By Erin Barker and Natalie Sanders
The last decade has seen significant pushback against non-compete agreements in the employment context. Several states have laws that prohibit or significantly limit their use, and now, the federal government is targeting them.
On January 4, 2023, the Federal Trade Commission (FTC) found that three employers’ non-compete agreements “constituted an unfair method of competition” and violated the FTC Act. The next day, the FTC proposed a broad rule prohibiting non-competes by all employers. Most recently, the Workforce Mobility Act of 2023 (WMA) was introduced in both the U.S. Senate and House of Representatives.
The FTC-proposed rule defines a non-compete as “a contractual term between an employer and a worker that prevents the worker from seeking or accepting employment with a person, or operating a business, after the conclusion of the worker’s employment with the employer.” The rule includes de facto non-compete clauses that prohibit a worker from seeking or accepting employment under a functional test. That means if another restrictive covenant, such as a confidentiality or non-solicitation agreement, is so broad that it is the functional equivalent of a non-compete, it too is prohibited.
The FTC-proposed rule contains no grandfather provision. Instead, it would require employers to rescind existing non-competes and individually notify workers in writing that the non-compete is no longer in effect and is unenforceable against the worker. In addition, the FTC proposed rule provides only limited use of non-competes in the sale of a business context, allowing their use for a substantial (25%) owner, but not for key employees or non-substantial owners.
In contrast, and perhaps as a signal of where the FTC may land after it considers comments to its proposed rule, the WMA does not require employers to rescind prior agreements and it allows broader use of non-competes in the sale of a business context. Specifically, it would allow non-owner, senior executives to enter into severance agreements containing a non-compete where the period of severance payments matches the period of non-competition, with a maximum one-year duration following the sale of a business or its dissolution.
While all of this signals imminent change nationwide in the use and enforceability of non-compete agreements, neither the FTC proposed rule or the WMA are law yet. The FTC proposed rule is open to public comment until March 20, 2023. The FTC would expect employer compliance with any final rule within 180 days after its publication. Of course, court battles and legal challenges to the FTC’s authority to impose and enforce such a rule are likely. Similar uncertainty surrounds the WMA. While the WMA has bipartisan support, it has been proposed in the past, without becoming law.
For now, attorneys can assist their clients in responding to the turning tide against non-competes in the following ways:
- Encourage employers who depend on non-competes to protect their trade secrets and competitive advantages to actively comment on the FTC proposed rule and communicate with lawmakers regarding the WMA;
- Review and update agreements. Consider the importance of severability clauses in the event a non-compete clause within an agreement becomes invalid and make sure other restrictive covenants (confidentiality and non-solicitation) are not so broad as to act as a non-compete;
- Confirm that non-competes conform to applicable state laws. In North Carolina, that includes understanding the “blue-pencil” rule and its limits. See Beverage Systems of the Carolinas, LLC v. Associated Beverage Repair, LLC, 368 N.C. 693, 784 S.E.2d 457 (2016), in which the North Carolina Supreme Court clarified that, while a court may strike through an unreasonable non-compete provision, it may not revise or rewrite the provision on behalf of the parties to the agreement to make it enforceable; and
- Frequently monitor legal developments impacting non-competes at both the federal and state level.
Erin Barker is an attorney at Brooks Pierce and advises clients on various employment and ERISA and benefits related matters. In addition to her employment and benefits practices, she also works with businesses, non-profits and individuals on an array of transactional matters. She is resident in the firm’s Greensboro office.
Natalie Sanders is a partner at Brooks Pierce in the firm’s Greensboro office. She provides counsel and defense to businesses in all aspects of the employment relationship. Her 25 years of experience as an attorney, operations manager, entrepreneur, and community volunteer allow her to relate well to management and provide nuanced guidance in complex matters.