Accordingly, the Proposed Rule not only requires employers not to enter into or “attempt to enter into” employee non-compete agreements, it also requires employers to rescind their existing noncompete agreements, and then notify the current and former employees that the non-compete is rescinded within forty-five days of the rescission. The Proposed Rule provides a form for the notice of recission.
There are a few exceptions. The ban will not apply to sales of a business or its assets. The Federal Trade Commission Act, which provides the authority for the Proposed Rule, also does not apply to the following industries: banking, savings and loan institutions, federal credit unions, common carriers, air carriers and foreign air carriers and certain persons subject to the Packers and Stockyards Act. It also does not apply to franchisors and franchisees.
Notably, the Proposed Rule provides that it preempts state law on the topic. The regulations calls for “conflict preemption” similar to the type of preemption that applies for Fair Labor Standards Act requirements, and thus the states are free to provide for greater protections for employees, but the Proposed Rule represents the minimum protection to be provided to employees.
In this way, the regulations propose the abolition of the patchwork of state caselaw, procedural rules, and statutes relating to non-competes. First, and obviously, an outright ban on non-competes and a requirement that employer’s rescind bargained-for non-competes with key employees is not just a change in the law, it is a change in the entire system of hiring and firing, retaining employees and negotiating agreements. Indeed, the Proposed Rule even bans an “attempt" to enter into a non-compete with an employee. Second, the Proposed Rule applies even to non-disclosure agreements, if they are overly broad. In its commentary, the FTC notes that a narrowly drafted non-disclosure agreement can protect employers’ interests adequately, but the question of what constitutes an “overly broad” non-disclosure agreement presents a challenge. Third, the Proposed Rule requires an extra element of scrutiny for agreements that require employees to repay training costs if they leave prior to a specific period of time. Such agreements are permitted if the cost is reasonable, and the FTC posits that employers could better achieve retention goals by drafting agreements with set terms of employment. This posits a dramatic departure from the well-settled principles of at-will employment. Finally, the proposal that this regulation would preempt the volume and nuance of various state laws on the topics is likely staggering to those of us who have spent a career litigating non-compete cases. For businesses, it will require a new approach to non-disclosure agreements, retention agreements and retention strategies that do not rely on the threat of litigation to enforce a noncompete. Just by way of example, many employee stock option plans contains non-compete provisions that apply in exchange for the grant of stock options. The combination of stock vesting over time, and perhaps increasing in value, plus the non-compete, represent valuable retention tools for highly compensated employees.
The FTC identifies non-compete clauses as unfair methods of competition under 15 U.S.C. 45 to justify the Proposed Rule. Courts, including in Pennsylvania, have attempted to address these concerns by imposing reasonableness requirements, requiring employers to identify protectable interests, and by applying equitable principles before enforcing the restriction. The FTC opines that such clauses negatively affect competitive conditions in labor markets, which is not an earth-shattering observation, and one that every court to evaluate the issue has made. The FTC also posits that non-compete clauses negatively affect competitive conditions in markets for products and services because of reduced labor mobility. The FTC cites studies showing an increase in consumer prices, decreased mobility in healthcare and industrial services, and inhibition of entrepreneurial ventures, innovation and new business formation. The FTC found that such clauses are coercive, both at the time of accepting employment, and when offered during the employee’s employment. None of these assertions are shocking, and non-compete lawyers have litigated these issues for as long as non-compete clauses have existed.
The FTC is accepting comments on the Proposed Rule until March 20, 2023. The FTC also invites comments on alternatives to the ban on non-competes set forth in its commentary, including whether the rule should impose a rebuttable presumption of unlawfulness rather than an outright ban; or, whether the rule should include a different standard for senior executives. If the Proposed Rule becomes a regulation, it will become effective within 180 days of publication of the final rule. A violation of the regulation could result in suits by the FTC against the employer, and the FTC could seek damages, rescission of the contract and public notification of the violation. It is impossible to know when or if the rule as proposed will become final, and given the FTC’s request for comment on alternatives, the rule may change before it is finalized. Employment law practitioners will have to consider strategies in preparing non-competes that will contain adequate alternative obligations to protect employers.
Patricia Collins is a Partner and Employment Law Chair with Antheil Maslow & MacMinn, LLP, based in Doylestown, PA. Her practice focuses primarily on employment, commercial litigation and health care law. Patricia Collins can be contacted at 215.230.7500 ext. 126.