FTC’s Proposed Ban On Non-Compete Clauses: Implications For Employers And HR

It is time to take a comprehensive look at your restrictive covenant agreements for compliance

On January 5, 2023, the Federal Trade Commission (FTC) proposed a new rule, the “Non-Compete Clause Rule,” that would ban employers from imposing non-compete clauses on their workers in the United States.  If implemented, the FTC noted that its new rule would make it illegal for an employer to:
 

The FTC noted that its proposed rule “would apply to independent contractors and anyone who works for an employer, whether paid or unpaid,” but there would be a “limited exception for non-compete clauses between the seller and buyer of a business” that “would only be available where the party restricted” owned “at least a 25% ownership interest” in the business. Similarly, the “proposed rule would generally not apply to other types of employment restrictions, like non-disclosure agreements” unless such other types of employment restrictions were “so broad in scope that they function as noncompetes,” i.e., de facto non-competes. In addition, the proposed rule would “require employers to rescind existing noncompetes and actively inform workers that they are no longer in effect.”  

The FTC is currently accepting public comment on the proposed rule until March 20, 2023, and is considering whether senior executives should be excluded, whether the rule should be applied differently to lower and higher income workers, and whether the rule should actually impose an outright ban or a rebuttable presumption that non-competes are unlawful. If the FTC ultimately decides to implement the rule, in whatever form, the final rule would be effective 60 days after being published in the Federal Register, and employers would have an additional 180 days thereafter in which to comply. Even then, the proposed rule is expected to face a storm of legal challenges, and it may be enjoined from going into effect until the legal challenges have been resolved. An action of this magnitude could get appealed all the way to the U.S. Supreme Court. In short, it is not at all clear what form the proposed rule will ultimately take, whether it will survive legal challenge, and, regardless, exactly when it will be resolved, one way or the other. 

Meanwhile, employers may have some combination of current employees with non-competes that the employers expect to be able to enforce at some point, potential new hires who are subject to non-competes with their current or soon-to-be former employers, or candidates who are or over the next year will be in the recruitment cycle and for whom employers will need to decide whether to include non-competes in their offer packages. These determinations present a number of potential legal implications for employers in general, and challenges for human resources professionals guiding employers in particular, including:
 

For many, if not most, companies, the greatest risk that the proposed rule may pose is to their confidential, proprietary, trade secret information and their intellectual property. And it is generally acknowledged that a company’s own employees often pose the greatest threat when it comes to theft of its trade secrets. The FTC cites the Defend Trade Secrets Act (DTSA) as a replacement remedy for the protection employers might otherwise obtain from non-competes. But this ignores some basic limitations of the DTSA. 

Perhaps, most importantly, the DTSA only protects trade secrets. But there is plenty of other information, data, and intellectual property that is competitively valuable and sensitive, and that can contribute to the good will of companies, that may not rise to the level of a trade secret. In fact, a recent case in which a court granted a group of defendants’ motion for summary dismissal of the plaintiff’s DTSA claim, illustrates why some may argue that the DTSA is not a satisfactory substitute for non-compete agreements. 

Finally, as to the remaining intimate knowledge of customers’ financial condition, circumstances, and business needs, FIB advances no evidence or argument about any disclosure or use of this intimate knowledge to solicit customers, or for any other unfair competitive advantage for Defendants or Glacier. Certainly, customers know lender representatives have this intimate knowledge, and it is not unusual for customers in any sector to follow their friends and/or service providers, in part because of the providers’ knowledge of customer needs. It is unrealistic to expect customers to forget their service relationship with another, just as it is unrealistic to expect Defendants to forget the knowledge they gained with their former employer. Had FIB wished to preclude Defendants from leaving to compete by taking employment with another financial institution, FIB could have proposed an enforceable non-compete agreement. The Court will not recognize a nonexistent non-compete agreement under the guise of “remembered secrets.”

First Interstate Bancsystem, Inc. v. Hubert, 2022 U.S. Dist. LEXIS 127748, __ F. Supp. 3d __, 2022 WL 2763407 (July 15, 2022) (granting summary judgment motion dismissing DTSA claims against all defendants).

Final Word

While the outlook is uncertain, employers would be well advised to take a comprehensive look at not only their restrictive covenant agreements for compliance concerns, but their trade secret and information security processes and programs in the event that non-competes at some point are no longer available or available to the same extent to protect the business.

Eric Akira Tate co-chairs the Global Employment and Labor practice at Morrison Foerster. He litigates bet-the-company trade secrets and employee mobility disputes across the country, and is a noted thought leader, including serving on the Board of Review for leading BNA treatises, Trade Secrets: A State-by-State Survey; Covenants Not to Compete; Employee Duty of Loyalty; and Tortious Interference in the Employment Context.