UPDATE: On April 23, 2024, the Federal Trade Commission has banned enforcement of non-compete clauses in employer-employee contracts. Click here for more. This article had been written prior to the ban.
When the Federal Trade Commission (FTC) bans non-compete agreements, as expected, what will it mean? It would render as void most existing non-competes, plus prevent the employer from taking any other action that could have the effect of limiting the former employee’s work options.
What should you know?
First, Can The FTC Really Do This?
It is questionable whether the FTC (part of the executive branch of government) has the right to pass a new law, which is the exclusive job of Congress, nor can an FTC “rule” arbitrarily replace existing state law. This concerns good ol’ “separation of powers,” about which we learned in grade school. Don’t worry: the House of Representatives has kindly provided a refresher course on its website, here, if needed.
Suffice to say, there is considerable debate on this topic. The FTC will argue that its power to regulate such agreements had been delegated to it from Congress, giving the FTC the power to act as Congress to legislate on this topic. Regardless, even if passed, the FTC ban will create great uncertainly in this area of law for years to come. Click here to read more about opposition to the ban within the FTC itself.
One thing is clear, even without a ban, the FTC has already started suing companies for entering into work restriction clauses, based on the FTC’s finding that such clauses non-compeare damaging to commerce. Click here for more. The new rule would generalize the existing policy of the FTC, disfavoring non-competes.
Timing of the Rule
When will the ban occur? The FTC’s ban of work restriction has not yet gone into effect. The public is given a chance to comment on the proposed rule. The comment period was open through Mar 10, 2023.
If the FTC’s Ban Goes Into Effect, Then What?
a. Misappropriation or Theft of Trade Secrets
A ban on work restriction by the FTC will have no effect whatsoever on state law that prohibits theft of “trade secrets.” Misappropriation of trade secrets – such as customers lists and other proprietary information — is illegal by statute in Pennsylvania and every state, even in the absence of an employment agreement, much less, a non-compete.
Thus, as always, an employer’s customer lists and certain other proprietary information will remain a protected, regardless of any new rule by the FTC regarding “non-competes.”
B. Solicitation of Customers and Workers
Also remaining in tact will be the right to prohibit solicitation of a company’s customers and employees. Employees should be cautious. Post-separation issues will loom large for employers and employees. Even if your work restriction clause is stricken down by the FTC, the parts in it referencing “non-solicitation” will remain.
Lots of things can constitute “solicitation.” Even an innocent (seeming) text or email (to your former employers customers or employees) — can get you into hot water. Be careful about how you announce your new job, in other words, even if most of your work restriction clause is stricken down by the FTC.
C. Disparagement
There are laws precluding trade disparagement in every state. Pursuant to common law, an employee may not say anything false and defamatory about a former employer or its agents. The employee will be responsible to the former employer for damages caused by the disparagement.
D. Work Restriction Relative to the Sale of a Business
The FTC ban on work restriction agreements will have one narrow limitation: it will not apply to the sale of a business, as the ban is currently envisioned. The FTC assumes that parties to such a sale have equal bargaining power, in such instances.
What Happens if the FTC’s Ban Fails?
Employers should hold off on the celebration. Work restriction agreements will remain disfavored. More-and-more states are banning such clauses, including the District of Columbia.
In states that allow work restriction, the courts will continue to perform a balancing test between the employer and employee’s interests, to evaluate the full effect of the work restriction. . As things stand, Pennsylvania heavily disfavors enforcement of such agreements. Arguably, work restriction clauses are against public policy, which is a defense to any contract in PA.
It May Be Over For Work Restriction Clauses, Regardless
Even if the FTC’s outright ban fails, the FTC has given new ammunition to the claim that work restriction clauses are against public policy. That is to say, the FTC’s preliminary investigation found — factually — that such clauses are bad for the economy and workers.
Thus, even if the FTC’s legal ban is not “binding” on judges in the various states, a state court judge could look at the FTC’s factual finding, as evidence that work restriction clauses are contrary to the public policy of the state, as well. Many states are moving toward an outright ban. Canada has already banned non-competes.
What To Do Going Forward
The law in this area will remain unclear for the coming months, if not years. In the interim, employers and employees need to factor into this the uncertainty, going forward.
Employees can:
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Immediately seek a re-negotiation of an existing (or prospective) clause, by reminding employers of the possibility of a major change to the law of this area
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Be mindful of the fact that while uncertainty still exists as to work restriction clauses, other conduct by the employee post-separation can remain banned.
Employers can:
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Be vigilant about prosecuting theft of trade secrets or disparagement, as those claims will survive the FTC ban.
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Draft work restriction clauses with certain contingencies, taking into account what parts of the agreement will remain, if the FTC bans any portion of it.
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Consider offering a carrot versus a stick: offer to pay the employee a bonus six months or a year or more following separation, contingent on the employee refraining from competition.
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Take measures to prevent employees from having access to accounts, customers, and trade secrets, knowing that workers may have greater mobility in the future.
Status of the FTC Ban
Check back here for updates about the coming FTC ban.
Legal Updates Around the World
As mentioned, Canada has banned non-compete agreements. “Effective October 25, 2021 employers are prohibited from entering into employment contracts or other agreements with an employee that include a non-compete agreement.
Call or Email to Set Up a Consultation
It’s free to schedule a consultation with our Pittsburgh lawyers to evaluate your rights in Pennsylvania concerning work restriction clauses. We handle such disputes, in Pittsburgh (Allegheny County) and all the surrounding counties: Beaver Butler, Washington, and Westmoreland Counties, Pennsylvania. Check back here for updates about the coming FTC ban.
