The Federal Trade Commission (FTC) proposal to bar nearly all noncompete agreements between employers and employees would have far-reaching impact across industries, affecting about 30 million workers.
The proposed rule would prevent employers from entering into noncompete agreements with workers and require employers to rescind existing noncompete agreements and provide notice that these clauses are no longer in effect.
The FTC said noncompetes—contractual covenants in which employees agree not to accept similar employment with a competitor after their employment period is over—harm competition by blocking workers from pursuing better opportunities and by preventing employers from hiring the best available talent.
Backlash to the rule has begun. Some experts argue that the agency has overstepped its authority, while others say the agreements are an important tool in fostering innovation and preserving competition.
The Society for Human Resource Management (SHRM)—which is preparing a formal comment for submission to the FTC—believes the agency should differentiate between agreements designed to limit labor market mobility and those designed to protect confidential trade secrets or strategic planning.
"The broadly drafted regulation would jeopardize the ability of HR practitioners to require the repayment of education or training benefits; it would also endanger the use of nondisclosure and nonsolicitation clauses," SHRM said.
If adopted, the final version of the rule would not become effective for at least 240 days, and then it is likely to be met with legal challenges. But experts say that whether the rule is adopted or not, employers should be prepared to act on the issue this year.
What Employers Should Do Now
First, employers should submit public comments on the proposed rule. The FTC is accepting public comments through March 20. "If you've got something to say, speak up and file comment," said Michael Greco, regional managing partner of the Denver office of Fisher Phillips.
"The more viewpoints and arguments raised questioning the legal and policy justifications for the FTC's proposed rule, the more the FTC will need to analyze when considering whether to publish a final rule and what such a final rule would cover," said Wendy Arends, an attorney in the Madison, Wis., office of Husch Blackwell.
Greco said that while it is uncertain what the final rule may look like, there is widespread consensus that something will be enacted.
"And after the recent FTC enforcement actions, companies should think carefully about whom they give noncompetes to," he said. "Revisit your use of noncompetes to see if they are necessary. Ask yourself, 'Is the noncompete necessary to protect legitimate business interests?' Can you protect yourself with a less burdensome covenant, such as a customer nonsolicit or a confidentiality agreement?"
Matt Durham, an attorney in the Salt Lake City office of Dorsey and Whitney, noted that the backlash against noncompete agreements has arisen from their broad use by employers.
"Some employers, for example, use them for most or all employees, including low- or entry-level employees," he said. "Courts and commentators have perceived such use as unnecessary and heavy-handed. Employers can evaluate their use of noncompete agreements and use them only with employees who have access to information or influence on customer relationships that are truly important to the company."
Employers should at least consider eliminating the use of noncompetes with low-wage earners to be in alignment with one of the top aims of the FTC, experts said.
Companies should be cautious and prudent when it comes to noncompetes while the rulemaking process plays out, but there's no need to panic, said Eric Hochstadt, an attorney in the New York City office of Weil Gotshal. "While this is a significant development, we advise caution before reacting too soon or too dramatically," he said.
"Have a credible and straightforward explanation for why a contract has a noncompete," Hochstadt continued. "For example, is the company going to make substantial investments in training the covered employees? Will those employees have access to trade secrets and other sensitive information that the company safeguards and that could be misused by competitors? Do they possess significant goodwill with clients and customers?"
He added that employers should ensure that the noncompete is reasonably tailored in terms of geographic scope and duration and that it does not unduly limit the pool of competitors for which the employee would be restricted from working.
"Companies should consider working with counsel to audit noncompetes and other restrictive covenants contained in their employment and equity agreements to ensure that they know
what type of agreements they have and whether those agreements comply with not only the proposed FTC rule but also comply with many new state laws that have been enacted over the last several years," Hochstadt said.
Employers may also be able to protect their information, relationships and goodwill using other types of agreements, Durham said. "Nonsolicitation, nondisclosure and intellectual property agreements can protect proprietary company information and client relationships without preventing an employee from working in the same industry."
Greco agreed that it's premature for companies to make too detailed or comprehensive a plan for complying with the proposed rule. "It's too early for that, but employers must get their trade secrets house in order," he said. "Identify your trade secrets, and make sure you have proper policies and procedures in place, such as allowing access only to those that need to know, conducting training and implementing technological controls."