FTC makes good on threat to ban most non-competes 

By Mark Bakker
Maynard Nexsen

Following a narrow 3-2 vote on party lines, the Federal Trade Commission (“FTC”) approved a sweeping final rule yesterday that – if it survives legal challenge – would create a nationwide standard that would radically modify the current landscape of restrictive covenants and significantly limit the post-termination protections currently available to many employers. As we noted last year here and here and here, the FTC largely adopted the proposed rule that would generally prohibit employers from imposing or enforcing non-compete agreements or other provisions that curtailed other post-termination employment options for most workers.

The final rule boldly attempts to pre-empt non-compete agreement drafting, usage and practice in most states by broadly prohibiting entry and voiding the applicability of most non-compete clauses with workers on or after the final rule’s effective date (120 days after publication in the Federal Register). Characterizing non-compete agreements as an “unfair method of competition” that violates the Federal Trade Commission Act, the rule is broad in application and scope:

• It defines “non-compete clause” both broadly and functionally as any 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 (including for example, provisions that require workers to repay training costs where the repayment is not reasonably related to those costs).
•  The rule not only prohibits employers from entering into or attempting to enter into new non-compete agreements but also a) requires employers to rescind currently existing non-compete agreements and provide notice of the rescission to current and former employees; and b) prohibits employers from representing that workers are subject to enforceable non-compete provisions.
• The rule does exempt existing agreements with “senior executives” (agreements entered into prior to the final rule’s effective date with employees earning more than $151,164 annually in a “policy-making position”) and both existing and future agreements entered into pursuant to a “bona fide sale of a business entity.” The rule would cover virtually all other workers, including employees, contractors, volunteers and interns.
• The FTC’s proposal would create a national, relatively unified standard by superseding and preempting any inconsistent state statute, regulation, or interpretation.

The final rule appears to recognize that narrowly drafted non-solicitation agreements and non-disclosure provisions could remain legal. While noting that nonsolicit provisions are subject to the “same inquiry” as noncompete clauses, the FTC did provide that “non-solicitation agreements are generally not non-compete clauses under the final rule because, while they restrict who a worker may contact after they leave their job, they do not by their terms or necessarily in their effect prevent a worker from seeking or accepting other work or starting a business.” However, the FTC specifically invalidated broad non-solicit clauses or confidentiality provisions that “function to prevent a worker from seeking or accepting other work or starting a business after their employment ends,” which the FTC admitted would be a “fact-specific” and a relatively subjective inquiry. It remains to be seen whether future courts or other clarifying rules will impact the interpretation of conventional non-solicitation provisions.

This rule will undoubtedly be subject to immediate legal challenges that may obviate any compliance requirements before the effective date. The U.S. Chamber of Commerce promptly filed a lawsuit to enjoin what it termed an “unnecessary and unlawful rule” and a “blatant power grab.” Like other recent far reaching agency proposals and orders that have been legally challenged, courts may bring clarity to what is otherwise going to be a period of uncertainty for employers who have relied on and/or used non-competition agreements in the past.

At this time, employers are best advised to be mindful of this rule and be prepared for the possibility that restrictive covenants will need to be significantly modified following the effective date. In the meantime, a cautious employer should engage with intentionality before offering additional consideration or bonuses for signing new restrictive covenants because the contemplated ban under the FTC rule may not warrant a significant investment in getting new non-compete agreements signed. In any case, attorneys on Maynard Nexsen’s employment and labor law team are available to advise on non-compete provisions, confidentiality agreements, and other contractual provisions that can help protect against unfair competition and assist in navigating the uncertainty going forward. Of course, we will continue to monitor these developments closely and report out on material changes.

Mark Bakker is an employment and labor lawyer with Maynard Nexsen PC.