group of workers sitting in a common area discussing the proposed non-compete ban

How Would a Non-Compete Ban Impact My Business? – 5 Things to Know

On January 5, 2023, the Federal Trade Commission (FTC) proposed a rule to ban non-compete clauses in employment agreements nationwide, except in very limited circumstances. If enacted as written, the proposed rule would supersede all contrary state laws that currently govern non-competes.

1. What is a Non-Compete Agreement?

A non-compete agreement is a restrictive covenant limiting your ability to work in a particular field or industry. Generally, the non-compete specifies the length and the geographic area of the restrictions.

Currently, state laws govern the enforceability of non-competes. Limitations on non-competes vary from state to state. For example, California, North Dakota, and Oklahoma, Montana and District of Columbia don't allow non-compete agreements. Pennsylvania and neighboring states limit (but don't prohibit) non-competes.

2. What Would the FTC's Proposed Rule Do?

If made final, the proposed rule would prohibit employers in every state from entering into or enforcing non-competes with workers (including employees, independent contractors, volunteers, interns, and any other individuals who work for an employer). The FTC rule states that non-competes are unfair methods of competition, which the FTC Act prohibits.

The proposed non-compete ban would require employers to rescind existing non-competes within six months. In addition, employers would have to provide individual notice to current and former employees that their non-compete clause is no longer in effect or enforceable.

The proposed rule does not prohibit non-competes that are part of the sale of a business.

3. When Could The Non-Compete Ban Take Effect?

The proposed rule is open for public comment until March 10, 2023. After that, public members may request more time to submit comments.

Once the comment period closes, the FTC may modify the proposed rule before deciding whether to reopen the comment period or whether to issue a final non-compete ban.

A final rule may face lawsuits challenging the rule's content or the FTC's authority to take away state authority to regulate non-compete agreements. Because of the likelihood of challenges, the timeline for any proposed rule is unclear.

However, the long-term trend among the states is to limit or ban non-compete agreements. State and federal courts have ruled against enforcement of non-competes where employers appeared to overreach. State legislatures have considered laws that prohibit or limit non-competes.

4. How Can I Protect My Business Without Using Non-Competes?

The proposed rule does not specifically ban other types of restrictive covenants, such as non-solicitation or non-disclosure agreements, which employers can use to protect their business interests. These are described below.

Non-Solicitation Agreements restrict ex-employees from asking customers, vendors, or other employees to move to the employee's new employer. The employee may work for a competitor but may not initiate contact with the former employer's customers, vendors, or employees to gain a competitive advantage. Like non-competes, non-solicitation agreements have a limited duration (typically one or two years).

Non-Disclosure/Confidentiality Agreements prohibit the employee from using confidential information acquired during an employee's tenure with the employer. Examples include customer lists, trade secrets, unique manufacturing processes, and product development initiatives. Unlike other restrictive covenants, confidentiality provisions need not include time limits.

Although the proposed non-compete ban does not prohibit non-solicitation or non-disclosure agreements, the ban would extend to de facto non-compete clauses. These are contractual provisions written so broadly as to have the functional effect of prohibiting workers from seeking or accepting new employment.

As such, business owners need to understand the terms of their employment agreements and avoid using overly broad language in them. Restrictive covenants should be written narrowly to protect legitimate business interests, such as confidential information or trade secrets, and shouldn't be any broader than necessary to protect those interests. Contact a business lawyer or employment attorney to review your current agreements.

5. What Else Can Businesses Do To Prepare for a Non-Compete Ban?

The FTC's proposed rule may or may not become law, and its final version may differ significantly from its current version. Nonetheless, employers should continue monitoring the status of the proposed rule and state law for any related legislative developments that may occur in the meantime.

While employers don't need to take any immediate action, business owners using non-competes should consider the enforceability of their existing restrictive covenants and determine if those restrictions are necessary to protect a business's interest.

Business owners may find it valuable to revisit and consider updating their existing employment agreements to best comply with the purpose of the proposed rule.

Talk to Our Employment Lawyers

It makes sense to have some restrictive covenants to protect your business if you're an employer.

Our business and employment lawyers can provide employers throughout Pennsylvania and New Jersey with sound advice and representation. Our employment law attorneys deal with workplace issues in an ever-changing environment and seek to minimize the risk of employee lawsuits for our clients.

If you'd like to learn more about enforcing a restrictive covenant or about creating an employment agreement for your business, call our Montgomery County and Bucks County law offices today at 610-275-0700.

The information above is general: we recommend you consult an attorney regarding your circumstances. The content of this information is not meant to be considered legal advice or a substitute for legal representation.

Contact Us