FTC Issues Proposed Non-Compete Ban To Spur Employee Mobility, Aligning with Existing California Law
POSTED BY Christopher J. Passarelli and Jennifer E. Douglas
Thursday, January 5, 2023, the FTC issued its proposal to prohibit non-compete clauses in employment agreements in an effort to boost wages and competition, citing worker mobility as essential to a thriving U.S. economy. California has long prohibited such clauses pursuant to Business and Professions Code Section 16600. The FTC’s proposed rule is shining a light on the issue, which makes it a good opportunity to focus California and non-California employers’ attention on what can be done to protect their businesses from unlawful competition.
The rule flows from President Biden’s 2021 Executive Order Promoting Competition, which directed the FTC to address unfair use of non-compete and similar agreements to stifle employee mobility and depress wages. Like California’s law, the proposed rule would invalidate existing non-compete agreements in place and would provide exception for the sale of certain types of businesses. If promulgated, the new FTC rule would supersede and preempt inconsistent state laws, and employers will be required to issue notice to employees, rescinding existing employment agreements to remove objectionable non-competition clauses.
Similar to California, under the proposed FTC rule, nondisclosure and non-solicitation agreements would also be scrutinized, e.g., as to whether such agreements are invalid in that they so broad as to effectively function as noncompete agreements.
The rule is currently open for public comment until March 6, 2023, and employers will be subject to enforcement 180 days after final publication.
For workers, the rule provides more flexibility to pursue future employment in a worker’s area of expertise, to market one’s talents and seek increased compensation. For employers, this rule is another wake-up call for the need to safeguard and secure trade secret assets of the business to which an individual has access.
Given the reality of increased mobility, employers should be ensuring that:
Employees with access to sensitive information are covered by up-to-date confidentiality and lawful non-solicitation obligations; and
Employers must redouble efforts to keep organized, diligent records of the existence, inventory and location of any employer assets or property, including devices and customer lists, so as to expediently secure such assets should an employee or contractor depart on short notice.
We continue to monitor developments and will make ourselves available to concerned clients to discuss what can be done to favorably address business impacts and requirements flowing from the new FTC rule and California’s existing non-compete prohibitions. For more information as to how this will impact IP rights, contact Chris Passarelli. For more information about how this will impact your employment agreements, contact Jennifer Douglas.
