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Noncompete agreements and the FTC proposal

Noncompete agreements are regularly used by businesses to prevent employees, after they leave their employment, from interfering with the employer’s business. This can mean not soliciting clients for whom the employee worked, all clients, employees, or even joining a business that competes with the former employer.

They can be abused, however. Take the case of the Baltimore TV news anchor who was bound to a 200-mile restriction; he couldn’t even work in Pittsburgh.

These restrictions are usually subject to time and geographical restrictions and should be used only to protect some important interest of the employer. For example, a radio station who hires a radio personality from another market and heavily promotes her. The hiring station doesn’t want to see the personality leave and walk to the station across the street after being promoted at the first station’s expense. But many employers use these restrictions to restrain trade, and this has caught the eyes of various legislators and influential agency heads who see these restrictions as unenforceable.

As a result, Maryland, D.C. and Virginia, among others, have enacted legislation making some of these restrictions unenforceable against employees making less compensation than a specified floor; the idea is that lower-paid employees are likely not in a position to damage the interests of a business when they leave their employment.

Now, the Federal Trade Commission has thrown its hat into this ring, and is looking at ways to prevent what it views as the purpose of these restrictive covenants—anti-competition, and anti-labor motives on the part of employers.

To enforce its beliefs, the FTC recently proposed a rule that would prohibit employers from requiring employees to sign noncompetes. In doing so, the FTC expressed “the freedom to change jobs is core to economic liberty and to a competitive, thriving economy.”

This proposed rule followed the FTC’s three lawsuits seeking to invalidate noncompetes.  Lest one thinks the FTC is a government outlier in its efforts to ban noncompetes, President Biden’s July 2021 pro-competition executive order encouraged the FTC to take action against noncompetes by banning or restricting their use.

The FTC’s proposed rule is under Matter No. P201200, and if enacted, would also extend to employees and to independent contractors.  Existing non-competes that would be subject to the prohibition are required to be rescinded, and notice of rescission must be given to affected employees on an individual basis.

The FTC’s proposed rule listed a number of examples of de facto noncompete clauses, including:  nondisclosure agreements; and reimbursement for training costs upon termination.

Years back I represented partners at a national firm who left to work for another large firm. Their partnership agreement forfeited their capital accounts and no amount of argument, including the use of experts, could convince the tribunal this was an unenforceable restriction.  Likely it would be under this rule, if adopted.

The goal of the proposed rule is to allow free migration of employees to new positions. There is nothing written about protecting sensitive information, unless doing so “effectively precludes the worker from working in the same field after conclusion of … employment. …”  It remains to be seen whether this de facto clause will conflict with the federal trade secret protection law, but the proposed rule provides that it shall supersede any state law that is inconsistent with the rule.

Finally, like California, which has had a similar restriction since 1948, the proposed rule would not apply to a seller of a business, if the seller is a substantial owner. It is not clear to what extent an employer could restrict an employee from joining a competitor where the employee’s new job might involve use of the former employer’s trade secrets, which the employee had in order to perform his job, but hopefully, this will become a recognized exception in the rule.

Comments have been requested, and it would be good to alert the FTC to concerns while there is still time.  Noncompetes may sometimes be abused, but they can also serve a valid purpose.

James Astrachan teaches trademark and unfair competition law and Second Amendment law at the University of Baltimore School of Law.  He is a partner at Goodell, DeVries, Leech & Dann, LLP, and the views expressed are his own.

 

 


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