Introduction to Noncompete Agreements
Employers have traditionally used noncompete agreements to protect their confidential and proprietary information by preventing a former worker from working for a competitior subject to certain geographic scope, duration and reasonableness tests. In recent years however, noncompete agreements have come under attack. Some states, California, Oklahoma and North Dakota have decided noncompete agreements are not enforceable, with very limited exceptions. A few other states have decided that noncompetes should be banned based upon income thresholds, notice and other variables. The FTC has taken this a step further. The FTC’s proposed rule would prevent employers from entering into a noncompete agreement with its workers and make all past noncompete agreements unenforceable. Click here to read the FTC’s proposed rule. If adopted, the proposed rule will go into effect early 2024.
Scope of the Proposed FTC Ban of Noncompete Provisions
The proposed rule will ban noncompete provisions by deeming them an unfair method of competition in direct violation of Section 5 of the FTC Act. To the extent any state’s noncompete law is inconsistent with this rule it will be overridden. If a state’s noncompete statute offers more protection to a worker then the state rule would be deemed consistent with the FTC’s proposed rule and not overridden. The best way to think of this is that the new noncompete law would be a floor and states are allowed to pass rules that provide greater protection to its workers. There is an exception with respect to the sale of business if the worker owned at least 25% of the stock or assets of the business being sold.
The FTC will apply a functional test to determine if a noncompete provision violates its propsal. Adopting substance over form, the FTC’s proposed rule provides that if any provision has the effect of prohibiting a worker from seeking or accepting employment or operating a business after the conclusion of the worker’s employment with the employer it will be considered a de facto noncompete provision. “Worker” is defined very broadly and includes, among others, employees, independent contractors and interns.
Affirmative Notice to Workers Required
The proposed rule also requires employers to terminate noncompete provisions with exisitng workers and to individually notify these workers that the noncompete is no longer enforceable. Employers will also have to notify former workers that they are no longer subject to noncompete provisions as long as available contact information is readily available.
Practical Tips for Employers
While it’s not certain the proposed rule will be passed, the business law group at Anderson Leavitt believes that now is a good time for employers to conduct a self-audit of their noncompete practices and in particular, their written agreements to determine what, if any, the impact will be should the rule become law. Particular emphasis should be given to confidentiality provisions which are usually overly broad and might be interpretated as a de facto noncompete provision. Perhaps the better approach might be to craft a very tightly drafted confidentialityand solicitation provisions to protect what is truly confidential and a true trade secret instead of the typical “list everything” approach. Even if the rule doesn’t pass, more and more states are chipping away at laws that restrict a worker’s ability to find work and, as a result, Anderson Leavitt reccomends that employers should be proactive and use this time to prepare for change in whatever form it comes.
This entry is presented for informational purposes only and is not intended to constitute legal advice.