Article by: Associate Michael A. Carlin

Noncompete clauses in employment contracts have long been a controversial topic. The debate has gained new momentum this year with the Federal Trade Commission (FTC) proposing a rule to ban such clauses with workers.

The FTC issued a Notice of Proposed Rulemaking (NPRM) on January 5, 2023, which proposes to prohibit employers from imposing noncompete agreements on their workers. The proposed rule aims to declare noncompete clauses as an unfair method of competition, leading to a complete ban on the use of noncompetes with workers, including independent contractors throughout the entire U.S.

Under the proposed rule: 
•   employers must remove any existing noncompete clauses from their contracts with workers
•     notify their workers that the noncompete agreements are no longer effective. 
•  non-compete agreements between business buyers and sellers, would be exempted, provided that the individual selling the business is at least a 25% owner of the enterprise

The FTC has solicited public comments on several issues, such as whether franchisees should be included in the rule, if senior executives should be exempted from the ban, and if low- and high-wage employees should be treated differently. The public comment period ends April 19, 2023.

Noncompetes have long been disfavored in several states, most prominently, in California. Employers operating in other states will not have to consider strategies that they have put into place to restrict their workers from taking business away from them. 

Employers have several options to protect their interests. 

Employers Can Still Require Employees To Execute Trade Secrets Agreements

The proposed rule would not affect an employer’s ability to require its employees to sign agreements limiting the use of the employer’s trade secrets.

Contractual agreements protecting trade secrets can prevent employees from using confidential information to set up a competing business or work for a competitor. These agreements can prevent employees from disclosing confidential information to unauthorized individuals, such as friends, family members, or other businesses. Such agreements are necessary to adequately protect the company’s investment in research and development by ensuring that employees do not take trade secrets with them when they leave the company.

Moreover, these agreements can give an employer legal recourse in case of a breach, such as filing for an injunction or suing the employee for damages. Having a trade secrets agreement in place can demonstrate to investors, customers, and partners that the company takes its intellectual property seriously and has measures in place to safeguard it.

Non-Solicitation Agreements

The FTC’s proposed rule regarding non-competes would not directly invalidate non-solicitation agreements. There are three basic types of non-solicitation agreements:

1.  Client non-solicitation agreements: In this type of agreement, the employee agrees not to solicit or do business with the clients of their current or former employer for a specified period. This can include a ban on contacting clients, promoting similar products or services, or doing business with clients in a particular region.
2.  Employee non-solicitation agreements: This agreement prohibits the employee from soliciting or recruiting other employees of the company to leave the company and join a competitor or a new company. This helps to ensure that the company retains its talented workforce.
3.  Vendor non-solicitation agreements: The employee agrees not to solicit or do business with the vendors or suppliers of their current or former employer. This can help prevent the employee from sharing confidential information or trade secrets with other businesses.

Although the FTC’s proposed rule does not target non-solicitation agreements, such agreements could easily be drafted to essentially restrict the employee from competing. This is especially true of client non-solicitation agreements. 

In conclusion, the proposed FTC rule to ban noncompete agreements with workers has sparked a national debate on the use of these agreements. While employers will have to remove existing noncompete clauses, they can still require employees to sign trade secrets agreements and non-solicitation agreements. The latter, though not directly targeted by the proposed rule, could still be drafted to restrict employee competition, particularly client non-solicitation agreements. It remains to be seen how the public comments on the proposed rule will shape its final version and its impact on employers and workers alike.