Will Noncompetes Soon Be Illegal?
By now, you have probably heard of the Federal Trade Commission’s proposed rule regarding noncompete agreements – they are under attack. As proposed, the FTC’s new rule would effectively eliminate almost all existing and future noncompete agreements across the country. This is obviously unsettling for many companies that have relied upon these noncompete provisions to protect their own goodwill, confidential information, and other proprietary aspects of the business. So you may be asking – could all of these noncompete provisions be “null and void”? Short answer, yes; they could be.
1. What Does the New Proposed Rule Say?
In January 2023, the FTC’s proposed rule was released. If the rule becomes final, it would do the following:
- ban almost all noncompete clauses;
- prevent employers from entering into noncompete clauses; and
- require employers to rescind existing noncompete clauses.
As far as timing, employers would have 180 days after the date of publication of the final rule to comply with these new mandates. Additionally, the new rule would require employers to provide current and former employees with notice that existing noncompete clauses have been rescinded within 45 days.
2. Who Does the New Proposed Rule Apply to?
Exceptions to the proposed rule include: (1) an owner selling a business entity or otherwise disposing of all of the person’s ownership in a business entity; or (2) an owner selling all or substantially all of a business entity’s operating assets.
Additionally, it is important to note that this new proposed does not apply to customer nonsolicit provisions. So, at least as currently drafted, the new proposed rule would not require employers to change their nonsolicitation provisions.
3. What is Next?
The new rule was proposed in January 2023, and the FTC received comments from businesses, trade groups, and other entities regarding the legal and practical effects of the new proposed rule. The comment period just ended on April 19, 2023, so many eyes are closely watching the FTC for their next move.
Companies should also expect almost immediate litigation over the rule as soon as it is finalized and released by the FTC. Many interested organizations have pledged to fight the new proposed rule, including the United States Chamber of Commerce.
4. So What Does that Mean for Companies?
Against the uncertain legal landscape, employers should consider other means of protecting interests short of noncompetes in existing and future employment agreements and contracts such as confidentiality or nondisclosure agreements. Additionally, companies should be doing an inventory of the potential enforceability of other provisions such as customer nonsolicitation or employee nonsoliciation provisions.
Additionally, companies should be proactively planning on how they will address the new proposed rule if it goes into effect. Will the Company’s existing noncompete provisions be enforceable? Does the Company have an obligation to notify employees that their noncompete provision is no longer enforceable? What about former employees? How will the Company protect its good will and confidential information in the aftermath of this new proposed rule?
Companies will be well served to start asking these questions now to avoid disruption down the road.