Nationwide, the body of law regulating non-compete agreements (including non-solicitation covenants, non-circumvention covenants, covenants barring poaching of employees) has been mainly regulated by state statutes as well as court decisions in state and federal courts. Federal law has generally stayed out of the regulation of restrictive covenants. About a year ago, the Federal Trade Commission (FTC), a federal agency regulating commerce and competition law, issued a proposed rule that would ban most non-compete agreements as unfair competition. If promulgated, such a rule would have a significant impact on many businesses and their employees. At this point, the proposed rule is not the law and awaits a final decision. The wording of the proposed draft of the rule is as follows: “It is an unfair method of competition for an employer to enter into or attempt to enter into a non-compete clause with a worker; maintain with a worker a non-compete clause; or represent to a worker that the worker is subject to a non-compete clause where the employer has no good faith basis to believe that the worker is subject to an enforceable non-compete clause. To comply with paragraph (a) of this section,… an employer that entered into a non-compete clause with a worker prior to the compliance date must rescind the non-compete clause no later than the compliance date. Proposed CFR § 910.2. The FTC accepted comment concerning the proposed rule through April 2023, and is expected to make a final decision about the proposed rule sometime in April 2024. Peter Mavrick is a Miami business litigation attorney, and represents clients in Fort Lauderdale, Boca Raton, and Palm Beach. The Mavrick Law Firm represents businesses and their owners in breach of contract litigation and related claims of fraud, non-compete agreement litigation, trade secret litigation, trademark infringement litigation, employment litigation, and other legal disputes in federal and state courts and in arbitration.
The effects of the FTC’s proposed rule are probably far reaching based on the FTC’s definition of “noncompete clause.” The FTC defines a noncomplete clause to mean “a contractual term between an employer and a worker that prevents the worker from seeking or accepting employment with a person, or operating a business, after the conclusion of the worker’s employment with the employer.” Proposed CFR § 910.1. This definition includes de facto clauses prohibiting workers from obtaining employment or operating a business after the conclusion of the worker’s employment with an employer. Id. One example of a de facto clause is an overly broad non-disclosure agreement that precludes a former employee from working in the same field as the former employer.
The FTC similarly defined worker broadly. Worker encompasses any natural person who works for an employer. Id. It does not matter whether the worker was paid or unpaid. Id. It does not matter whether the worker was classified as an employee or independent contractor. Id. Any worker qualifies under the proposed rule. Therefore, most, if not all, employment related relationships will fall within the ambit of “worker” for purposes of the proposed rule.
There are at least two exceptions to the FTC’s proposed non-compete ban. The first exception pertains to business purchases. The proposed rule would permit noncompete provisions resulting from the sale of a business or substantially all of a business’ operating assets. Proposed CFR § 910.3. The second exception allows noncompete provisions pertaining to a franchisor/franchisee relationship. Proposed CFR § 910.1.
Adoption of the proposed rule will likely spur significant litigation. Chief among the potential lawsuits are claims relating to the FTC’s inability to create such a far-reaching rule. Opponents of the proposed rule could prevail in their challenges because the United States Supreme Court recently singled a potential willingness to revisit the broad rule making authority given to agencies under Chevron, U.S.A., Inc. v. Nat. Res. Def. Council, Inc., 467 U.S. 837 (1984). But only time will tell. For now, you should be aware that the noncompete provision contained within your employment agreement may not be enforceable for long.
Peter Mavrick is a Miami business litigation lawyer, and represents clients in Fort Lauderdale, Boca Raton, and Palm Beach. This article does not serve as a substitute for legal advice tailored to a particular situation.