New Year and New Federal Trade Commission Proposed Rule
2023 must have the Federal Trade Commission (“FTC”) feeling particularly ambitious because on January 5, 2023, the FTC proposed a new rule – 16 CFR Part 910 (the “Rule”) – which would not just limit, but outright ban the enforcement of non-competition agreements nationwide.
Let that sink in for a moment. What the FTC is proposing here would dramatically reshape the landscape of one of the fundamental bedrocks of employment law: the ability of employers to ensure that they are not unwittingly training their future competition. Believe it or not, the Rule goes even further than that, also banning “de facto” non-competition clauses, which include “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” (emphasis supplied). In other words, under the FTC’s new Rule, employers will be unable to recoup training costs if an employee jumps ship, save perhaps for the actual cost of the training itself. Time will tell whether the cost of the employer’s time spent training such employees is sufficiently “reasonably related” to the provision of training as to be recoverable, but given the scope and breadth of the Rule, we suspect the FTC intends to limit such costs to the “actual costs” of the training, e.g., the cost of trainers, supplies, notebooks, exams, and other hard costs.
We’re not done……
As currently written, the Rule would be retroactive as well, requiring employers to take affirmative steps to repeal or nullify any existing non-competition agreements entered into within six (6) months of the Rule’s effective date - which is currently unknown - or risk facing civil action from the FTC.
There is exactly one exception to the FTC’s otherwise total ban on non-competition agreements: “the Rule would not apply to a non-compete clause entered into by a person who is selling a business entity or otherwise disposing of all of the person’s ownership interest in the business entity, or by a person who is selling all or substantially all of a business entity’s operating assets, when the person restricted by the non-compete clause is a substantial owner of, or substantial member, or substantial partner in the business entity at the time the person enters into the non-compete clause.” This is the FTC’s clumsy way of saying that non-competition clauses are enforceable when they arise from the sale of a business; this is to prevent someone from selling a business, then effectively re-opening the same business next door to compete with the purchaser.
There is one other noteworthy omission from the FTC’s new restrictions: the Rule would not prohibit non-disclosure agreements, or customer non-solicitation agreements, meaning employers won’t be without recourse if a former employee/new competition attempts to sell your trade secrets, or poach your existing customers.
Whew! That’s a lot to take in. You’re probably feeling a little anxious at the thought of all the employees that you’ve nurtured and developed over the years leveraging the training and experience you’ve given them at your expense into positions with your fiercest competitors. Take a breath because we’re not done yet. There’s still hope that the worst parts of the Rule won’t come to pass.
First, the Rule is still very much hypothetical. The public has until March 6, 2023, to submit comments and recommendations regarding the Rule. The Rule will likely soften a bit after this process as a result of lobbying from pro-business groups doing their best to ensure this Rule does not pass as currently written. From there, it will be another 180 days (September 2, 2023) if not more until the final version of the Rule actually becomes effective. Between now and then, the Rule will doubtless be subject to legal challenges.
We all should remember when the Department of Labor tried to raise the salary-basis threshold for exempt employees from $455 per week to $921 per week back in 2016, or just last year when President Biden attempted to forgive a small portion of outstanding student loans, not to mention all the COVID-19 restrictions the federal courts have struck down.
The FTC’s own Commissioner, Christine S. Wilson, provided the FTC’s lone dissenting vote against the new Rule; Commissioner Wilson has already essentially provided an outline for a court to use to strike down most if not all of the current Rule. Per Commissioner Wilson: (1) the Commission lacks authority under the FTC Act to engage in “unfair methods of competition” rulemaking; (2) the Commission’s authority to promulgate the non-compete clause rule is susceptible to challenge under the major questions doctrine; and (3) if the Commission does possess such authority, it could be an impermissible delegation of legislative authority.
So, if we believe this Rule will either fail outright, or be significantly amended prior to its implementation, why sound the alarm? Two reasons: first, while we can make informed predictions, nothing is ever certain when it comes to this sort of rulemaking. While there’s a high probability that opponents to the Rule will get this before their favorite sympathetic judges in a chosen venue, there’s always the possibility that they could be outmaneuvered; everything changes if it’s a California or New York judge who gets the first bite at this proverbial apple. In that case, this Rule will likely take effect, at least temporarily, and employers will need to respond accordingly.
Second, proposals like this act as barometers for larger trends. As of today, no less than 13 states already restrict enforcement of non-competition clauses, with 3 such states – California, North Dakota, and Oklahoma – banning them outright with just as much stringency as the FTC’s proposed Rule. More states are set to join this group in the coming years, whether or not the FTC’s Rule passes or fails. While Florida will almost certainly not be rushing to join them, we would not have predicted that either North Dakota or Oklahoma would side with California on this issue either. Thus, even if the FTC’s proposed Rule doesn’t survive judicial scrutiny, this issue will be far from settled, and employers would be wise to begin formulating backup plans for the potential day when non-compete agreements are no longer favored in the majority of jurisdictions.
The best way to be ready for that day – whether it comes from the FTC on September 2 of this year or even next, or state-by-state after years of intense legal battles – is to shore up the non-solicitation and non-acceptance provisions of your existing non-compete agreements. Even if the FTC manages to get its way, employers will still be allowed to protect their own customer base through non-solicitation and non-acceptance agreements, even as the non-competition provisions of those same agreements become unenforceable.
In the meantime, rest assured that the Sensenig Law Firm will be monitoring this issue closely and passing along any relevant updates to you as they develop. For now, employers are free to draft public comments for the FTC to post on https://www.ftc.gov/policy/public-comments once the public comment period officially opens, which should be any day now.