On Jan. 5, the Federal Trade Commission announced a new proposal that would effectively ban employers from imposing noncompete clauses on employees. While legal experts predict at least part of the rule could eventually come to fruition, the proposal is likely going to face a legal battle.
According to an FTC press release, noncompetes constitute an “unfair method of competition” and violate Section 5 of the Federal Trade Commission Act.
Calling noncompetes a “widespread and often exploitative practice that suppresses wages, hampers innovation and blocks entrepreneurs from starting new businesses,” the agency adds that the proposed rule banning them could increase wages by “nearly $300 billion per year and expand career opportunities for about 30 million Americans.”
Labor attorney Mark Goldstein, a partner in Reed Smith’s New York City office, says the proposal is expansive.
It would bar future workplace noncompete clauses with any paid or unpaid workers, including employees, independent contractors and interns. It would also invalidate any preexisting noncompete clauses and would, in fact, require businesses to “rescind such preexisting clauses” and “notify workers of the same in an individualized written communication,” he says.
“The same notification requirements,” he adds, “would likewise apply with regard to former workers who remain bound by noncompete clauses, so long as the employer has the worker’s contact information readily available.”
The rule, however, would not apply to franchises and in instances of a business sale.
But, for employers that have historically relied on noncompetes, the adoption of this rule would be a significant game-changer for their legal landscape.
“It would effectively change how many, if not most, U.S. employers operate from the perspective of retaining key talent and safeguarding against employees taking the company’s ‘secret sauce’ and duplicating it right across the street,” he says.
And, Goldstein says, HR leaders and employers should anticipate that the FTC will likely adopt the rule in some form or fashion this year. He adds that it is a virtual certainty, however, that whatever rule is adopted will be subject to immediate legal challenge on a host of fronts, including whether the FTC even has the authority to issue a rule like this—much less such a broad and comprehensive proposal.
Julie Werner, a partner in the Employment Counseling & Litigation practice at Lowenstein Sandler in New York City, agrees that there will be plenty of pushback from a legal standpoint.
As a starting premise, she says, laws regarding noncompetes have historically (for over 100 years, in fact) been based on a matter of state law, and states have approached the issue very differently. Some, such as California, have specific statutes regulating noncompetes, and in the many states that don’t, it’s been a matter of common law.
“So, it’s been an issue decided by courts,” she says.
For the FTC rule, public comments are open for 60 days, after which the agency will vote on its adoption. If it moves forward, it will become effective after 180 days; it’s during this period that Werner and Goldstein say to expect to see a number of legal challenges.
Werner compares the process to the recent OSHA-imposed nationwide vaccine mandate, which the U.S. Supreme Court ultimately found was an overstep of OSHA’s legal authority.
“If OSHA, in the middle of a pandemic, doesn’t have the legal authority to impose a rule to protect public health, you have to question the degree to which the FTC would have the legal authority to say that noncompetes should be banned,” Werner says.
For now, HR should treat this issue as business as usual, Goldstein and Werner agree, but that could change depending on the legal challenge outcomes.
“Insofar as the rule is adopted and survives legal challenges, HR leaders will want to review the contractual protections they have in place with employees besides the noncompete clause,” Goldstein notes. He adds that robust provisions like client and employee non-solicit clauses, as well as confidentiality and non-disclosures clauses, are going to become more important than ever, as will reviewing such clauses for compliance with applicable state laws.
For employers that use “template” or “form” employment agreements and offer letters, he explains, it will be imperative to review them and remove any provisions that conflict with the rule that is adopted. This is especially important, given that the FTC’s recent litigation tactics suggest that it intends to make this an issue of top priority in the coming years.
“HR professionals and employers need to keep an eye on what’s going on, but legal action is virtually guaranteed,” Werner says.