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FTC noncompete rule a long time coming
The internet exploded in 2014 when it was uncovered that Jimmy John’s Sandwiches, a company with annual revenue in the billions, required the minimum wage “sandwich artists” at its franchises to sign restrictive noncompete agreements. Under the terms of those agreements, the workers promised that during their employment and for a period of two years after that they would not make sandwiches for any other business that derived 10 percent of its revenue from sandwiches.
After the backlash – and a class action – Jimmy John’s franchises tactically settled many of their suits and dropped the noncompetes from their employment agreements.
Despite the public outcry over no-compete agreements, the Federal Trade Commission (“FTC”) and the White House have estimated that approximately between 30 to 60 million American workers today are still subject to a noncompete agreement as part of their employment contracts.
These agreements, which are sometimes also known as restrictive covenants or covenants not to compete, are contractual agreements between employer and employee that limit the employee’s future ability to start or enter into a similar trade or profession of their current employer and prevents the employee from using confidential information or trade secrets gleaned from their current job.
In some ways it’s understandable that an employer would want a high-level employee who has learned skills at the company and is privy to the company trade secrets to be prevented from taking those skills and secrets to a competitor. However, many low-wage employees, such as the Jimmy John’s sandwich artists, are also subject to these agreements.
For years, worker’s rights groups and others have advocated to ban or severely curtail noncompete agreements between employers and their employees. In spring 2016, the U.S. Treasury Department issued a report on the economic effects and pervasive misuse of noncompete agreements. In Fall 2016, President Obama issued his “State Call to Action on Non-Compete Agreements.”
These pushes have gained traction. California and North Dakota have outright banned noncompete agreements. The ban on noncompetes is often credited for the success of Silicon Valley. Meanwhile, Delaware, Massachusetts and New York have severely restricted or called into question the enforceability of noncompete agreements. In all, more than 20 states and D.C. have enacted some worker protections on noncompete agreements.
In summer 2021, President Joe Biden, through his “Executive Order on Promoting Competition in the American Economy,” among other things called on the FTC to ban or limit noncompete agreements, saying they stifled wages, competition, innovation and limited worker mobility.
On Jan 5, 2023, the FTC announced a proposed new rule that could impose a nationwide prohibition on noncompete agreements for all workers and industries.
Under the FTC’s proposed rule, it would be illegal for employers to: (i) enter into or attempt to enter into noncompete agreements with workers, (ii) maintain a non-compete with a worker, or (iii) represent to a worker that he or she is subject to a noncompete.
The proposed rule would also require employers to rescind existing noncompete agreements and to affirmatively advise those workers that they are no longer subject to a noncompete.
Notably, the prohibition on noncompete agreements would apply to all workers of an employer, including independent contractors.
The FTC estimates that by prohibiting noncompete agreements that wages could increase by as much as $300 billion per year and expand career opportunities for the millions of workers currently subject to non-compete agreements.
The FTC is soliciting written comment from the public on this proposed rule, as well as hosting a public forum on Feb. 16, 2023, to examine the rule and allow persons to testify as to the practical effects of noncompete agreements.
Whether the FTC proposed rule is passed, in whole or in part, it is clear that many states on their own initiative are prohibiting or limiting noncompete agreements.
Clients will wonder what they can do to protect their confidential information or to prevent their star employee from going to a competitor. In addition to offering competitive salary packages and a healthy work environment, employers can look to confidentiality clauses and other contractual protections that prevent the unauthorized disclosure of trade secrets.
In the meantime, clients should be counseled to scrutinize their current noncompete agreements to ensure that they are in compliance with local and federal regulations.
Elizabeth J. McInturff, Esq., a partner at JDKatz, PC, represents clients in complex civil and commercial matters, such as plaintiff’s side litigation, contract disputes, employment litigation, construction litigation and actions arising under consumer protection acts and state wage laws.
