The Federal Trade Commission (FTC) has recently turned its focus to employee noncompete clauses, with the agency announcing a proposed regulation on January 5, 2023 that would implement a near-comprehensive ban across the United States, with limited exceptions. Employee noncompete agreements have been used extensively by technology companies seeking to protect their innovations, so this development could have significant ramifications for the industry.
The Proposed Regulation
Notably, the proposed regulation would apply to noncompetes with all types of employees, regardless of position within the company, access to confidential information, or income level.1 It would also extend to similar agreements with independent contractors, interns, and volunteers. Further, the proposed regulation would also apply retroactively to existing noncompete agreements, meaning technology companies with preexisting noncompetes would be required to rescind them and notify both current and former employees that those agreements are no longer in effect.
The proposed regulation would not, however, affect other forms of employee agreements such as non-disclosure or non-solicit agreements unless such agreements operate in practice as a noncompete agreement (i.e., where non-disclosure requirements are so broad that they have the effect of precluding the employee from working in the same field). It also will not affect non-employment-related noncompetes, such as non-compete agreements entered into between businesses. Also excluded are employee noncompetes made in connection with the sale of a business or a business unit, provided that the worker so restricted is a 25%-or-greater owner of the business or business unit being sold.
As it currently stands, the regulation would abolish noncompetes regardless of whether a state has a law providing for them. For technology companies with operations solely in California, where employee noncompetes are largely banned already,2 this development may have limited ramifications. However, employers with operations outside of California need to be aware of the potential legal ramifications of the proposed regulation.
The FTC is currently soliciting feedback to the proposed rule through its formal comment process, with a deadline for submission of March 20, 2023. This proposed rule has already garnered significant attention and is likely to draw a host of comments. Statements issued by the FTC’s Commissioners about the proposed regulation suggest that the FTC is interested in hearing from the public about the potential impact of the proposed rule and whether the agency has appropriately considered the costs and benefits of noncompete clauses.
This suggests that the final version of the rule could change based on public comments. As a result, technology companies should evaluate whether to submit comments to the FTC. In particular, if the proposed ban may cause harm to a company’s legitimate business interests, such as the need to protect confidential information and innovations, now is the time to make those objections heard. Whether established enterprise or startup, technology companies should also take steps now to evaluate how they are protecting their businesses, and whether other types of agreements, such as appropriately tailored non-disclosure agreements, may make sense now given the proposed ban.
Ultimately, whatever rule the FTC adopts will likely be challenged in court. There are questions on whether the FTC has the authority to adopt substantive antitrust regulations, and even if it does, it is far from clear whether it would extend to the power to make these types of reforms to an area of employment that has long been regulated by states.
1 A handful of states permit employee noncompete agreements where an employee earns above a certain income threshold. In Washington, noncompetes are permissible where an employee earns over $100,000 a year. Wash. Rev. Code § 49.62.020. The same is true in Illinois for employees earning over $75,000 a year, and in Colorado for employees earning over $101,250 a year, among other states. 820 Ill. Comp. Stat. 90/10(a); Colo. Rev. Stat. § 8-2-113.
2 Aside from California, the only other states that currently prohibit virtually all employee noncompetes are North Dakota and Oklahoma.
Thomas R. Hutchison also contributed to this article.