In a move expected since prior to President Biden taking office, on January 5, 2023, the Federal Trade Commission issued a proposed rule that would create a national prohibition on all existing non-compete provisions in employment contracts and upon any other restrictive covenant provisions (non-solicit, trade secret, confidential information, invention agreements) that effectively act as non-competes by restricting future employment, with the only current exception being for those non-compete agreements that are attached to or part of the sale of a business for someone having not less than a 25% ownership stake in the sold business.
"...but also would invalidate all existing non-compete provisions in current employment agreements."
The proposed rule not only prohibits new non-compete restrictions to be included in employment agreements, but also would invalidate all existing non-compete provisions in current employment agreements. The proposed rule requires employers to notify employees, in writing, that their in-force non-compete restrictions are no longer enforceable.
Impact on Current Laws and Challenges
The FTC rule claims that the Commission possess the requisite rulemaking authority as it asserts non-compete provisions inherently stifle innovation, prevent new business creation, reduce workers’ wages, and hinder economic freedom and growth. The Commission recognizes that other trade secret laws, like the Defend Trade Secrets Act (DTSA) and state adoptions of the Uniform Trade Secret Act (UTSA), protect trade secret and confidential information, but the de facto non-compete prohibition included in the rule seems to undercut both the enforceability of the DTSA and UTSA – leaving a significant legal questions as to the effective scope of the proposed rule and what it means for both employers and employees. This conflict and the scope of the FTC’s authority to impact existing employment agreements and to effectively overrule existing federal and state legislation are sure to be the subject of significant comment over the next 60 days and, probably, litigation if the proposed rule goes into effect as currently constituted.
As of the date of this alert, employment agreements containing reasonable non-compete provisions remain enforceable under respective state laws. In any event, and to make sure that an employer’s reasonable expectations for client, customer, information, and other protections are preserved; it is critical that any company’s restrictive covenant employment agreement be reviewed by competent legal counsel with experience in litigating and drafting such agreements. BHMK’s attorneys have the experience and capacity to perform such a review and regularly do so for our business and corporate clients.
Should you have any questions or concerns regarding the new FTC proposed rule on non-competes, please ask to speak with one of our BHMK attorneys at 513-579-1500.