The Federal Trade Commission (FTC) has proposed new Federal regulations to ban non-compete clauses from employment agreements. The ban will include non-solicitation and other restrictions that are currently designed to deter employees from competing with an employer after the employment relationship concludes. The FTC is targeting any contractual term that has the effect of prohibiting a worker from seeking employment or operating a business after termination, including prohibiting employers from seeking to recoup their investment in training where an employee departs within a specified period of time.
The proposed ban will also impact relationships with independent contractors, externs, interns, volunteers and even sole proprietors providing service to a client.
The proposed regulations set forth two exceptions to the non-compete ban: (1) a franchisee in a franchisee-franchisor relationship, and (2) sale of all or substantially all of a business to preserve the goodwill of the business.
The franchisee-franchisor exception is consistent with the “rule of reason” exception to anti-trust restrictions. Under the regulations, a franchisor-franchisee agreement against poaching employees from other franchisees will not be presumed to decrease competition and will be permitted.
The goodwill exception, however, only applies if the person subject to the non-compete agreement owned at least a 25 percent interest in the business at the time of entering into the non-compete. This standard is less restrictive than California law. In California presently a non-compete with an employee is enforceable when the employee sells all of his equity (even if he or she has little equity) The FTC’s proposed regulations appear to hold quantification over need which will result in
fewer enforceable non-competes that are designed to preserve the goodwill of a business for the prospective purchaser.
The FTC’s regulations will require employers to give individualized notice to employees that any existing non-competes are rescinded. In addition, the regulation will supersede any state law or regulation that is inconsistent with the FTC’s regulations, although states will be entitled to create greater worker protections than those proposed by the FTC.
The FTC is not waiting for the regulations to take effect. Since the outset of 2023, it has prosecuted a handful of cases asserting that non-competes represent unfair competition.
While a private right of action does not yet, appear to exist within the regulations, if enforced, such regulations will strip employers of the ability to enforce noncompete clauses and may give employees the power to claim that non-compete agreements constitute a violation of public policy, a breach of the implied covenant of good faith and fair dealing or a predicate element to support a claim of unfair business practices.
The public comment period on the proposed regulations ended April 19, 2023. If the current version of the proposed regulations is promulgated, they will go into effect 180 days after the regulations are published.
In order for businesses to protect their trade secrets and other valuable confidential information, and in order for equity holders and employees to avoid or mitigate enforcement of non-competition provisions, it is essential that you discuss this matter with your business attorney.
The information presented is not intended to be, and does not constitute, “legal advice.” Because each situation varies, and only brief summary information is provided here, you should not use this information as a basis for action unless you have independently verified with your own counsel that it applies to your particular situation.
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