In the first installment of our 2023 Trade Secrets & Non-Competes Webinar Series, Seyfarth partners Kate Perrelli, Michael Wexler, Robert Milligan, Dan Hart, and Dawn Mertineit discussed the new Federal Trade Commission’s (“FTC”) proposed rule banning the use of non-competes with employees and workers. The expert panel addressed what the proposed rule would do and what employers need to know to respond.
As a conclusion to this webinar, we compiled a summary of takeaways:
- The FTC’s attempted regulation of employment non-competes as part of its rulemaking powers is unprecedent in the 109 years since its creation in 1914. The FTC bases its rulemaking authority on Section 5 of the Federal Trade Commission Act, which provides: “The Commission is hereby empowered and directed to prevent persons, partnerships, or corporations . .. from using unfair methods of competition in or affecting commerce and unfair or deceptive acts or practices in or affecting commerce.” 15 USC § 45(2).
- On November 10, 2022, the majority on the FTC issued a new policy statement that outlined an expansive definition of “unfair methods of competition” and indicated that it would engage in aggressive enforcement of actions that it regards as “unfair methods of competition,” even if those actions do not constitute violations of federal antitrust law. The proposed Rule is the FTC’s first test of the broader powers that it claimed in its November statement, and the proposed Rule is much broader than anything that the Biden Administration had previously hinted at, including in then-candidate Biden’s platform campaign statement or in the 2021 executive order. A day before the FTC issued its proposed rulemaking, FTC that issued a press release that it had sued, and reach a settlement with, three employers in the security and manufacturing sector that the FTC alleged had “illegally imposed noncompete restrictions on workers.” Thus, the FTC apparently is not waiting for a final rule before flexing its muscle and employers should examine their existing non-competes to determine whether they are overly broad and may invite FTC scrutiny.
- The proposed rule impacts not just typical employee non-compete agreements but also non-compete agreements that are made in connection with the sale of business entities. While there is an exception for 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 defined as an owner, member, or partner holding at least a 25 percent ownership interest in a business entity, the 25% interest threshold is arbitrary and ignores the business realities, complexity and individuality of such transactions. Moreover, it applies retroactively to such transactions so parties to the transaction may not get the benefit of their bargain.
- The proposed rule is only a proposal at this point, as the FTC has solicited public comment on the proposed rule before it issues a final rule. The deadline to submit comments is March 20, 2023, and we encourage all affected employers to submit comments.
- It’s unclear whether the final rule will be as sweeping as the current proposal. Regardless of the final form of the rule, we expect legal challenges to the FTC’s rulemaking, including significant constitutional challenges to whether the FTC has power to issue rules at all on worker non-competes.
- In the interim, employers should take a close look at their restrictive covenant agreements to ensure that they are reasonable and compliant with ever-evolving state law.
You can view a recording of the webinar and all other webinars in our Trade Secrets & Non-Competes Webinar Series here.