Client Alert: The FTC Proposes Ban on Noncompetes

Earlier this month, the Federal Trade Commission (FTC) proposed a rule that would prohibit employers and employees from entering into noncompete agreements. In the very near future, the proposed rule will enter the federal register, which will trigger a 60-day public comment for stakeholders. A compliance date would be set for 180 days after the publication of a final rule, which the FTC is hoping to implement this by the end of the year.

The proposed rule provides some extensive and confusing content. In the document, it states “(a) Unfair methods of competition.  It is an unfair method of competition for an employer to enter into or attempt to enter into a non-compete clause with a worker; maintain with a worker a non-compete clause; or represent to a worker that the worker is subject to a non-compete clause where the employer has no good faith basis to believe that the worker is subject to an enforceable non-compete clause.‎”

“The rule has a broad description of what a noncompete agreement is and has not defined what a conforming noncompete agreement is, but rather focuses on what is an “illegal” noncompete.” Nick Santomasimo, an Associate in our Parsippany office, says. “There is definitely some confusion that will need to be cleared up if this gets passed.”

Additionally, Santomassimo states “There are two scenarios in which this calls for an “impermissible” noncompete. First scenario, the provision is written so broadly its asked to prevent an employee from working in the same field after the conclusion of the employment; or second scenario, 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 time period, where the required payment is not reasonably related to the costs the employer incurred for training the worker”.

This ruling is especially important for independent contractors or anyone who works for an employer, whether paid or unpaid, to be cognizant of.  The proposed rule would generally not apply to other types of employment restrictions, like non-disclosure agreements and client or customer nonsolicitation agreements. Under this new proposed law, employers would be required to rescind existing noncompete clauses and provide notice to employees that such clauses are no longer in effect. Additionally, it would include a ‘’limited exception” for noncompete clauses between the seller and the buyer of a business. However, other types of employment restrictions could be subject to the rule if they are so broad in scope that they function as noncompetes.

Santomassimo elaborates, “From what I have read, it is unclear as to how broad the scope of what will be prevented, as they will take into consideration after the public comments. The new rules look to focus as a “general” prohibition, rather than a limitation on what you will be able to use within employment agreements. This historic proposal is certainly something to follow in the coming months and will have a significant impact on the world of employment law, if passed.”

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