By Sara J. Ackermann, John H. Fisher II and Nicole L. Stangl
January 11, 2023
Dear Ruder, we are getting lots of long emails from various sources about this proposed noncompete ban. Can you please break this down in easy-to-read language so we don’t have to review the entire 216 pages of the FTC’s proposed rule?
Dear Reader, Yes we can! See our answers to some frequently asked questions below!
When will the proposed ban go into effect? First of all, there may be legal challenges (is anyone else having deja vu?). As was the case with the federal vaccine mandates, the FTC may face litigation as to whether it had the authority to issue such a sweeping rule. However, absent a legal challenge that ties this up in the courts, the FTC will accept comments from the public until March 10, 2023. It will then review the comments and issue a final rule (while we cannot predict how long that will take, it certainly will be a few weeks or months after the March 10 date.). After the final rule is issued, then employers must be in compliance within 180 days.
Who is affected? All workers—not just employees, but also independent contractors, interns, volunteers, etc. The FTC is seeking comments about whether or not there should be varying standards for various types of workers (i.e., highly paid executive v. office staff), but currently, no such distinction exists in the proposed rule.
What exactly is banned? The FTC defines a prohibited noncompete as “a contractual term between an employer and a worker that prevents 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.”
What about customer non-solicitation agreements and nondisclosure agreements? It depends. The proposed rule includes a “functional test for whether a contractual term is a non-compete clause.” If these agreements are so broad as to prevent the worker from other employment, it may fall within the ban. Currently the FTC includes two examples: 1) non-disclosure agreement between an employer and worker that is so broad “it effectively precludes the worker from working in the same field after the conclusion of the worker’s employment with the employer,” and, 2) a training reimbursement provision where the required payment is not reasonably related to the costs the employer incurred. We hope the FTC will provide specific examples in these areas in its final rule so employers have more clarity.
How does the proposed rule affect state law? As currently written, it will supersede all current state laws regarding noncompete agreement enforceability.
What if we already have noncompete agreements with current or former employees? You will need to rescind these agreements and provide notice to these employees and former employees. As currently proposed, you will have 180 days after the final rule is published to do so. Note that if you have a noncompete tied to a severance agreement or employment agreement, the other terms of the agreement will not be affected. For example, if you have a severance agreement with a former employee that includes a noncompete, you will be unable to enforce the noncompete, but the waiver and release of claims within the agreement will still be enforceable.
Are there any exceptions? Yes, there are narrow exceptions that apply to the sale of a business whereby the seller may agree not to compete with a buyer in certain cases.
What should we be doing now? We cannot predict with certainty whether this rule will be published as proposed, or whether it will be stalled with legal challenges. But if you want to discuss how this may affect your business in the event it is eventually the law of the land, contact a member of Ruder Ware’s legal team!
The content in the following blog posts is based upon the state of the law at the time of its original publication. As legal developments change quickly, the content in these blog posts may not remain accurate as laws change over time. None of the information contained in these publications is intended as legal advice or opinion relative to specific matters, facts, situations, or issues. You should not act upon the information in these blog posts without discussing your specific situation with legal counsel.
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