FTC BANS NONCOMPETE AGREEMENTS IN ALMOST ALL CIRCUMSTANCES

By Andrew B. F. Carnabuci

In a move sure to affect many American employers, the Federal Trade Commission (“FTC”) on Tuesday released its final rule on noncompete agreements—banning them across the board in almost all circumstances.

A noncompete agreement generally requires an employee of a company to contractually agree, as a condition of employment, that for a certain period of time (usually six months to twelve months) after they leave the company's employ, they will not enter the market that the company occupies, either by working for an established competitor or by opening their own competitor company.  Noncompete agreements are used by many employers to safeguard their trade secrets and client bases.  Critics, however, say that they unfairly restrict workers' rights to practice their professions freely and have an anti-competitive effect on labor markets.

The FTC's new rule would establish a broad blanket-ban on these agreements across the entire country, in almost all cases.  In a significant revision since the notice-and-comment version of the rule, one exemption was added for the most senior executive employees, who may still have their pre-existing noncompete agreements enforced under the new rule.  New noncompete agreements going forward for even senior executives will be banned once the new rule takes effect.  Noncompete agreements would be absolutely forbidden for all other classes of employees.

The new rule will take effect 120 days after its formal publication in the Code of Federal Regulations (“CFR”), expected shortly.  Moreover, the rule would also retroactively void most pre-existing noncompete agreements, even if they were legal at the time they were executed.

 Two related types of agreements favored by many employers—nondisclosure agreements (contracts to not publicly divulge certain information) and nonsolicitation agreements (contracts to prevent an employee from soliciting a company's clients or employees)—remain generally lawful, although they may be subject to certain other federal, state, and local restrictions.

Approximately 18% of the U.S. workforce—or 30 million employees—are currently under noncompete agreements.  The repercussions of the FTC's ban will therefore be significant, as these 30 million workers will be no longer precluded from directly entering the same market as their former employers for any period of time.

 “Noncompete clauses keep wages low, suppress new ideas, and rob the American economy of dynamism, including from the more than 8,500 new startups that would be created a year once noncompetes are banned,” said Lina Khan, the FTC Chair.

Many major employers, represented by trade groups such as the U.S. Chamber of Commerce, plan to challenge the FTC's rule in court—as soon as Wednesday—as they view noncompete agreements as necessary to protect their interests.  It is possible that this anticipated litigation may result in a federal court “setting aside” the rule as a form of preliminary relief available under Section 706 of the Administrative Procedures Act (5 U.S.C.), which often functions as a “nationwide injunction” against the enforcement of a federal regulation.  In other words, the rule may be “set aside” before it even goes into effect, making the 120-day timeline for it to go into effect highly contingent, and the future of noncompete agreements in general difficult to discern.

Due to this uncertainty, employers should consult with seasoned employment counsel before making any decisions regarding the use or disuse of these agreements.  The employment lawyers at Rose Kallor are always available to help employers understand the ever-changing landscape of noncompete agreements and other employment law issues.  We can be reached at 860.361.7999 or visit us online at www.rosekallor.com.