Non-competition agreements are contracts between an employer and employee that prevent the employee from working for a competitor or starting a competing business, typically within a specified geographic area and period of time after the employment ends. Such agreements are a common tool that companies utilize to protect their valuable business interests (e.g., goodwill, confidential information, business relationships) from being unfairly used by a competing company or interest.

In July 2021, President Biden signed an executive order asking the Federal Trade Commission (“FTC”) to exercise its rule-making authority to curtail the unfair use of non-competition agreements because such agreements limit worker mobility, depress wages, and stifle entrepreneurship and innovation. On January 5, 2023, the FTC answered President Biden’s call to action as it proposed a rule that – if implemented – would effectively ban employers from entering into non-compete agreements with workers and require employers from rescinding all existing non-competition agreements.

Under the proposed rule, a non-competition agreement or clause is defined as 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.” The rule goes on to include “de facto non-competition clauses” which have the same restrictive effect on workers such as non-disclosure agreements that are written so broadly so as to preclude the worker from working in the same field or a contractual term that requires a worker to repay the employer for training costs if the worker separates within a specified period of time and where the payment is not reasonably related to the costs incurred by the employer.

To rescind existing non-competition agreements, the rule would require the employer to take active steps to notify all workers who signed the agreement that that it is no longer in effect and cannot be enforced against the worker. This notice must be provided to both current and former workers within forty-five (45) days of the rescission in an individualized communication in a paper or digital format. The rule contains model language that employers can use to provide the required notice.

The rule provides that the ban does not apply to non-competition agreements that are entered into as part of the sale of a business or a person who selling all of his or her ownership interest or operating assets in a business. What about state law that allows non-competition agreements? Any state law or regulation that is contrary to the FTC’s proposed rule would be superseded and, thus, invalid.

Even if non-competition agreements are eventually banned or significantly limited in their use by the FTC, companies still have tools to protect their business interests including confidentiality agreements that reasonably define and limit the disclosure of confidential information. Companies can also utilize federal and state laws such as the Defend Trade Secrets Act, the Computer Fraud and Abuse Act, and the Uniform Trade Secrets Act (state law enacted in Texas and New Mexico) to bring claims against individuals and companies who misappropriate trade secret information and obtain injunctive relief to prevent or cease the misappropriation. Further, in some circumstances, actions can be brought against employees for breach of fiduciary duties or duty of loyalty when they engage in conduct that undermines an employer’s interest.

The FTC has invited the public to submit comments on the proposed rule until March 6, 2023. Thereafter, the FTC will review the comments and eventually issue a final rule. We will continue to monitor and keep you updated on all significant changes on this issue. Please feel free to contact Kemp Smith’s Labor and Employment Department if you need guidance and assistance.