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Thursday, January 26, 2023

FTC Contemplates Complete Ban on Non-Compete Agreements

On January 5, 2023, the Federal Trade Commission (FTC) announced a proposed regulation that would completely prohibit non-competition agreements in the workplace.  A non-compete clause is a contractual term between an employer and worker that prevents the worker from seeking or accepting certain employment, or operating certain businesses, after the worker’s employment ends.  Previously, the FTC issued a statement in November 2022 in which it declared its intention to exercise authority under Section 5 of the FTC Act which would be in line with President Biden’s Executive Order from July 2021 urging the FTC to promulgate new rules governing non-competes.  If this were to happen, the consequences for both employers and employees would be significant.

With certain exceptions, the proposed rule would make it illegal to (1) enter into or attempt to enter into a noncompete with a worker, (2) maintain a noncompete with a worker, and (3) represent to a worker that the worker is subject to a noncompete agreement.  The rule would effectively require employers to rescind all existing noncompete agreements and notify employees that they are no longer subject to the contract’s terms.

The key element of the proposed rule begin with Section 910.2(a) which states “It is an unfair method of competition for an employer top enter into or attempt to enter into a non-compete clause with a worker; maintain with a worker a non-compete clause; or repreent to a worker that the worker is subject to a non-compete clause.”  For existing noncompete agreements, proposed Subsection 910.2(b)(10) directs employers to rescind those clauses.

The proposed regulation contains a narrow exception for the use of non-competes in the purchase of a business, but it only allows a purchaser to utilize non-competes with workers who are also owners, members, or partners of entities with 25% or more ownership interest in the purchased entity.

Currently both Massachusetts and Rhode Island permit noncompete agreements that are reasonably tailored to protect a legitimate business interest.

There are many risks and benefits to both employers and employees.  Employers will have a much higher risk of being victimized by the misappropriation of confidential information.  The legislation will also alter the dynamics of pay negotiations for top executives and key employees.

The proposed regulation was published in the Federal Register on January 8, 2023, opening a 60-day public comment period which will end on March 10, 2023. Following this comment period, the FTC will then consider any comments and make revisions to the regulation.

If you have any questions regarding non-competition agreements, please feel free to contact the Law Offices of Samuel S. Reidy for a free consultation.

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