Noncompete agreements have historically been controversial under US law. In general, a noncompete agreement is any agreement or contractual clause that limits an employee’s ability to work for a competitor of the employer. Employers typically use noncompete agreements to prevent their competitors from hiring their key employees, but employees often feel that they unfairly limit the employee’s options for future job opportunities.
To date, the validity and permissible scope of noncompete agreements has varied by state law. Most states have certain limitations on scope and duration in order to balance the needs of the business and the needs of the employee. In terms of scope, many states employ some version of the “janitor test,” which says that a noncompete is void and unenforceable if it restricts an executive from working for a competitor in a completely different role, such as a janitor.
States often also impose geographic and temporal limitations, invalidating noncompete clauses if they are nationwide in scope of if they last for more than a year or two. But the details of these limitations vary significantly from state to state, such that a noncompete that is valid in Virginia may not be valid in New York or California. In an employment market in which remote work is increasingly prevalent, these state-by-state variations seem increasingly arbitrary. Accordingly, this is a matter that could potentially benefit from federal regulation.
In January of 2023, the US Federal Trade Commission took what some consider a fairly extreme position on noncompete agreements: it proposed a rule that would not only limit the scope of them nationwide, but would actually ban all such agreements outright as an unfair method of competition. The FTC’s proposed rulemaking estimates that banning noncompete agreements would increase workers’ earnings nationwide by nearly $300 billion, and that it could save consumers up to $148 billion in health care costs.
One FTC Commissioner dissented to the entire rulemaking process, noting that it “represents a radical departure from hundreds of years of legal precedent” that requires a fact-specific inquiry into the details of each specific noncompete clause in order to determine whether a clause is an unfair method of competition. Commissioner Wilson’s dissent notes that the purpose of noncompete clauses is to encourage businesses to invest in training their employees with some assurance that such investment would not immediately inure to the benefit of its competitor, noting that such investment is beneficial to employees overall. The public comment period on the FTC’s proposed rule extended into April of this year, and, not surprisingly, business interests such as the US Chamber of Commerce came out strongly opposed to the ban, while labor unions and employee organizations generally support it.
Even if the FTC does approve this rule, it likely will not go into effect anytime soon or at all, as it will almost certainly be the subject of numerous legal challenges. Opponents of the noncompete ban will almost certainly challenge the FTC’s authority to ban noncompete clauses. While the legal history is somewhat convoluted, many scholars believe that, following the Magnusen-Moss Act in 1975, the FTC’s rulemaking authority is limited to rules related toconsumer protections, and does not allow for rules governing competition between businesses. In addition, the FTC’s authority will likely be challenged under the “major questions” doctrine, which can be used to question whether a federal agency can regulate an area that has been traditionally regulated by state law without an express act of Congress.
Finally, even if the FTC is able to overcome these hurdles and impose a complete ban on noncompete agreements, businesses can still find some solace in the robust protections of the Defend Trade Secrets Act of 2016 and related state laws enacted under the Uniform Trade Secrets Act. Trade secret law does not offer exactly the same protection as a noncompete agreement for a business because it cannot completely prevent an employee from working for a competitor in a similar role.
However, to the extent that a business relies on any confidential or proprietary information, systems, processes, or know-how to perform the employee’s job, and the company has taken appropriate steps to protect those trade secrets, a business can still prevent a former employee from taking those trade secrets to its competitor and using them to benefit the competitor in his or her new job. Accordingly, if the FTC’s proposed ban on noncompete agreements tells us anything, it is that a business should not rely on any single mode of legal protection and should employ all tools available to it to protect its investments.
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