Employment-related non-compete agreements that prevent employees from accepting a job with a new employer that competes with their previous employer have long been subject to regulation by the states. Through legislation and court cases, the states have taken various approaches to the issue. For example, California and Oklahoma ban the use of non-compete agreements in the employment context. However, Texas is among the majority of states that permit such agreements with certain limitations.
In 2023, this may change, as the U.S. Federal Trade Commission (FTC) proposed a rule yesterday that would result in a nationwide ban on these types of non-compete agreements. The proposed rule would also require employers to rescind any existing non-compete agreements with current and former employees. Moreover, the proposed rule extends beyond the employer/employee relationship and would also preclude non-compete agreements with independent contractors and volunteers.
The FTC’s proposed rule states that restrictive covenants such as non-disclosure agreements and non-solicitation agreements are not precluded. However, the rule’s definition of a “non-compete clause” includes a provision that if such agreements are so broad in scope that they function to prevent an employee from working for a competitive employer, then these, too, would be prohibited. Obviously, entities that rely on restrictive covenants to protect their businesses will need to carefully thread the needle going forward if the FTC’s rule is finalized and enforced.
The use of restrictive covenants in other contexts, such as the sale of a business, would not be impacted by this rule. However, when an employment agreement is entered into as part of such a sale, the rule will apply to any non-competition provisions in that agreement unless the person subject to the non-compete owned at least 25% of the acquired entity.
Before the proposed rule is final, there will be a 60-day intake period for public comments. Upon the review of the public comments, the FTC will promulgate a final rule, which would not be effective until 180 days later.
While such a rule was expected to be proposed by President Biden’s FTC, it was not predicted to be a complete ban on non-competes. Certain industries or high-paying occupations were expected to be excluded from such a ban. It is possible that changes will be made before the final rule is published as a result of the public comments that are received. Additionally, the FTC is likely to face court challenges to this rule as an overreach of the authority granted to the FTC by Congress. Such litigation may result in a lengthy delay before the rule can be enforced.
Sprouse Shrader Smith will continue to monitor the situation and provide updates. For questions or concerns about the issue, please contact either the author of this article or your attorney at the firm.
Article by Iwana Rademaekers