partner with Perkins Coie’s Labor & Employment law group,  says employers should implement and audit mechanisms and procedures to better protect trade secrets. This should include strengthening IT and data use policies, performing regular trade secret and information security audits and utilizing monitoring software or other protections where highly proprietary information is concerned. Additionally, leaders should focus on improving onboarding and offboarding procedures (including immediate data restriction and wiping procedures) and having “quick response” plans if trade secrets are found to have been compromised.

“They also should review and strengthen their other restrictive covenants with employees, which are aimed at protecting trade secrets, such as NDAs, non-solicitation agreements and training repayment agreements,” she adds, noting the FTC rule also prohibits use of agreements deemed to be “functional noncompete” agreements.

Barnes & Thornburg’s Roberts says how thoroughly employers choose to prepare for the enforcement of the FTC noncompete rule will likely depend on several factors, mainly their workforce and their industry. 

However, “all employers should, at a minimum, conduct an audit of their existing agreements,” he says, adding they should consider both the benefits and costs of revising–or not revising–agreements as the cases play out.

“Ultimately, the new rule raises more questions than it answers and will continue to be challenged in court,” Roberts says.

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Tom Starner
Tom Starner is a freelance writer based in Philadelphia who has been covering the human resource space and all of its component processes for over two decades. He can be reached at [email protected].