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FTC Proposes Banning Non-Compete Agreements

Businesses utilize non-compete clauses to ensure that an employee will not utilize information learned during employment to compete with the employer once the employment relationship ends. They are a critical tool utilized by employers to ensure that individuals are not able to learn proprietary trade secrets and then immediately begin competing against a company after learning those secrets. Generally, a non-compete is enforceable if it is support by consideration, protects a legitimate business interest of the employer, and is reasonable in scope, geography, and time. These agreements, which date back to at least the 15th century, are currently being reviewed and could be deemed illegal.

The Federal Trade Commission (FTC) recently issued a Notice of Proposed Rulemaking banning non-compete clauses in the work setting and categorizing such clauses as unfair methods of competition. In a 3-1 vote, the majority of the FTC asserted that non-compete clauses are exploitive and coercive. The proposed rule would ban non-compete agreements for all United States private employers regardless of the size of the employer, the business of the employer, or the position of the employee. The proposed rule also creates penalties for employers who attempt to enter into non-compete agreements with employees and forces employers to provide notice that all existing non-compete agreements are rescinded.

The lone dissenter to the proposed rule noted that the commission lacks authority to engage in rulemaking on unfair methods of competition. Under Section 6(g) of the FTC Act, the commission is authorized to “make rules and regulations for the purpose of carrying out the provisions of the subchapter.” While it is clear the FTC has rulemaking authority to protect consumers, there is a lack of clarity as to whether it can engage in substantive competition rulemaking since the act expressly excluded rulemaking for unfair methods of competition. This lack of clarity will likely be a source of numerous legal challenges to the proposed rule.

The public has until March 10, 2023, to submit comments on the proposed rule, and many influential groups (including the U.S. Chamber of Commerce) have chimed in against the proposed ban on noncompete agreements. In response to comments received during the public comment period, the FTC could decide to limit the proposed rule or scrap the idea all together. For the time being, your company's non-compete agreements are safe. If you have any questions regarding your company’s non-compete agreement or any other employment law related questions, please contact the skilled Labor and Employment Law attorneys at Crivello, Nichols & Hall, S.C.

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