"FTC Proposed Rule to Ban Noncompete Clauses: Steps to Safeguard Your Business."
On January 5, 2023, the Federal Trade Commission proposed a new rule that would ban almost all noncompete agreements, including ones already in place.
Does your business utilize noncompete agreements to protect its trade secrets, confidential information, customer, client or patient relationships, or goodwill? That’s wise. In the current service economy, the most important assets of many businesses aren’t their brick-and-mortar premises or physical inventory, but rather their intangible assets such as intellectual property and goodwill. Enforceable noncompetes are narrowly tailored to protect these valuable assets for a reasonable period of time by prohibiting departing employees from competing in the same territory they serviced for the former employer. Currently, individual state laws define what is and is not permissible with regard to noncompetes.
All that may be about to change.
On January 5, 2023, the Federal Trade Commission issued notice of a proposed rule that would not only prohibit employers from entering into noncompetes with workers in the future, but also would require them to rescind any noncompetes entered into prior to the effective date. The FTC’s own notice estimates that this rescission requirement would affect approximately 30 million existing contracts nationwide. The only exception to the prohibition would be for individuals who sell all of their ownership interest in a business entity or all or substantially all of a business entity’s operating assets. The notice claims that the prohibition “generally” would not include other types of restrictive covenants such as nondisclosure agreements or customer nonsolicitation agreements.
This would represent a radical change to the way many companies do business, not to mention the disruption of millions of otherwise enforceable contracts. The FTC’s notice is available here.
Fortunately, you have an opportunity to be heard. The FTC has invited the public to submit comments on this proposed rule and, based on those comments, may make changes to the final rule. However, comments must be submitted no later than 60 days after the proposed rule is published in the Federal Register. That hasn’t happened yet, but will very soon. As a result, interested parties must be prepared to act soon.
Please contact your WWHGD attorney or one of the members of our Intellectual Property Practice Group if you would like to submit a comment on this potential rule change or if you would like us to prepare one on your behalf. We also can review your current contracts to assess whether they might be impacted by the proposed rule and assist you in drafting nondisclosure agreements or customer nonsolicitation agreements that should be exempt from the proposed rule.