The Federal Trade Commission (“FTC”) recently announced a sweeping proposed new rule that will effectively prohibit all post-employment covenants not to compete between employers and employees (“Rule”).
The public is invited to submit comments on the Rule until early March 2023. It is slated to take effect shortly after the July 4, 2023 holiday. The FTC may adjust the Rule in response to public comment and has invited comments on not just the overall aspects of the Rule, but also:
- whether non-competes are “unfair” methods of competition under our nation’s antitrust laws and which negatively affect competition in the labor markets;
- whether the Rule should apply uniformly to all workers or whether there should be exemptions or different standards (such as “rebuttable presumptions”) for different categories of workers, such as senior executives or other highly skilled workers; and
- whether low and high wage earners should be treated differently under the Rule.
When made effective the Rule would not only ban non-compete clauses on a going
forward basis, but also would:
- invalidate those agreement already in place; and
likely cause enforcement efforts to be challenged regarding other “de facto” employment-related restrictive covenants, such as non-disclosure and non-solicitation agreements.
According to the U.S. Treasury Department, about one in five workers are subject to a non-compete agreement and such agreements likely reduce wages by as much as 20%. The proposed Rule applies to an employer of any size and proposes only a limited exception for certain non-compete agreements between a seller and a buyer of a business (where the restricted party owns at least a 25% interest in the business).
Notably, the Rule requires that the employer notify all of its workforce on an individualized basis -- including, but not limited to, current and former employees, independent contractors, interns, gig workers (such as rideshare drivers), apprentices, sole proprietors providing service to a client or customer, and volunteers, whether paid or not, and for whom the employer has contact information readily available -- within 180 days after publication of the final Rule, that any non-compete agreement that any worker entered into is rescinded and no longer in effect within 45 days of the rescission.
Keeping in mind that the State of California already prohibits non-competes with only a few narrow exceptions -- what does this mean for most California employers?
First and foremost, the FTC did not discuss, in its 218-page Notice of Proposed Rulemaking, whether “garden leave” arrangements and/or long notice periods for non-solicitation and/or non-disclosure agreements (that arguably are so broad in scope that they effectively prevent a worker from seeking or accepting new employment) would be considered “de facto” (and thus prohibited) non-competes. So now they could be considered fair game for a challenge.
Second, while the enforcement of non-competes in the U.S. has, in the past, been subject to a patchwork of state-based laws and regulations (typically enforced by state attorney generals in state court and involving agreements with senior or other key executives), now it appears that the FTC is stepping up and testing its own enforcement authority for injunctive relief. The feds have recently entered consent decrees with three companies whose non-compete clauses and use thereof allegedly violated Section 5 of the FTC Act.
One of the three companies, Prudential Security, had imposed non-compete restrictions on low-wage security guards even after a Michigan state court held that the employer’s clauses were unreasonable and unenforceable under state law. Two other companies, O-I Glass and Ardagh Group, had imposed restrictions on skilled manufacturing workers and engineers in what the FTC considered was a “highly concentrated” (glass manufacturing) industry.
While the Rule does not create a private right of action or subject violators to treble damages often asserted for violations of other federal antitrust laws, private individuals, however, can still sue employers under antitrust laws and seek monetary penalties. In all, this is a good reminder for employers to consider whether restrictive covenants are reasonable in terms of scope and duration, meet technical state labor code requirements, and if in use, are applied to an appropriate subset of the employer’s workers.
Before the Rule goes into effect, there will likely be legal challenges arguing that the FTC exceeded its “mandate” or authority to engage in such rulemaking and/or that the Rule, as proposed, exceeds limits already imposed by certain doctrines developed by the U.S. Supreme Court. While it is always difficult to predict with certainty whether a regulatory action such as the Rule will survive legal challenges, for those employers interested in submitting comments to the FTC, we are more than happy to help and assist.