On January 5, 2023, the Federal Trade Commission ("FTC") announced a proposed rule that would ban non-compete agreements between employers and employees by designating them as "unfair methods of competition" under Section 5 of the FTC Act. Typically, non-compete agreements prevent workers from working for a competitor or starting a competing business for a period of time after their employment ends, within a certain geographic area. In the absence of a non-compete agreement, employees are free to compete with a former employer, provided they do not disclose confidential or trade secret information belonging to the former employer.
Critics of non-compete agreements argue that they are anti-competitive, discourage the free movement of labor and stifle employee wages. Proponents argue that such agreements protect valuable trade secret information and encourage companies to invest in employee training and sharing of information. Currently, non-compete agreements are enforced on a state-by-state basis according to state statutory and decisional law. In New York, for instance, a covenant not to compete will be enforced against an employee only "to the extent reasonable and necessary to protect valid business interests." Morris v. Schroder Capital Mgmt. International, 7 N.Y.3d 616, 620 (2006). The public will be allowed to submit comments on the FTC proposed rule for 60 days, at which point the agency will move to make it final.
The FTC's proposal follows the measures taken in California to prohibit the use of non-competes in employment agreements. While the FTC's proposed rule is still in the early stages, the beginning of the calendar year is a good time for employers to review employment documents including existing non-competes and to re-evaluate them. There are several anticipatory steps employers can take at this stage including but not limited to: (1) assessing whether current non-competes provide for additional compensation which could help to make them enforceable as a form of severance pay following termination; (2) utilizing "garden leave" as a means of keeping employees on payroll while preventing them from competing even if they are not actively working for the company; and (3) bolstering other proprietary information agreements to ensure that employees recognize the risks associated with using information learned in the course of employment and sharing that with a competitor.
Originally published by 26 January, 2023
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