Ban on non-compete clauses in US would be a ‘big deal’

As we reported back in January, the US Federal Trade Commission is consulting on a proposed new rule that would essentially ban all non-compete agreements between employers and employees in the United States. The consultation runs until March 20 although, given the high level of interest, the FTC extend it for a further 60 days. We’ll speak to a US lawyer on the prospect of a change to the law and what that would mean for businesses with a presence in the US.

This is not a quick process and there’s a lot of uncertainty around it. The FTC’s initial proposal is likely to change in light of comments they receive and it could take until 2024 for the FTC to publish a final rule. Even then, it’s likely to be subject to legal challenge further delaying its effective date assuming the rule survives. On top of that there’s also the presidential election to factor in with a possible switch in the parties at the end of 2024. 

So let’s get a view on this. Scott LeBlanc is an employment lawyer at law firm Husch Blackwell in Wisconsin and earlier he joined me by phone to discuss it. I started by asking Scott how big a deal this is for his clients:

Scott LeBlanc: “If it goes into effect, and that's the big ‘if’ that we're talking about with our clients, if it goes into effect, it would be a very big deal. It would be a change over the way that we have thought about non-competes in the United States, really, since the formation of contracts began here. It's always been that we've followed the English common law which is each state has their own body of laws that they've developed over time where they've made a decision about whether, and under what circumstances, non-competes are enforceable and each state has developed its own bodies of laws based on that. This would be a big change because it would be basically wiping out 150-200 years of legal precedent in all the states about how we think about non-competes and how we've learned to draft non-competes. It would be it would, basically, be starting over with a completely new paradigm.”

Joe Glavina: “The definition of non-compete is really very quite wide and it’s likely to catch other popular types of restrictive covenants. So, where is the focus of FTC’s proposed rule meant to be?”

Scott LeBlanc: “So the proposed rule squarely focuses on what we tend to, in the employment law world, call traditional non-competes, which are you may not go and work for a competitor, or you may not go and work for specific named businesses for a certain period of time, but what the rule also recognises is that there are certain types of restrictions that go along with those kinds of restrictions that can have the effect of a non-compete, that can essentially bar someone from working for a competitor even though they may not explicitly say that. So, the classic example would be your customer non-solicit type restrictions. If you're in an industry where all of the companies sort of share the same customers, if someone is walled off from contacting any of those customers that would in effect act as a non-compete within that industry. So the rule recognises that certain types of restrictions, even though they may not be explicit non-competes, they may serve the function of non-competes in that way, customer non-solicits being, I think, the main one. The other one that the FTC focuses on is non-disclosure agreements. So, this would be you cannot use or disclose certain confidential information, or proprietary information, of the company when you move on and go to a new employer. The FTC has recognised that if those agreements are written in a way that is too broad, for example, you can't use any information that you used while you were with us with the company, which would include presumably any and all information about the industry, that could also that could also serve as a non-compete if it's if it's drawn too broadly. So it specifically bans non- competes, but it also recognises that certain other types of restrictions, depending on the circumstances and how the language is actually drafted in the agreement, may also qualify as non competes.”

Joe Glavina: “I see from the article you’ve written on this subject that your message to clients is not to panic, at least not yet. Is that because the FTC’s proposed rule may never be enacted or, at least, not in its current form?”
Scott LeBlanc: “Yes. I think we've seen a little bit of a pattern with this here in the United States where there has been certain legislation that has been introduced almost with the understanding that it's supposed to move the needle, to move hearts and minds, from a political standpoint recognising that it may not actually go into effect from a legal standpoint. So, the most recent example that I can think of was when we had a bit of controversy here over employer vaccine mandates, whether or not employers could mandate vaccines and there was an effort on the part of the federal government to try and pass rules that would require employers to require their employees get vaccinated. There is a process in the United States where when agencies propose rules like this, they are subject to legal challenge and it's difficult, sometimes, to win those legal challenges. So, both in the vaccine mandate sector and in this, you have a federal agency, in this case the Federal Trade Commission, which is doing something that it has never done before. This has never been something that has been regulated at a federal level, at the national level, here in the United States, it's always been a state law issue and so, because they are stepping into this territory, that makes them very vulnerable to a judge saying they don't have this authority to be able to do this and so I think many of us feel like it is likely to be challenged and, oftentimes, people who are looking to challenge these rules will find the judge that know is going to be most favourable to them and then often a judge can issue a legal injunction that would basically stop this in its tracks. We have an election coming up in 2024 and, presumably, if the parties change power in 2024 this rule might be rescinded. So, there's a lot of ifs and a lot of hoops that we would need to jump through before this actually goes into effect. This is part of a trend that we've seen, at least on the state law level and so, as I say, in some ways it's an effort to win over hearts and minds and I think we might see more states beyond those that have already sort of taken steps to make non-competes more difficult to enforce, or impossible to enforce, to follow the federal government's rule here. 
So I think just putting this out there where people are now talking about it as a possibility makes it easier for those states that want to take steps to scale back non-competes to be able to do that.”

Scott has written a couple of articles on this subject which you may be interested in reading. One deals with the FTC’s proposed rule, as we’ve just been discussing. The other is an interesting development. Aside from the FTC’s route to new law, a number of Senators are pushing forward legislation that would ban non-compete agreements.  We’ve put a link to both of articles in the transcript of this programme.

LINKS
- Link to Husch Blackwell article on FTC’s proposed rule
- Link to Husch Blackwell article on Senators efforts to ban non-compete clauses