When operating a business, you must understand the potential for litigation between your business, employees, and other parties, including disputes over non-compete and other employment agreements. The business litigation lawyers at Kramer Green can help you work to resolve these disputes in the most efficient manner possible, whether through negotiations, alternative dispute resolution, or formal court proceedings. We are here to represent your interests in any legal disputes involving your business.
Implementation of the FTC Rule
The Federal Trade Commission (FTC) issued a proposed rule on January 5, 2023, prohibiting businesses from including non-compete clauses in contracts with employees and independent contractors. According to the FTC, non-compete clauses, including those already in existence, are an unfair form of competition under the FTC Act, 15 U.S. Code § 45(a)(1), which states that “unfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce, are hereby declared unlawful.” If adopted, the rule would apply prospectively and retroactively, effectively invalidating all existing non-compete clauses.
The Federal Register published the proposed rule on January 19, 2023. There is a 60-day comment period after the publication date, which expires on March 20, 2023. After the comment period closes, the FTC can issue a final rule, which may be the same proposed rule or an amended one based on the comments it receives. The final rule likely would go into effect 180 days after the publication date of the final rule. Businesses should keep an eye on this rule as it develops, as it could significantly impact existing and future employment contracts. Additionally, legal challenges to the final version of the rule are likely.
Application of the FTC Rule
Under the currently proposed rule, a non-compete clause is “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.” Therefore, the FTC’s proposed rule would not invalidate or prohibit an employer’s use of non-disclosure and non-solicitation agreements. However, it would ban all de facto non-compete agreements, including the following:
- “A non-disclosure agreement between an employer and a worker that is written so broadly that it effectively precludes the worker from working in the same field after the conclusion of the worker’s employment with the employer.”
- “A contractual term between an employer and a worker that requires the worker to pay the employer or a third-party entity for training costs if the worker’s employment terminates within a specified period, where the required payment is not reasonably related to the costs the employer incurred for training the worker.”
“Workers” do not include only employees but also include independent contractors, interns, volunteers, apprentices, and sole proprietors. Therefore, an employer-employee relationship is not required to trigger the application of the rule.
Under the new rule, employers would have to rescind or invalidate existing non-compete agreements by the compliance date stated in the rule. In addition, employers must give personalized notice to each affected worker stating that the non-compete is no longer in effect within 45 days of the rescission date. The rule includes model language for the notice to workers.
Exceptions to the Rule
The FTC’s proposed rule has an exception for 25% owners of businesses. The seller of a business who owns 25% or more of the business could be subject to a non-compete clause in a sales agreement with a prospective buyer of the business. Nonetheless, owners with less than a 25% share in the business could not be bound by such a non-compete clause.
Issues for Businesses to Consider
In light of the uncertainty as to when the FTC will publish a final rule and what that rule will contain, as well as the potential for legal challenges, businesses should be vigilant in monitoring this situation. For instance, if the rule becomes final, employers must proceed to give their employees notice of rescission of non-competes. In addition, if a court later invalidates the rule, employers could be left in a precarious legal position regarding the validity of existing non-compete agreements.
Likewise, the lack of an exception in the proposed rule for senior executives or key employees is problematic because it removes a common retention method. As a result, businesses may want to rethink their retention practices and settle upon other benefits that may substitute for retaining key talent until this issue is resolved.
We Can Help You Protect Your Business
The business litigation attorneys of Kramer, Green, Zuckerman, Greene & Buchsbaum, P.A. have the skills and knowledge necessary to assist you throughout any type of business litigation you might encounter. We know how important your business is to you, and we take all actions needed to help you protect it.
Together, we can work to resolve business-related legal disputes as they arise. We also can take steps to decrease the risk of litigation for your business. Call our office today at (954) 966-2112 or reach out to us online to set up an appointment and learn more about our legal services.