To Compete or Non-Compete: Rulemaking Proposal Aims to Ban Non-Competes Nationally
A majority of states currently recognize the enforceability of non-compete agreements to some extent. Generally, these agreements prohibit employees from working in the same or similar profession for a period of time following termination of the employment relationship.
Like many jurisdictions, Florida recognizes that non-competes serve legitimate business interests, including protecting an employer's trade secrets, confidential business information, client relationships and the company's goodwill. Thus, in Florida, non-competes are generally enforceable, provided they are "reasonable in time, area, and line of business." See Fla. Stat. § 542.335. On the other hand, California law provides "every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void." See Cal. Bus. & Prof. Code § 16600. Other states have taken a more middle-of-the-road approach. For example, in Maine, the use of non-compete agreements amongst low-wage workers (defined as those earning at or below 400 percent of the federal poverty level) is prohibited. See Me. Stat. tit. 26, § 599-A(3).
On Jan. 5, 2023, the Federal Trade Commission (FTC) issued a Notice of Proposed Rulemaking (NPRM) that seeks to align the nation closer to California's approach. The proposed rule would prohibit an employer from entering into or attempting to enter into a non-compete clause with a worker; maintaining any existing non-compete clause; or, under certain circumstances, representing to a worker that the worker is subject to a non-complete clause. The sole exception is where the party restricted by the non-compete clause is an owner, member or partner holding at least a 25 percent ownership interest in a business entity. The NPRM clarifies, however, that non-disclosure agreements (NDAs) and non-solicitation agreements would not be included in the rules grasps unless such agreements are so broad in scope that they function as a non-compete.
Along with the NPRM, FTC Chair Lina Khan issued a statement describing the perceived issues with non-competes. First, the FTC estimates the proposed rule would increase employee earnings by close to $300 billion per year due to increased marketplace competition. Also, the FTC found non-competes reduce innovation and competition in products and services by reducing entrepreneurship and new business formations while driving up costs for existing products and services. As to the products and services market, the FTC notes these labor markets are fluid and spread across state lines.
Although the FTC addresses some concerns that may arise if the proposed rule goes into effect (i.e., ensuring that employers maintain an ability to safeguard trade secrets through NDAs or non-solicitation agreements), several equally important concerns remain. For example, employers must now consider how they will safeguard their investment in employee training and career mentorship. Further, non-compete agreements are sometimes leveraged by employees to secure higher wages that the employer would not have agreed to without the restriction. Finally, the proposed rule prohibits the maintenance of non-compete agreements and with it, essentially rewrites millions of employment agreements across the country.
The proposed rule provides interested parties 60 days to submit comments for the FTC's consideration before the rule is finalized. Employers and other interested parties may engage counsel to help draft and submit comments expressing any concerns that the FTC should take into account before a final rule is issued.