Noncompete agreements are one of the most commonly used legal devices to protect a company’s critical business information. Noncompete agreements are contracts between an employer and one or more employees that prohibit the employee from accepting a job with a competitor and within a specified geographic area. The Federal Trade Commission (FTC), an agency of the federal government whose job is protecting economic competition, has just announced a rule that may mean the end of noncompete agreements.
The background as seen by the FTC
According to the notice of rulemaking published on January 5, 2023, the FTC estimates that about one in five American workers—or approximately 30 million individuals—are subject to noncompete agreements with their employer. These agreements usually prevent an employee from taking a job with a competitor or starting their own business within a specified time and in a specified area after leaving the current employer. The FTC surmises that noncompete agreements decrease competition for workers and thereby lower wages for workers who are subject to noncompete agreements and those who are not. The FTC went on to assert that noncompete clauses also prevent new businesses from forming, stifle entrepreneurship and prevent innovation.
The terms of the proposed rule
The rule applies to any partnership, corporation, association, limited liability company or other legal entity or division or subdivision thereof. The ban applies to any contractual term that prevents the worker from seeking or accepting employment with a person or another business after the conclusion of the worker’s term of employment with the current employer. The proposed rule is also designed to use a functional test to determine if a particular agreement or contract clause has the effect of prohibiting a workers form seeking or accepting employment from a competitor. A common example of such a clause might be a nondisclosure agreement that prevents an employee from using information obtained from a current employer in a new job.
The FTC rule, if adopted, would supersede all state statutes and regulations affecting noncompete agreements.
Solid legal support
The comment period for the proposed rule ends on March 10, 2023. Anyone wishing to submit a comment—either for or against the proposed rule—must submit the comment by the deadline. The future of the proposed rule is uncertain, and its effect is difficult to predict. Anyone who is concerned about how the proposed rule may affect their business or employee relationships may wish to seek advice from a knowledgeable corporate attorney.