What Should You Do About the Federal Trade Commission’s Proposed Rule Banning Non-Compete Clauses?
If you are reading this, you likely already know that the Federal Trade Commission (“FTC”) has noticed a proposed rule banning the use of post-term non-compete clauses by employers nationwide. The proposed rule would require employers to rescind existing, post-term non-compete clauses within 180 days after the publication of the final rule.
Again, the FTC’s rule is merely proposed, not final. And extensive legal challenges are certain. For now, however, here’s what employers should understand.
A post-term non-compete clause is generally understood to prohibit a former employee from performing competitive activities in a certain geographic area for a limited time. A post-term non-compete clause is distinct from a post-term non-solicitation covenant, which precludes a former employee from soliciting business from certain of a former employer’s clients, and a post-term non-disclosure covenant, which limits a former employee’s ability to use or disclose confidential information. Non-compete clauses are also typically understood to be distinct from “garden leave” clauses, which require employees to provide advance notice of their resignation and effectively prohibit them from working during the notice period.
The FTC’s proposed rule, however, purports to apply to any contractual term that is a “de facto” non-compete clause because it has the effect of prohibiting a worker from “seeking or accepting employment with a person or operating a business after the conclusion of the worker’s employment with the employer.” Indeed, the FTC’s proposed rule expressly states that a non-disclosure covenant would be a “de facto” non-compete clause if it “is written so broadly that it effectively precludes the worker from working in the same field after the conclusion of the worker’s employment with the employer.” By that logic, the FTC’s proposed rule could also encompass non-solicitation and garden leave clauses.
In short, the FTC’s proposed rule has the potential to undermine the enforceability of a significant amount of your restrictive covenants—of particular concern with respect to key employees such as those with access to customer lists. Prudent employers should review their existing contracts to determine what provisions could be invalidated to develop a proactive strategy. For example, employers should consider aligning their existing non-compete and enforcement practices to comply with the purpose of the FTC’s proposed rule, i.e., ensuring that non-competes are not targeting low-wage workers and enforcement is limited to protect truly legitimate business interests.
Furthermore, if you are making any hiring decisions, particularly with respect to executives, do not assume your “standard” restrictive covenants in previous employment agreements are going to be enforceable. Strong claw back provisions may be in order if you are basing compensation, in part, on the assumption that you will be able to protect your investment in your new hire.
Finally, in every jurisdiction, employers must take reasonable steps to protect the confidentiality of a trade secret for that information to be considered a protected “trade secret.” Traditionally, the use of non-disclosure clauses has been considered the paradigmatic example of a reasonable step to protect information confidentiality. Given that the FTC’s proposed rule could conceivably require employers to rescind their existing non-disclosure clauses, you should give serious thought about how else you can protect your trade secrets, including implementing much tighter controls on physical and electronic access.
If you would like more guidance about navigating the FTC’s proposed rule change and how it could affect your employment contracts, please contact author Dan Davis at firstname.lastname@example.org.