Q: What is the FTC, and why is my non-compete agreement any of its business?
A: The FTC is short for the Federal Trade Commission, the agency responsible for regulating, among other things, unfair methods of competition in the United States economy. Two summers ago, President Biden instructed the agency to take action to curb the unfair use of non-compete clauses and other agreements that might unfairly limit worker mobility.
This proposed rule is the FTC’s response to the President’s call to action.
Q: What would the proposed rule actually do?
A: Two big things.
First, it would prohibit employers from entering non-compete agreements with workers[1] in the future.
Second, it would force companies to formally rescind existing non-compete provisions and tell the affected worker that it has done so.
A “non-compete” clause is broadly defined under the rule as any contract term that prevents a worker from seeking or accepting employment with a person, or operating a business, after the worker’s employment with an employer ends. The FTC did create a narrow exception for certain non-competes entered in the sale of a business context.
Q: Are my non-solicit and non-disclosure clauses safe?
A: Probablybut be careful.
The FTC’s proposal only explicitly bans non-compete provisions, not other types of restrictive covenants like non-solicit or non-disclosure provisions. There is an important caveat, however.
The FTC will use a “functional” test to determine whether a particular contract term constitutes a non-compete clause, meaning that the title given to a term will hold little sway if it operates as a de facto non-compete provision. To help illustrate the point, the FTC explained that a non-disclosure agreement written so broadly that it effectively precludes a worker from working in the same field after his or her employment, would constitute a non-compete clause banned by its rule.
In other words, if a contract term operates like a non-compete, the FTC will treat it like a non-compete.
Still, non-solicit and non-disclosure agreements that do not limit worker mobility, but instead are more narrowly tailored to protect a company’s proprietary information and relationships with employees and customers, should be safe from the FTC’s ban.
Q: What’s next for the “proposed” rule, and will it actually become effective?
A: That’s still up in the air. Right now, the rule is still only a “proposed” one. We are in the middle of a 60-day notice and comment period that ends on March 20, 2023, during which the FTC is accepting and reviewing comments on its proposal from interested parties and the general public.
After that ends, the FTC could change the proposal from an outright ban to something narrower, like only allowing non-competes for senior executives or high earners who work in specific roles. Or the agency could simply move to finalize the proposed rule as-is.
There is no specific time within which the FTC must make its decision. On top of that, it is possible, if not probable, that a lawsuit will be filed to stop the FTC’s rule from taking effect, which could stall things by several more months (if not longer).
Given all that, it could be a while before we have a clear understanding of when the FTC’s rule could take effect and, if so, in what form.
Q: How can I use Pennsylvania law to protect my business in a world without non-compete clauses?
A: Even if the FTC bans non-competes altogether, there are still ways that Pennsylvania employers can protect their confidential information and the relationships that drive their business.
There is the Pennsylvania Uniform Trade Secrets Act, which the Commonwealth enacted in 2004 to outlaw the actual or threatened misappropriation of a company’s trade secrets, i.e., information that derives actual or potential economic value to a company by being kept confidential. Material that has been found to constitute protectable trade secrets in Pennsylvania includes, among other things, confidential customer lists, marketing strategies, and pricing strategies.
Pennsylvania courts also typically enforce well-drafted non-disclosure agreements that require current and former employees to keep important proprietary information confidential, even if it may fall short of constituting a trade secret.
Perhaps the most important strategy for companies will be to use targeted non-solicit provisions to protect the relationships with their employees and client base. These provisions are enforceable in Pennsylvania if they are executed in connection with an employment relationship, are reasonable in scope, and so long as the employee receives “consideration” for agreeing to it (such as a new job, a promotion, a bonus, etc.)
If you have questions about the enforceability of? your non-solicit or non-disclosure agreements, you should contact your attorney.
Q: BONUS QUESTION: So, what should we do now?
A: We are still in the middle of the FTC’s comment period, so companies still have some time to consider their next possible steps. Among other things, this could include:
- Identify the workers currently bound by non-compete clauses and evaluate and take steps to protect against potential risks associated with elimination of the non-compete restrictions;
- Analyze current non-solicitation and non-disclosure provisions to see if they would be at risk for invalidation as a de facto non-compete clause under the FTC’s proposed rule;
- Review and enhance policies and practices on handling and using confidential or trade secret information; and
- If you are interested, submit your comments on the proposed rule directly to the FTC here.
[1] Note: The term “worker” means any person who “works for an employer,” whether paid or not, and it includes employees, independent contractors, interns, and apprentices.
