The Federal Trade Commission recently proposed a rule that would prohibit employers from requiring employees to enter into non-compete agreements as a condition of employment. If adopted, the proposed rule will have a significant impact on the employer/employee relationship for any company that utilizes non-compete agreements as a means of protecting its business interests. If adopted, the rule would deem non-compete agreements an unfair method of competition and would require employers to rescind existing non-compete agreements within 180 days after the publication of the final rule (and give notice to employees of such rescission).
While the use of non-compete agreements is often abused by employers, many commentators and business advocacy groups argue that the proposed rule is overly broad and that a blanket prohibition against non-compete agreements would be another regulatory act of “throwing the baby out with the bathwater.” In its zeal to protect workers, the FTC may put many businesses, especially those that develop new technologies, at a competitive disadvantage. One business advocacy group, the Society for Human Resource Management (SHRM), has stated that it “believes the FTC should differentiate between agreements designed to limit labor market mobility and those designed to protect confidential trade secrets or strategic planning.” While such an approach certainly makes sense, it may be very difficult to craft a rule that reasonably protects both employers and employees. The comment period for the proposed rule ends on March 20, so it will be interesting to see whether groups like SHRM simply lobby against the proposed rule or put forth alternative proposals that address the rule’s overreach.
Until the rule is finalized, however, businesses would be well-advised to begin preparing for a new rule that limits the use of non-compete agreements, even if the proposed rule gets scaled back to some degree. Often, the objectives of a non-compete agreement can be substantially achieved with well-drafted non-solicitation and non-disclosure agreements. Unless written in such a way that they effectively prohibit employees from obtaining gainful employment elsewhere (i.e. a non-compete in disguise), non-solicitation and non-disclosure agreements can be drafted in a manner that shields the employer’s customer base from poaching by former employees and protects the employer’s proprietary interests in trade secrets, technology, information, systems, and processes from outside disclosure.
Finally, it should be noted that the proposed rule does exempt from its scope a non-compete agreement entered into by a person in connection with the sale of his or her business that is intended to protect the goodwill of the business for the buyer. So, whatever form the new rule takes, it should not affect traditional non-compete agreements entered into in such circumstances. However, if the selling person will become employed by the buyer following the sale, care should be taken to ensure that any non-compete agreement relates exclusively to protection of the goodwill transferred in the sale and not the seller’s post-closing status as an employee of the buyer.