What The FTC’s Proposed Ban On Employee Noncompete Agreements Could Mean For The Technology Industry – Media

The Federal Trade Commission (FTC) has recently turned its focus
to employee noncompete clauses, with the agency announcing a proposed regulation on January 5, 2023 that
would implement a near-comprehensive banacross the United
States, with limited exceptions. Employee noncompete agreements
have been used extensively by technology companies seeking to
protect their innovations, so this development could have
significant ramifications for the industry.

The Proposed Regulation

Notably, the proposed regulation would apply to noncompetes with
all types of employees, regardless of position within the company,
access to confidential information, or income level.¹It
would also extend to similar agreements with independent
contractors, interns, and volunteers. Further, the proposed
regulation would also apply retroactively to existing noncompete
agreements, meaning technology companies with preexisting
noncompetes would be required to rescind them and notify both
current and former employees that those agreements are no longer in
effect.

The proposed regulation would not, however, affect other forms
of employee agreements such as non-disclosure or non-solicit
agreements unless such agreements operate in practice as a
noncompete agreement (i.e., where non-disclosure
requirements are so broad that they have the effect of precluding
the employee from working in the same field). It also will not
affect non-employment-related noncompetes, such as non-compete
agreements entered into between businesses. Also excluded are
employee noncompetes made in connection with the sale of a business
or a business unit, provided that the worker so restricted is a
25%-or-greater owner of the business or business unit being
sold.

As it currently stands, the regulation would abolish noncompetes
regardless of whether a state has a law providing for them. For
technology companies with operations solely in California, where
employee noncompetes are largely banned already,²this
development may have limited ramifications. However, employers with
operations outside of California need to be aware of the potential
legal ramifications of the proposed regulation.

Next Steps

The FTC is currently soliciting feedback to the proposed rule
through its formal comment process, with a deadline for submission
of March 20, 2023. This proposed rule has already
garnered significant attention and is likely to draw a host of
comments. Statements issued by the FTC’s Commissioners about
the proposed regulation suggest that the FTC is interested in
hearing from the public about the potential impact of the proposed
rule and whether the agency has appropriately considered the costs
and benefits of noncompete clauses.

This suggests that the final version of the rule could change
based on public comments. As a result, technology companies should
evaluate whether to submit comments to the FTC. In particular, if
the proposed ban may cause harm to a company’s legitimate
business interests, such as the need to protect confidential
information and innovations, now is the time to make those
objections heard. Whether established enterprise or startup,
technology companies should also take steps now to evaluate how
they are protecting their businesses, and whether other types of
agreements, such as appropriately tailored non-disclosure
agreements, may make sense now given the proposed ban.

Ultimately, whatever rule the FTC adopts will likely be
challenged in court. There are questions on whether the FTC has the
authority to adopt substantive antitrust regulations, and even if
it does, it is far from clear whether it would extend to the power
to make these types of reforms to an area of employment that has
long been regulated by states.

Footnotes

1 A handful of states permit employee noncompete
agreements where an employee earns above a certain income
threshold. In Washington, noncompetes are permissible where an
employee earns over $100,000 a year. Wash. Rev. Code §
49.62.020. The same is true in Illinois for employees earning over
$75,000 a year, and in Colorado for employees earning over $101,250
a year, among other states. 820 Ill. Comp. Stat. 90/10(a); Colo.
Rev. Stat. § 8-2-113.

2 Aside from California, the only other states that
currently prohibit virtually all employee noncompetes are North
Dakota and Oklahoma.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.