What is the Proposed FTC Rule?
The FTC has proposed a new rule (the “FTC Rule”) that would prohibit non-compete agreements in most employment situations. (The full text of the FTC Rule can be found here: https://www.ftc.gov/legal-library/browse/federal-register-notices/non-compete-clause-rulemaking.) If the FTC Rule goes into effect, it would apply throughout the country. It would negate state laws that are inconsistent with it, but any state laws that provide greater protections to employees than the FTC Rule would not be considered inconsistent with it. The only exception to the FTC Rule would be situations in which the employee is subject to the non-compete agreement being entered into as a part of selling their substantial interest in a business or the assets of a business. The FTC Rule states in part: “It is an unfair method of competition for an employer to enter into or attempt to enter into a non-compete clause with a worker; maintain with a worker a non-compete clause; or represent to a worker that the worker is subject to a non-compete clause where the employer has no good faith basis to believe that the worker is subject to an enforceable non-compete clause.”
Additionally, if the FTC Rule goes into effect, existing non-compete agreements will be required to be rescinded and employers must provide notice to existing and former employees that the non-compete agreements are no longer in effect. The FTC Rule has been published for comments and is not currently the law. However, it seems likely that the FTC Rule or a similar version will go into effect.
How Could the FTC Rule Effect Employers?
If the FTC Rule does go into effect, employers in states where non-compete agreements are currently permitted will be faced with a decision about how to protect themselves without using non-compete agreements with employees. However, in certain states non-compete agreements are already generally not enforceable in the employment context. For instance, in California, non-compete agreements are generally only allowed in situations where a party subject to a non-compete agreement sells the goodwill of a business or all their interest in a business. See Cal Bus & Prof Code § 16600, et seq.; see Edwards v. Arthur Andersen LLP, 44 Cal. 4th 937, 947-48 (2008). This is essentially the same as the FTC Rule. Therefore, in California non-compete agreements will generally not be enforced against employees who are not also significant shareholders or members of a company. Accordingly, some states will not be significantly impacted if the new rule goes into effect, since non-compete agreements are already generally not permitted there. However, to the extent that employers in such states have non-compete agreements with employees, even though they are not enforceable, employers would still need to rescind such non-compete agreements in the FTC Rule that goes into effect.
Employers with employees in states that already do not allow non-compete agreements already need to be sure they are taking other steps to protect themselves, and all employers should consider such steps in case the FTC Rule goes into effect. Please also note that whether non-competes are enforceable currently depends on the law of the state where the employee is physically located, rather than where the employer is located. However, this distinction will likely be much less important if the FTC Rule goes into effect.
Employers Should Have Strong Confidentiality Agreements
In the absence of the ability to enforce non-compete agreements, companies should make sure that they have strong confidentiality agreements and non-solicitation agreements with employees. The main concern for most employers is that employees will take the employer’s valuable confidential information with them and use it to compete with the employer if the employee goes to work for a competitor. If employers feel confident that employees will not use the company’s trade secrets or other confidential information, they likely will not feel as strongly about former employees working for a competitor. Therefore, the key to protecting a company without non-compete agreements is to make sure that employees are not using the company’s confidential information and trade secrets against it.
Confidentiality agreements should clearly define what types of information constitute the employer’s confidential information and clearly state the employee’s obligations with regard to protecting this information and not using it for the benefit of anyone other than the employer. If an employer has strong confidentiality agreements in place, it will generally accomplish the main goal of a non-compete agreement: preventing employees from using a company’s confidential information against it. However, confidentiality agreements can be somewhat more difficult to enforce than non-compete agreements, since it is generally easy to prove that an employee is working for a competitor, but harder to prove that an employee is using a former employer’s information unless the use is obvious. Despite the possible difficulty of proving a violation of a confidentiality agreement, they still help to deter employees from using a former employer’s confidential information and can also deter an employee’s new employer from using confidential information that an employee might bring with them since the new employers often want to avoid getting entangled in litigation.
Please note that the FTC Rule does specify that the definition of a non-compete agreement includes “a contractual term that is a de facto non-compete clause because it has the effect of prohibiting the worker from seeking or accepting employment with a person or operating a business after the conclusion of the worker’s employment with the employer” such as “[a] non-disclosure agreement between an employer and a worker that is written so broadly that it effectively precludes the worker from working in the same field after the conclusion of the worker’s employment with the employer.” Therefore, it is important that confidentiality agreements be written to prevent a former employee from using an employer’s legitimate confidential information, but not to be so broad that they would effectively prevent the former employee from being able to work in the field.
Employers Should Also Have Strong Non-Solicitation Agreements
Another concern that employers often have which they may try to alleviate through a non-compete agreement is that a former employee will attempt to take clients and/or other employees with them if they go to work for a competitor. This can be dealt with through a non-solicitation agreement rather than a non-compete agreement. A non-solicitation agreement essentially says that if an employee leaves a company, they agree not to solicit business from a client or customer of the company and/or not to solicit an employee to leave employment with the company. Non-solicitation agreements generally cannot prevent an employee from informing clients, customers, or other employees that they are going to work for a different company, but can restrict employees from actively asking clients, customers, or other employees to come with them. As to other employees, a former employee can generally not be prevented from publicly listing a job opening but can be prevented from specifically asking a former colleague to come with them to their new employer. Therefore, non-solicitation agreements can also accomplish one of the important goals of a non-compete agreement.
Another concern that employers may have is that if they put time and resources into training an employee and the employee takes any leave before doing substantial work for the employer, causing the employer to lose their investment in the employee. While employers may request commitments from employees to remain with a company for a certain amount of time, employers cannot prevent employees from resigning. However, employees who have little skill and training are normally paid less than employees who are more skilled and provide more value to the company. Therefore, the risk to employers of an inexperienced employee resigning after they have received training should be considered in the employee’s salary or wage. Moreover, the FTC Rule would prohibit a “contractual term between an employer and a worker that requires the worker to pay the employer or a third-party entity for training costs if the worker’s employment terminates within a specified time period, where the required payment is not reasonably related to the costs the employer incurred for training the worker.” Therefore, it is advisable not to require that an employee pay back any training expenses unless the costs are the actual reasonable costs incurred by the employer in providing the training.
Employers should keep an eye out to see if the FTC Rule, as currently proposed or modified, goes into effect. If it does, employers should stop using non-compete agreements with employees in most situations and should notify any current or former employees whom they have non-compete agreements with that the agreements are rescinded. Moreover, regardless of whether the FTC Rule goes into effect, employers should make sure that they have strong confidentiality agreements and non-solicitation agreements with employees. These agreements should be drafted or reviewed by an attorney to make sure they are following all relevant laws and provide proper protection.
Please do not hesitate to reach out to TALG* if you have any questions about the FTC Rule, non-compete agreements, confidentiality agreements, or non-solicitation agreements.
*The Amin Law Group, Ltd., DBA TALG