Last week, the Federal Trade Commission (“FTC”) proposed a rule that has employers across the country worried about the enforceability of non-compete clauses in their employment contracts. Generally, a non-compete clause is a contractual term that blocks an employee/contractor from working for a competing employer, or starting a competing business, typically within a certain geographic area and time period once the employment relationship ends. The FTC feels that non-compete agreements prevent workers from leaving jobs, decrease competition for workers, lower wages, and prevent new business formation. The FTC’s Chair, Lina Khan, is a strong opponent of non-compete agreements, and her adverse position to these agreements was made crystal clear in two FTC determinations last week.
On January 4, 2023, the FTC ordered three smaller companies, O-I Glass, Inc., Ardagh Group SA, and Prudential Security, not to enforce their non-compete agreements because the FTC held that the applicable agreements were illegal restraints on the companies’ employees. The order prohibits the companies from enforcing, threatening to enforce, or imposing those non-compete agreements against the identified employees. Chair Khan further explained that the offending non-competes blocked workers from freely switching jobs, thereby depriving them of higher wages and better working conditions, and similarly deprived businesses of a talent pool that they need to build and expand. Many were quick to point out, however, that these particular non-compete agreements would have been struck down in court because they were overly broad and did not seek to protect a legitimate business interest. Clearly, the FTC is looking to establish a track record of ordering smaller companies to do away with their non-compete agreements before going after bigger companies.
The very next day, the FTC doubled down on their actions by releasing a proposed rule and a fact sheet that would completely prohibit all U.S. companies from implementing non-compete clauses into their employment contracts. Moreover, the rule would (a) require employers who have already entered into non-compete agreements to rescind them within six months; (b) extend coverage to company employees (both paid and unpaid), independent contractors, interns and volunteers (affecting roughly 30 million workers); and (c) supersede all state laws that currently cover non-compete agreements.
However, the rule does offer some limited exceptions and would permit non-competes when: (1) a business owner stays on as an employee after selling the company to a new owner, or (2) an employer pays the expenses to train a new hire. Even with these exceptions, critics of the proposed rule argue that it may be unconstitutional. Indeed, by creating this rule, the U.S. government may be violating its authority under the separation of powers doctrine which permits Congress, not a federal agency, to create laws. The proposed rule also may infringe on Article I of the Constitution, which protects the rights of individuals to enter into contracts and outlaws Congress/the states from passing laws that punish actions retroactively (known as “Ex Post Facto” laws).
Needless to say, the proposed rule has left many companies worrying about the future of their employment contracts even though there are multiple solid arguments against effectuating the rule, including that the FTC lacks the authority to unilaterally implement it. Perhaps most notably, the proposed rule does not impact or affect the enforcement of confidentiality or non-solicitation agreements, so some meaningful restrictive covenants will remain viable. Only time will tell how broad or narrow the rule will be, but in the meantime, the public and employers may submit comments on the proposal within sixty (60) days after the Federal Register publishes the proposed rule. The rule then would take effect 180 days after the final version is published. In any case, based on the immediate uproar from the business community, it is certain that the rule will be met with a significant wave of litigation challenging its constitutionality.
If you have any questions about this article or how the FTC’s proposed rule may affect your company, please contact Seth Briskin, Lester Armstrong, David Smith, Steven Dlott or Joe Pokorny at 216-831-0042.