A Changing Landscape?

 

By John Gannon, Esq.

 

Last month, President Biden gave his State of the Union address, during which he hyped the legislative accomplishments made during his time in the Oval Office. One of the topics that made the list: non-compete agreements.

Specifically, the president discussed the Federal Trade Commission’s (FTC) proposed rule to ban all non-compete agreements in the workplace. The rule could affect the employment terms of more than 30 million American workers.

 

Background

As many readers are likely aware, Massachusetts state law already restricts the use of non-compete agreements in the workplace. The Massachusetts Noncompetition Agreement Act (MNAA), which was passed back in 2018, prohibits non-compete agreements with non-exempt employees. In addition, non-compete agreements are enforceable only if an employee is terminated for cause. Under the MNAA, non-competes generally must be limited to 12 months, and must be supported by garden leave (i.e., paying the employee some amount of money during the non-compete period).

The MNAA does not prohibit agreements restricting employees from soliciting business with customers or clients, nor does it impact non-disclosure agreements meant to protect dissemination of trade secrets. And non-compete agreements entered into after the effective date of the MNAA — Oct. 1, 2018 — are not affected.

On Jan. 5 of this year, the FTC proposed its own rule that would ban all non-compete agreements, with limited exceptions. The proposed rule also bans ‘de facto’ non-competes, which could include anti-solicitation and non-disclosure agreements, depending on how they are written.

According to the FTC, “when employers use non-compete clauses to restrict workers from moving freely, they have the power to suppress wages and avoid having to compete to attract workers. Based on existing evidence, non-compete clauses also reduce the wages of workers who aren’t subject to non-competes by preventing jobs from opening in their industry.” The FTC estimates that “the proposed rule could increase workers’ earnings across industries and job levels by $250 billion to $296 billion per year.”

 

The Proposed Rule

The FTC’s proposed rule would ban all non-compete agreements between employers and employees, as well as independent contractors. The rule defines a non-compete as “a contractual term between an employer and a worker that prevents the worker from seeking or accepting employment.”

This is not limited to traditional non-compete provisions that limit an employee from seeking work with a competitor. The rule would encompass post-employment restrictions that ostensibly prohibit the employee from seeking future employment. Certainly, an argument could be made that overly broad non-solicitation or non-disclosure agreements have the effect of prohibiting a worker from going to work elsewhere.

Unlike the MNAA, the FTC’s proposed rule would rescind all employment non-compete agreements currently in place. It would also require employers to inform employees currently subject to a non-compete agreement that the agreement is no longer valid.

 

Strong Resistance

Not surprisingly, the FTC’s proposed rule does not sit well with businesses.

Calling the rule “blantantly unlawful,” the U.S. Chamber of Commerce noted that, “since the agency’s creation over 100 years ago, Congress has never delegated the FTC anything close to the authority it would need to promulgate such a competition rule.

“Attempting to ban non-compete clauses in all employment circumstances,” the chamber went on, “overturns well-established state laws which have long governed their use and ignores the fact that, when appropriately used, non-compete agreements are an important tool in fostering innovation and preserving competition.”

The FTC has invited public notice and comments on the proposed rule through March 20. Businesses and others can submit comments at www.regulations.gov/document/FTC-2023-0007-0001. After the close of this comment period, the FTC will publish a final rule, incorporating the input it receives.

This will just be the beginning. After the rule is issued, employers and trade associations are certain to challenge the rule in court. Ultimately, the legality of this rule may be decided by the U.S. Supreme Court, which is precisely what happened with the recent rule proposed by OSHA mandating a COVID ‘vaccine-or-test’ policy for larger employers. This rule was struck down by the Supreme Court earlier this year.

 

Next Steps for Employers

Many businesses in Massachusetts went through a non-compete process and procedure review back in 2018, due to the MNAA. However, employers need to understand that the proposed FTC rule goes beyond traditional covenants banning employees from working for competitors post-employment. It would be wise for employers to review non-solicitation and non-disclosure agreements currently in place to be sure they will be enforceable should the FTC’s proposed rule become the law of the land.

Businesses should also enhance any agreements meant to protect trade secrets and/or client relationships with suitable policies and procedures. This involves making sure confidential information stays confidential by limiting data access to ‘need-to-know’ groups. It also involves implementing polices geared toward ensuring that sensitive company information stays on site and cannot be accessed on an employee’s personal device.

Finally, employers should carefully follow the progress of the FTC’s proposed rule and work with legal counsel in drafting or enforcing non-compete and non-solicitation agreements going forward.

 

John Gannon is a partner with the Springfield-based law firm Skoler, Abbott & Presser, P.C., specializing in employment law and regularly counseling employers on compliance with state and federal laws; (413) 737-4753; [email protected]