The rule is already facing several legal challenges, including from the U.S. Chamber of Commerce. Here’s how employers can be prepared.
By Maggie Mancini
In a move that could have sweeping implications for much of the American workforce, the Federal Trade Commission (FTC) on Tuesday issued a final rule to bar employers across the nation from imposing noncompete agreements on employees. In a statement released earlier this week, the federal agency explains that banning noncompetes “promotes competition” by allowing employees to immediately seek new jobs with direct competitors of their previous organization. The rule, if made effective, would impact the estimated 30 million workers—nearly one in five Americans—who are subject to a noncompete agreement with their employer.
“The FTC’s new rule banning most noncompetes with workers is not a surprise,” says Robert Milligan, trade secrets, computer fraud, and noncompete partner at Seyfarth Shaw LLP. “President Biden has made clear that he does not like noncompetes with workers and several of his federal agencies have been very vocal in their opposition to noncompetes with workers, including the FTC and the NLRB. With the upcoming election, the FTC’s rule positions the Biden administration as attempting to follow through on his pledge and further position his administration as pro-worker.”
Milligan says that though the rule would apply to much of the American workforce, there are still some exceptions. For example, existing non-compete agreements may remain in effect for senior executives but would not apply to all other workers once the rule is finalized and could not be imposed for senior executives entering new agreements. Fewer than 1% of workers are estimated by the FTC to be senior executives under the final rule, he explains.
“Since the FTC’s authority only extends to for-profit businesses, the rule will not affect non-profit organizations,” says Joshua Weiner, partner with Lindabury, McCormick, Estabrook & Cooper P.C. and co-chair of the firm’s employment and labor law group. “The rule also does not apply to non-compete agreements entered into by a person during the ‘bona fide sale of a business’ of the person’s ownership interest in a business entity or of all a business’s operating assets.”
The final rule becomes effective 120 days after its publication in the Federal Register. During that time, Milligan says that trade associations and businesses across the country are likely to challenge the rule’s legality. Milligan adds that he expects “at least some of the challenges to be successful, because any final rule in which the FTC claims authority to ban restrictive covenants is not likely to withstand constitutional scrutiny.”
Shortly after the rule was proposed, the U.S. Chamber of Commerce announced that it intends to sue to keep the rule from becoming effective. Weiner explains that there’s a strong possibility that the district court that hears the lawsuit from the U.S. Chamber of Commerce will have the ability to place a temporary restraining order or injunction on the rule, which would delay its implementation for the duration of court proceedings.
From Weiner’s perspective, there are several possible reasons why a court will likely—at least temporarily—halt enforcement of the rule. For one, the court may find that the rule exceeds the FTC’s statutory authority. The court may also find that the ban on existing noncompete agreements violates the U.S. Constitution or that the FTC’s decision to publicly announced the proposed rule was in violation of the Administrative Procedure Act, Weiner adds.
In addition to the legal challenge from the U.S. Chamber of Commerce, a separate suit was filed in Texas federal court by an impacted employer, Milligan says. And given recent Supreme Court guidance on the limits of agency authority, he says that there is a decent chance that the rule is ultimately invalidated. However, nothing will happen until the challenges make their way through the courts.
Despite the bevy of legal challenges the proposed rule is expected to face, employers should remain prepared for any changes to their policies governing non-compete agreements, Milligan says.
Both attorneys provided some advice to HR leaders looking to remain compliant and prepare their workforce for any changes that the FTC’s rule may bring.
- Review existing agreements to ensure they comply with state law. Amid legal challenges, state law will govern the legality and use of non-compete agreements, Milligan explains. Employers should also review other protections for trade secrets and other confidential information.
- Be prepared to remove non-compete agreements if the rule becomes effective. If the FTC rule withstands legal challenges, employers must comply with the rule and provide notice to employees about the changes. There is no need to send out notices yet, as the rule may not stand.
- Evaluate training for employees with access to confidential information. Onboarding and offboarding are critical times to educate employees not to disclose secure information. Milligan explains that other agreements—like confidentiality agreements and non-solicitation restrictions—can protect that information. “Employers should take time to review their non-solicitation and non-disclosure agreements and amend where necessary to enjoy the protections these agreements provide while not running afoul of the FTC ban,” says Weiner.
