Breaking: Federal Trade Commission Proposes Rule To Outlaw Non-Compete Agreements
Under the direction of President Biden, the Federal Trade Commission (FTC) has issued a proposed rule that will outlaw non-compete agreements in the workplace. Back in July 2021, President Biden issued Executive Order 14036 directing the FTC to either ban or limit employee non-competes in order to promote competition in the American economy, increase wages, make it easier for employees to change jobs, and eliminate aggressive tactics by large companies. Biden's Executive Order specifically focused on the "unfair use" of non-compete clauses and other clauses that "unfairly limit" worker mobility.
The order issued by President Biden raised numerous questions regarding how far the FTC would go to limit or restrict the use of non-compete agreements. Indeed, such restrictions are used to protect employer trade secrets and confidential information, customer and business relationships, and allow employers to invest in their employees by providing access to training and valuable information relating to the employer’s business operations. Non-compete agreements are designed to restrict workers from leaving their employment to compete for a period of time after their separation. Generally, such prohibitions apply within a certain geographic area where the employer maintains business operations.
Non-competes are enforceable in the vast majority of states as long as the restriction is deemed reasonable to protect the legitimate interests of the employer. There are volumes of judicial decisions and statutory authority addressing the enforceability of non-competes under state law. The FTC has essentially gone "all in" and is proposing a complete ban on such agreements in the workplace, subject to limited exceptions. The new rule will effectively overturn judicial decisions and statutory authority in numerous states.
What you need to know about the new FTC rule:
1. The new rule imposes a ban on non-compete agreements that prevent a "worker from seeking or accepting employment with a person, or operating a business, after the conclusion" of employment.
2. Non-compete agreements currently in effect must be rescinded by the employer within 180 days after the final rule is published. Employers will be required to provide notice to their workers that the restrictions are no longer in effect.
3. The new rule not only applies to employees but also applies to independent contractors and workers who provide services to clients and customers of the employer.
4. The new rule does not apply to non-compete agreements relating to the sale of a business if the individual restricted is the owner or a "substantial member or substantial partner of the business."
5. The new rule does not address post-employment restrictions relating to the solicitation of customers and employees. In other words, customer-based restrictions that prevent an employee from soliciting or providing competitive products and services to customers may still be enforced as provided under state law, as well as restrictions relating to the solicitation and hiring of employees.
What is the impact on Nebraska employers?
As stated above, the new rule will invalidate judicial authority and state statutes across the country. Interestingly, the new rule would arguably have no effect on Nebraska non-compete law. The new law appears to be consistent with state public policy and how the courts have defined unfair competition when analyzing restrictive covenants. Nebraska falls within a very small number of jurisdictions that do not enforce non-compete agreements. Employees are generally free to seek and accept employment with a competitor. Similar to the FTC rule, non-compete restrictions are only enforceable in Nebraska in connection with the sale of a business or other transactions similar to the sale of a business.
Nebraska courts will, however, enforce restrictions that prevent a former employee from soliciting or providing competitive products and services to customers with whom they did business and had personal contact. Under the FTC rule, customer-based restrictions are not addressed. Rather, the new rule only addresses non-compete restrictions that prevent a worker from "seeking or accepting employment with a person or operating a business after the conclusion of the workers' employment." Customer-based restrictions should still be enforceable to the extent allowed under state law. In addition, restrictions relating to the solicitation and hiring of employees should also be enforceable as provided under state law.
The issuance of the new rule comes on the heels of a recent settlement entered into between the FTC and three companies – Ardagh Group SA, Owens-Illinois Group, Inc. and Prudential Security Inc. The FTC found that the companies engaged in aggressive tactics by using non-competes that unfairly restricted worker mobility. The companies agreed to stop using these agreements and rescind existing agreements.
What happens next?
The new rule becomes effective 180 days after date of publication of the final rule. The public will have 60 days to submit comments on the proposed rule after the Federal Register publishes the proposed rule. The FTC is requesting public comment on a number of topics including whether franchisees should be covered under the rule, whether senior executives should be exempted, and whether the rule should apply differently to low and high wage earners.
We fully expect there will be strong opposition and litigation will be initiated to block the new rule. We will continue to keep you posted regarding any legal developments.
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