The Federal Trade Commission has spoken, and U.S. post-“employment” noncompete agreements are now an endangered species.  The Commission’s Non-Compete Clause Rule, if enacted in the form announced on January 5, 2023, would go beyond merely shielding the vulnerable.  Instead, it would effectively ban almost all post-work noncompetes – even for those employees and independent contractors not warranting such protection – while entirely ignoring legitimate business concerns.

Noncompetition agreements currently are governed by state law.  A few states prohibit employee noncompetes outright, whereas several other states ban them only as to low- or low-to-mid-income employees.  Many jurisdictions, though, allow their courts to determine enforceability on a case-by-case basis.  Such courts tend to ask whether the geographic scope and time period of a particular restrictive covenant are “reasonable” under the circumstances given (i) the employer’s legitimate interest in protecting itself from unfair competition, and (ii) the employee’s right to make a living.  For example, a given court might deem a six-month, 10-mile noncompete too onerous for a chef operating in a certain suburban area while enforcing a one-year, worldwide noncompete against the former chairman of a multinational beverage company.  (Some of those courts engage in “blue-penciling” –  the modification of unenforceable restrictive covenants to encompass more reasonable, enforceable terms.  Thus, the hypothetical six-month, 10-mile noncompete mentioned above might be changed, for example, to a three-month, five-mile restriction.)

The new, superseding prohibition, however, would (i) cover employees at all levels, not just lower-wage, unskilled workers; (ii) apply even to independent contractors and certain sole proprietors that provide services to clients or customers; (iii) include certain client non-solicitation agreements and certain non-disclosure agreements that merely have the effect of noncompetes; (iv) apply retroactively to invalidate existing noncompete agreements; (v) cover virtually any situation other than that involving franchising or the sale of a business or substantially all of a business’s operating assets (and in the “sale” situation, hinder only the seller’s owners); and (vi) subject potential violators to, among other consequences, civil penalties and monetary damages.

To be sure, the FTC seems well-intentioned.  Noncompete provisions, it argues in its accompanying Fact Sheet, effectively lower wages both for the workers who sign them and for those who do not, prevent new businesses from forming, and stifle entrepreneurship and innovation.  The Commission further contends that the new rule would increase American workers’ annual earnings by between $250 billion and $296 billion while narrowing racial and gender wage gaps. 

Unfortunately, however, the FTC’s analysis is a facile one and its proposal is a stunningly overbroad one that invites absurd, highly unfair, and even counterproductive results.  What about the employer who, faced with the retroactive invalidation of a previously permitted noncompete, already trusted a highly paid executive with sensitive proprietary information?  (Although trade secrets statutes presumably would remain enforceable, actual violation of one by a departing employee who starts a competing business might be exceedingly difficult to prove.)  What about the construction subcontractor whose efforts caused its engineers to be placed on a large project, only for the prime contractor to “cut out the middleman” and directly hire the employees to work on the project?  And what about the business executive who willingly accepted a noncompete in exchange for a six-figure bonus?  Indeed, it is quite possible that a rule intended in part to create economic opportunity and promote innovation will actually stifle internal trust, cooperation, and exchange of ideas – thereby having a stifling effect.

In some form, a national standard limiting noncompetition agreements might actually serve the FTC’s stated goals.  One like the Non-Compete Clause Rule, which ignores nuance and strips courts of fact-specific flexibility, is not such a standard.

If you would like to discuss any of the issues in this post, please contact David Ross at dross@garrishorn.com.