With some exception, non-compete agreements have historically been enforced by courts if reasonably tailored to protect legitimate business interests. However, recent developments on the federal and state levels suggest that businesses may have an increasing difficulty in enforcing non-compete agreements.
For some contextual background, former President Obama issued a state callto-action in October 2016 involving non-compete agreements. The initiative was premised on the concern that non-compete agreements inappropriately limit worker mobility (particularly for lower wage earners), and unduly suppress the labor market and wages. Since then, and continuing through the current Biden administration, the federal government has taken steps to address the enforceability of non-competes.
In just the first quarter of this year, administrative and legislative efforts have been noteworthy. On January 5, 2023, the Federal Trade Commission (FTC) proposed a new rule that would ban employers from imposing non-competes on their workers, with limited exceptions. The proposed rule is based on the FTC’s finding that non-competes constitute an unfair method of competition in violation of Section 5 of the FTC Act. To address such alleged violations, the FTC’s proposed rule would generally prohibit employers from (1) entering into or attempting to enter into a non-compete with a worker; (2) maintaining a non-compete with a worker; or (3) representing to a worker, under certain circumstances, that the worker is subject to a non-compete. While the proposed rule is technically limited to non-compete agreements, other restrictive covenant agreements could be subject to the rule where such agreements are so broad in scope that they function as a “de facto” non-compete. As such, employers should ensure that agreements involving non-disclosure and/or non-solicitation restrictions are narrow enough to avoid falling under the purview of the FTC’s proposed ban.