The Federal Trade Commission (FTC) proposed a rule in January 2023 that would ban non-compete agreements nationwide. The draft rule is part of a concerted federal effort to address the impact and legality of these common employment agreements.
For decades, backers of federal non-compete regulation have argued that these agreements have become overly broad and excessively used among low-income workers. Critics argue that non-compete agreements restrict employees' mobility, discourage entrepreneurship, and lower wages.
Supporters, on the other hand, dissent that non-compete agreements help safeguard trade secrets and encourage investment in employee training.
What's the Latest on the FTC Rule to Ban Non-Compete Agreements?
The proposed rule was open for public commentary through April 19, 2023, and received an overwhelming response – close to 30,000 comments. Since then, the agency has been wading through and digesting the comments before deciding whether to make changes to the draft rule.
The FTC is not expected to vote on a final version of its proposal before April 2024. Any final rule would be published in the Federal Register and take effect 180 days after publication, similar to the rulemaking process at other federal agencies.
If the rule is approved as proposed in January 2023, employers across the country would be prohibited from executing non-competes with their employees. The rule would also be proactive, requiring employers to rescind existing non-compete agreements and provide notice that these clauses are no longer in effect.
What other efforts are taking place at the federal level to ban non-competes?
Congress Shares Results of GAO Study and Reintroduces Bipartisan Bill
Congress also is considering federal action on non-compete agreements in employment contracts. In 2019, members of Congress asked the U.S. Government Accountability Office (GAO) to conduct a nonpartisan study on the use of non-compete agreements and their effects on the workforce. The GAO released the results of that study in a May 2023 report.
The GAO estimated that 18 percent of workers were subject to noncompete agreements, and 38% of workers have been subject to a non-compete agreement at some point in their career. Through a survey of state attorney general offices, the GAO also found that workers’ job mobility is reduced in states that are more likely to enforce non-compete agreements, while state bans on non-compete agreements for certain workers increased workers’ wages, on average.
A bipartisan group of Senators leveraged the release of that report to bolster awareness of a bill introduced to Congress in February 2023 entitled the “Workforce Mobility Act of 2023”.
According to statements made by the bill’s sponsors, Senators Christopher Murphy (D-CT) and Todd Young (R-IN), the Workforce Mobility Act would:
- Narrow the use of non-compete agreements to include only necessary instances of a dissolution of a partnership or the sale of a business;
- Charge the Federal Trade Commission and the Department of Labor with enforcement, as well as making explicit a private right of action in federal court;
- Require employers to make their employees aware of the limitation on non-competes, as studies have found that non-competes are often used even when they are illegal or unenforceable. The Department of Labor would also be given the authority to make the public aware of the limitation; and
- Require the Federal Trade Commission and the Department of Labor to submit a report to Congress on any enforcement actions taken.
Unlike the FTC’s proposed rule, the Act would not apply to non-compete agreements entered into prior to its enactment and includes exceptions, such as the sale of ownership interest in a business and partnership agreements. A similar bill was introduced in 2021 but was stalled in committee.
National Labor Relations Board Questions Legality of Non-Compete Agreements
Five months after the FTC issued its draft rule, National Labor Relations Board (NLRB) General Counsel Jennifer Abruzzo issued a memo questioning the legality of non-compete agreements. In the May 30, 2023, memo, Abruzzo argues that non-compete provisions inhibit private-sector employees from threatening to resign or to seek other employment opportunities in pursuit of better working conditions.
Abruzzo instructed her regional directors and officers to “seek evidence of the impact of overbroad non-compete agreements on employees and, where applicable, present at trial evidence of any adverse consequences, including specific employment opportunities employees lost because of the agreements.”
What Does a Potential Federal Non-Compete Ban Mean for Texas Employers?
A potential federal non-compete ban and increased scrutiny should remind employers that adequately protecting sensitive business information, such as trade secrets and intellectual property, requires a comprehensive approach.
Non-disclosure agreements, non-solicitation agreements, confidentiality agreements, as well as business policies and practices that protect proprietary information can be effective alternatives.
Employers should also remain focused on creating non-competes that are reasonable in scope, duration, and geographic area to ensure they are enforceable in Texas.
Call (713) 909-7323 or contact us online to speak to an experienced business attorney about bolstering your trade secret and intellectual property protections.
