On Jan. 5, 2023, the Federal Trade Commission (FTC) published a proposed rule that would effectively ban the use of non-compete agreements in employment contracts and preempt all state laws that provide less protection to workers. If made final, non-compete agreements would be considered an unfair method of competition, with very limited exceptions. The public is permitted to comment on the proposed rule through March 20, 2023. The FTC will then issue a final rule, which would take effect 60 days after it becomes final. Employers would have 180 days to comply.
What Does the Rule Say?
The proposed rule provides that it is an unfair method of competition for an employer to enter into or maintain a non-compete clause with a worker or to represent to a worker that the worker is subject to a non-compete clause. The proposed rule contains broad definitions of the terms “non-compete clause,” “employer” and “worker” and requires employers to rescind all preexisting non-compete clauses and provide notice to workers that their non-compete clauses are no longer effective and enforceable. The proposed rule does not apply to non-compete clauses for the sale of businesses in certain situations, but this exception is very narrow. Read FTC Proposes New Rule Banning Non-Compete Agreements for a more comprehensive overview of the proposed rule.
FTC Non-Compete Ban Proposal Next Steps…
If the proposed rule is made final, it will likely face significant legal challenges. However, given recent legislation and legal decisions restricting the use of non-compete clauses, it is critical that businesses prepare accordingly. We recommend businesses take the following steps now to ensure compliance should the proposed rule, or some form of it, become final:
1.) Submit Public Comments
The public has through March 20, 2023 to submit comments on the proposed rule. Businesses should evaluate how they would be impacted by the proposed rule and submit public comments to the FTC or support a broader industry-wide group comment.
2.) Review Existing Employment Agreements
Businesses should review all existing employment agreements and identify those agreements that contain non-compete clauses.
3.) Consider Alternative Clauses
Businesses should consider using alternative clauses, such as garden leave provisions or forfeiture-for-competition agreements, to discourage competition. Garden leave provisions are a variation of a notice provision where, instead of actively working during their notice period, employees are relieved of their duties during that time but are still employed and therefore cannot work for a competitor. Forfeiture-for-competition agreements provide that employees forfeit certain benefits, such as severance pay or stock incentives, if they compete.
4.) Execute and Review Non-Disclosure and Confidentiality Agreements
Without non-compete clauses, businesses have fewer opportunities to protect their confidential information and trade secrets. Thus, businesses that have not already done so should execute non-disclosure and confidentiality agreements that comply with jurisdictional requirements and are reasonably tailored to protect business needs. Businesses that already have non-disclosure and confidentiality agreements should review these agreements to ensure they remain compliant with jurisdictional requirements and cannot be interpreted as de facto non-compete clauses.
5.) Implement and Review Non-Solicitation Provisions
Non-compete clauses also protect businesses from former employees utilizing insider information and preexisting relationships to solicit current employees and customers. Thus, it is imperative that businesses implement and/or review their non-solicitation provisions, which are not impacted by the proposed rule, to ensure they are comprehensive but still legally enforceable.
6.) Protect Confidential Information and Trade Secrets
Businesses should take additional steps to safeguard confidential information and trade secrets. Under Ohio law, not all confidential information rises to the level of a trade secret, so businesses should be cognizant that they may need to do more in order to protect their trade secrets. Businesses should ensure that only required personnel and employees have access to confidential information and trade secrets. Businesses should also train employees on how to handle trade secrets and develop a data protection plan that addresses unauthorized data access.
Preparing Your Business
KJK will continue to monitor the latest developments and provide any necessary updates. If you have any questions or would like to discuss preparing your business for the potential non-compete ban further, please contact KJK’s Labor and Employment Chair Rob Gilmore (RSG@kjk.com; 216.736.7240) or attorney Hannah Kraus (HJK@kjk.com; 216.736.7243).