FTC’s proposed ban on noncompete agreements could have widespread ramifications for employers

There is a growing sentiment by many that employers overuse non-compete agreements and that low-wage employees should not be subject to such agreements at all. The common example used by critics of non-compete agreements is the fast-food worker who, but for mandatory noncompete obligations to his or her current employee, is unable to take a better paying job at a competing restaurant down the street.

Until 2023, the enforceability of these agreements was generally considered to be an issue of state law. The majority of states, Arkansas included, require non-compete agreements to be reasonable in time and geographic scope and limited to protecting only the employer’s legitimate business interests, such as specialized training provided by the employer, the employer’s trade secrets and confidential information, and the employer’s customer lists. Said another way, a non-compete like the one in the example above would be considered invalid in most states based on existing law. Enter the federal government. In 2024, employers will need to be mindful of a potential federal rule aimed at regulating most non-compete agreements out of existence.

Early last year, at the direction of President Biden, the Federal Trade Commission (FTC) proposed a sweeping rule to ban most non-compete agreements nationwide. The FTC bases its authority to issue the ban based on a preliminary finding that non-competes constitute an unfair method of competition and therefore violate Section 5 of the Federal Trade Commission Act. If adopted, the proposed rule would be the first of its kind since the FTC’s creation in 1914.

With very limited exceptions, the proposed rule forbids any contractual term between an employer and a worker that has the effect of preventing the worker from seeking or accepting employment with a person, or operating a business, after the conclusion of the worker’s employment with the employer. The proposed rule defines “worker” to include employees, independent contractors, interns, and even volunteers, with no exception for executives or other highly compensated employees.

While the FTC touts that the ban on non-competes will increase worker earnings by nearly $300 billion and double the number of companies in the same industry founded by a former worker, there is also a very real danger that the rule will effectively eliminate a company’s ability to effectively protect its trade secrets and confidential information.

The FTC is expected to issue the new rule as early as April 2024. If it does, the rule will supersede all conflicting state laws and employers will be required to rescind any existing noncompete agreements within 180 days of publication of the rule. Further, within 45 days of the rescission, employers will be required to provide notice to all current and former workers subject to an existing non-compete agreement that the agreement is no longer in effect.

The sky is not falling yet. The rule will undoubtedly be subject to legal challenge, and one can reasonably expect enforcement of the rule to be stayed pending the resolution of that litigation. The rule may ultimately be struck down as an administrative overreach under the “major questions” doctrine, which limits the rulemaking authority of federal agencies on issues of major political or economic significance.

In the meantime, however, the FTC can be expected to investigate and contest noncompete agreements under its newly recognized Section 5 enforcement powers. Further, the 2024 federal elections could result in a new Congress passing its own ban, which already has some support on both sides of the aisle and would not face the same challenges as the FTC’s proposed rule.

Employers should take this opportunity to review their noncompete agreements to ensure they are tailored to protect legitimate interests and are only being used when actually necessary. Employers should also consider other avenues with which to prevent the misappropriation of valuable proprietary information, such as adding security measures, limiting access to sensitive information to those who need to know, and using well-drafted confidentiality and non-solicitation agreements.

If you have questions or concerns regarding the use of non-compete agreements in your business or have any other compliance concerns, please do not hesitate to contact us in the New Year.

Editor’s note: Brett Taylor is an attorney with the Rose Law Firm in Little Rock. The opinions expressed are those of the author.