Status of non-compete agreements in the US: The impact of the FTC’s proposed rule
Erin Barker & Natalie Sanders
by Erin Barker and Natalie Sanders
The last decade has seen significant push back against non-compete agreements in the United States. Several states have laws that prohibit or significantly limit their use, including California, Colorado, Illinois, Maine, Maryland, New Hampshire, Oklahoma, Rhode Island, Virginia, and Washington.
Non-compete agreements are now being targeted by the US federal government as well. On 04 January 2023, the Federal Trade Commission (FTC) found that the non-compete agreements of three employers “constituted an unfair method of competition” and violated the FTC Act.
The next day, the FTC proposed a broad rule prohibiting non-competes by all employers. The proposed rule defines a non-compete as “a contractual term between an employer and a worker that prevents the worker from seeking or accepting employment with a person, or operating a business after the conclusion of the worker’s employment with the employer”.
The rule includes de facto non-compete clauses that prohibit a worker from seeking or accepting employment under a functional test. That means if a non-solicitation provision or a confidentiality agreement is so broad that it is the functional equivalent of a non-compete, it too is prohibited.
The proposed rule contains no grandfather provision. Instead, it would require employers to rescind existing non-competes and individually notify workers in writing that the non-compete is no longer in effect and is unenforceable against the worker.
The FTC’s proposed rule provides an exception in the sale of a business context, but only for a substantial (20%) owner. Non-owner (but key) employees still may not be subjected to a non-compete as part of a business sale.
The proposed rule is not final. It is open to public comment through 19 April 2023. It is unclear how long after the close of the comment period the FTC may issue a final rule. Once a final rule becomes effective, however, the FTC has indicated it will expect employer compliance within 180 days. Legal challenges to the FTC’s authority to impose and enforce such a rule are also likely. Nevertheless, the message is strong.
The tide is turning against non-competes in the US, and even without the new rule, the FTC is cracking down on them as an unfair method of competition. Companies engaging workers in the US should take caution to comply with state laws regarding non-competes and prepare for the likelihood that even narrowly tailored non-competes may become unenforceable. Companies should also recognise and plan for the likelihood that the publicity the FTC’s proposed rule is receiving will embolden workers in the US to challenge or even completely disregard their non-competes.
The text of the proposed rule can be accessed here.
This publication provides an update on a legal development. It is not intended as legal advice. For assistance evaluating how this proposed rule may impact your workplace, please reach out to a member of the Brooks Pierce Labour & Employment team.
Brooks Pierce is a full-service corporate law firm providing innovative and comprehensive legal services to businesses, organisations, and individuals worldwide.
GGI member firmBrooks, Pierce, McLendon, Humphrey & Leonard, LLPGreensboro, Raleigh, and Wilmington (NC), USAT: +1 919 573 6242Law Firm Services
Erin Barker advises clients on various employment and ERISA & benefits related matters. In addition to her employment and benefits practices, she also works with businesses, non-profits and individuals on an array of transactional matters. Contact Erin.
Natalie Sanders provides counsel and defense to businesses in all aspects of the employment relationship. Her 25 years of experience as an attorney, operations manager, entrepreneur, and community volunteer allow her to relate well to management and provide nuanced guidance in complex matters. Contact Natalie.
