Guest Commentary By Emma Schuering, Jack Blum, Isaac Caverly, Eric Packel and Ross Weimer, Polsinelli
To ring in the 2023 new year, the Federal Trade Commission has taken multiple actions targeting the use of noncompete agreements, all of which are consistent with President Biden’s July 2021 executive order on competition in the labor market. Te FTC has proposed a rule banning the use of noncompete agreements with employees and independent contractors. Te FTC’s proposed rule would ban employers from entering into, maintaining or enforcing noncompete clauses with their workers, including employees, independent contractors and unpaid workers. Te FTC’s notice does not mince words about its effect, as the agency states its intention to “categorically ban employers from using non-compete clauses.”
Noncompetes Under Attack Proposed FTC ban reinforces need to
protect competitive information now
Te rule defines a noncompete clause as “a contractual term between an employer and a worker that prevents the worker from seeking or accepting employment with a person, or operating a business, aſter the conclusion of the worker’s employment with the employer.” Altough the rule does not target nonsolicitation or nondisclosure clauses, it proposes a functional test to determine whether a clause meets the definition, meaning that a nondisclosure or nonsolicitation covenant that effectively bars an employee from seeking employment in their chosen industry could be considered a noncompete. Noncompete clauses that require the employee to pay liquidated damages to the employer in the event of competition also are prohibited.
Te rule would apply retroactively and require employers to rescind any existing noncompete contracts within 180 days aſter publication of the final rule. Employers also would be required to provide individualized notice to the employees within 45 days of rescinding the noncompete clause. Importantly, the rule would not apply in the context of a sale of a business or ownership interest of at least 25%.
Te FTC is seeking comments on the proposed rule until March 20. Even if the proposed rule or a variation of it is ultimately implemented, it will likely face a multitude of legal challenges.
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