Employer Non-Competes Under Threat by FTC Proposal
By: Tyler Hartney, Phyllis Karasov, and Andrew Moran
On January 5, 2023, the Federal Trade Commission (FTC) issued a proposed rule which, if enacted, would ban most non-compete clauses in employment contracts. The rule would also require employers to rescind existing non-compete clauses with its workers and provide those workers with written notice that the non-competes have been rescinded.
This rule, if enacted, would apply to agreements between employers and employees, independent contractors, interns, externs, volunteers, apprentices, and/or sole proprietors that provide services to clients or customers. However, the rule would not prohibit the use of non-competes in contracts for the sale of a business or non-compete agreements with franchisees in the context of a franchise agreement.
The rule, as proposed, would ban non-compete restrictions, even if not titled as such. The FTC’s proposal makes clear the prohibition would invalidate even “de facto non-compete” provisions which include overly broad non-disclosure agreements or agreements that require an employee to repay employers for training costs if the employee does not remain an employee for a particular duration. If the proposed rule is enacted, employers will need to evaluate all agreements that may fall under the FTC’s broad definition of a non-compete agreement in order to provide the required notice of recission to employees. Failure to properly rescind all existing non-competes could result in an FTC enforcement action and penalties.
The FTC voted 3-1 to publish the Notice of Proposed Rulemaking, which is the first step of the administrative rulemaking process. The next step of the rulemaking procedure is a 60-day public comment period. The FTC will then review comments and consider whether to make changes and issue a final rule.
The proposed rule is guaranteed to face a variety of legal challenges. FTC Commissioner Christine S. Wilson, who voted against the proposed rule, issued a statement in which she provided potential bases for legal challenges that could be asserted against the enforcement of the proposed rule. Those potential legal challenges include: (1) the FTC doesn’t have the legal authority to make and enforce this rule; (2) this rule may be of such great significance that it may only be enacted by the legislature; and (3) if congress did delegate legislative authority to create this rule to the FTC, such a delegation of authority would be unconstitutional.
The final rule, yet to be published, may be different from the proposed rule. There is a 60-day comment period in which the public can submit comments, objections or support for the proposed rule. Employers have the right to submit comments, and it can be expected that various business and employer associations and organizations will submit comments and objections to the proposed rule. Employers should engage legal counsel to analyze existing practices that may be impacted by the proposed rule and identify which agreements and employees are subject to existing non-competes Employers and their legal counsel should determine if there are alternative legal protections that can be put in place in order to best protect confidential information and other business interests without risking classification as an unenforceable non-compete agreement under this proposed rule.
Pending Attempts to Ban Non-Competes Statewide in Minnesota
Just into the legislative session, the Minnesota legislature is considering a pair of companion bills in the House (HF295) and Senate (SF405) that aim to invalidate a large sum of employment-based non-compete provisions. If these bills can muster enough political support to become law, all non-compete agreements with employees in Minnesota that earn under a certain annual salary and would require “garden leave” payments for employees making above the salary threshold, which are payments made after the termination of the employment relationship which provides the former employee with some compensation during the restricted period. The salary required to have an enforceable non-compete agreement under the initial drafts of these bills is at or above the median family income for a four-person family in Minnesota as determined by the US Census Bureau. For employees that satisfy the income threshold and can have a valid non-compete, the required garden leave payments must be at least half of the employee’s highest annualized salary within the prior two years and must be paid on a pro-rata basis over the entire course of the restricted period.
Each bill, as currently formatted, define a “covenant not to compete” as an:
[A]greement between an employee and employer that restricts the employee, after termination of the employment from performing:
(1) work for another employer for a specified period of time;
(2) work in a specified geographical area; or
(3) work for another employer in a capacity that is similar to the employee's work for the employer that is party to the agreement.
Like the rule proposed by the FTC on a national level, the Minnesota bills do not apply to non-compete agreements that are made as part of the sale of a business.
Both bills contain a provision that only applies to non-compete agreements agreed to by an employee without the assistance of counsel wherein the bills invalidate any choice of law provision that would require an employee to litigate or arbitrate outside of the state of Minnesota or apply the law of another jurisdiction and deprive the employee of its protections under this law. As an additional protection for employees who entered into the agreement without the assistance of counsel, if the employee is forced to invalidate a choice of law provision in a non-compete, the employee will be entitled to reasonable attorney fees. At this time, neither bill has left the committee stage. However, we will continue to monitor these bills as they progress through the legislative process.