The Federal Trade Commission (FTC) recently proposed a new rule to ban all employment-based non-compete clauses. If adopted, it would also require employers to rescind all existing non-compete agreements.
Why Is the FTC Trying to Eliminate Non-Compete Agreements?
This latest action by the FTC is part of a larger effort to empower workers to change jobs and to deter American companies from engaging in anticompetitive behavior.
The rule would declare all non-compete clauses “an unfair method of competition.” It would disallow employers from requiring non-competes as a condition for employment. Additionally, the proposed rule would require recission of existing non-compete covenants within 180 days of the rule’s final publication.
Does the FTC Allow Non-Solicitation or Non-Disclosure Clauses?
The proposal does not specifically impact non-solicitation or non-disclosure clauses created to protect confidential information or trade secrets. Nonetheless, it would provide a challenge because the FTC could declare restrictive covenants to be “de facto non-competes” if a fact-specific inquiry resulted in that determination.
What Are the Next Steps for the Rule?
The proposed rule is published in the Federal Register, and the public has until Mar 10, 2023, to submit comments. The FTC will then review and consider those statements and determine if changes are warranted.
How Will This Rule Affect the Economy and Business Owners?
The economic impact of this rule change could be significant if it goes into effect. Non-compete clauses bind roughly one in five employees to their employers. If enacted, the fact sheet released by the FTC accompanying the proposed rule notes, it “could increase workers’ earnings across industries and job levels by $250 billion to $296 billion per year.” That would constitute a dramatic shift in the American economic landscape, particularly for small to medium-sized companies already stretched to their limits by the ailing and constantly transforming new “now” in American business.
What does this mean for you as a business owner? Two of the most important aspects of a successful business are customer relationships and trade secrets. Prior to this proposed new rule, most companies relied on non-competes to protect both of those prized assets.
Options for Businesses in the Absence of Non-Compete Agreements
If non-compete agreements become a thing of the past, other options are available to protect your business if an employee decides to leave. For example, for customer and employee relationships, your non-solicitation restrictive covenants should be narrowly drawn and focus on the relationships your employees developed with your customers while working for you.
Regarding your confidential information, the FTC recommends utilizing trade secret laws to protect your most valued intellectual properties in the event one or more of your employees decide to move on to new opportunities. To make those laws effective, however, you must demonstrate that you have taken reasonable steps to keep that information secret. That requires multiple steps.
To ensure protection in the event this new rule goes into effect, you will need sound legal advice on the best strategy to implement for your business and its future.
Learn How the FTC’s Non-Compete Rule Could Impact You
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At S Burns Legal LLC, our goal is to provide our clients with personalized support as they expand their unique businesses. We’ve also been known to provide some sage, strategic business advice, too.