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Focus Antitrust & Trade/Bankruptcy Law The FTC’s Looming Ban on Noncompetes
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BY BRIAN JORGENSEN AND TOM YORK
Antitrust enforcement continues to be a high priority in the Biden administration. In its latest salvo, the Federal Trade Commission (FTC) has proposed an unprecedented rule banning most employer-employee noncompete clauses. The new rule will be a major departure from decades of precedent and would prohibit conduct that is currently lawful in Texas and 46 other states. While the new rule will not go into effect until later this year (and may be subject to constitutional challenges), businesses and their counsel should be prepared by taking steps now to minimize risk.
The FTC’s Rule Prohibiting Noncompetes
Under the FTC’s proposed rule, an employer would violate Section 5 of the FTC Act—which prohibits “unfair methods of competition”—if it (i) enters or attempts to enter into a prohibited noncompete clause with a worker; (ii) maintains an existing prohibited noncompete clause; or, under certain circumstances, (iii) represents that a worker is subject to a noncompete without a goodfaith belief that the noncompete is lawful.
As drafted, the proposed rule would apply broadly to almost all workers, including employees, independent contractors, externs, interns, volunteers, and apprentices. There is no exception for senior executives or employees with specialized skills or knowledge.
Once adopted, employers would be required within 180 days to inform each employee currently subject to a prohibited noncompete that the employer has rescinded it. If a company maintains existing noncom- petes or enters into new noncompetes after the final rule goes into effect, the FTC may attempt to obtain an order requiring the company to comply with the rule. The FTC may also attempt to impose penalties of $46,517 per violation, per day, against the company.
While the FTC’s proposed rule contains some exceptions, they are very narrow and generally only exclude noncompetes imposed by state or local governments, between franchisors and franchisees, and between the buyer and seller of a business.
Simultaneous FTC Enforcement Actions
The FTC released the proposed rule one day after it filed complaints against three companies and two individuals for imposing and enforcing anticompetitive employeremployee noncompetes. One complaint alleged that a security company used lawsuits to enforce noncompete clauses, which required low-wage security guards to pay a $100,000 penalty if violated. Other complaints challenged noncompetes that prohibited working for a competitor for at least one year after employment, including lowerlevel positions.
The companies and owners all settled with the FTC, which ordered the parties to stop using noncompete agreements, end enforcement of existing noncompetes, and notify affected employees that the noncompetes no longer restrict their employment options.
How to Respond to the FTC’s Actions
Businesses should consider whether and how to react to the FTC’s rule and recent enforcement actions. To minimize risk, businesses should consider the following rules of thumb:
1. Tailor the geographic scope to the reasonable need for the noncompete. The noncompetes subject to the FTC’s recent enforcement actions covered North America in one action, and 100 miles in another. Both were large geographic areas.
2. Tailor the duration to the reasonable need to protect confidential information. If the company’s confidential information becomes stale quickly, consider a shorter noncompete. Alternatively, confidential information with a longer shelflife may justify a longer noncompete.
3. Tailor the scope to a legitimate need to protect the company or its confidential information. For example, it may not be necessary to prohibit an employee from working for a competitor if that employee will work in a competitor’s business unit that does not compete against the company, or would not allow the employee to use the company’s confidential information.
4. Be reasonable and make judicious use of noncompetes. For example, consider whether noncompetes are actually necessary for all or most lowlevel employees.
5. Consider alternatives to noncompetes that involve less restrictive means, such as confidentiality agreements The FTC has expressed a favoring of alternatives by emphasizing that the legitimate objectives of noncompetes can be achieved through less restrictive means. Consider whether NDAs, customer non-solicit agreements, or similar agreements could protect the company’s interests. HN
