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The Changing Landscape of Non-Compete Agreements: FTC Data Reveals Rapid Legal Changes

In recent years, non-compete agreements have been at the center of a whirlwind of legal changes. Once commonplace in employment contracts across various industries, these agreements are now undergoing significant revisions. The concerns over their potential to stifle competition and innovation have spurred a transformation in the legal framework surrounding them. We will explore this transformation and delve into how non-compete agreements, once widely applicable, now face enhanced scrutiny and growing restrictions.

The Evolving Nature of Non-Compete Agreements:

Historically, non-compete agreements were employed to safeguard a company’s proprietary information, customer relationships, and trade secrets. They served as critical tools for protecting business interests. Now, they are being viewed by the Federal Government as an unlawful restraint of trade because they make it harder for employees to change employers.  This change of focus, from protecting the interests of employers to promoting the ability of employees to change employers, has significant implications for federal contractors.

FTC’s Preliminary Finding:

One of the pivotal moments in this evolving landscape is the FTC’s preliminary finding that non-compete agreements constitute an unfair method of competition, thus violating Section 5 of the Federal Trade Commission Act. According to Chair Lina M. Khan, “The freedom to change jobs is core to economic liberty and to a competitive, thriving economy.” This finding, based on President Biden’s July 9, 2021, Executive Order on Promoting Competition in the American Economy, which noted non-compete agreements “may unduly limit workers’ ability to change jobs” and encouraged the Federal Trade Commission (“FTC”) to exercise its rulemaking authority to limit the use of non-compete clauses that may “limit worker mobility,” has set the stage for significant legal changes.

Impact on Federal Contractors:

Federal contractors, who often operate in highly specialized sectors with unique employment needs, have historically used non-compete agreements to protect sensitive proprietary and financial information and to ensure that  employees did not immediately join competing firms and use that sensitive information to provide the new employer with an unfair competitive edge.   

The FTC’s Stand on Non-Competes:

The FTC’s proposed rule, aims for a nationwide ban on non-compete agreements with workers, has received immense attention. This rule, which would cover anyone working for an employer whether paid or unpaid, would also require employers to affirmatively rescind existing non-compete agreements.  While the policy behind the proposed rule is unlikely to change in this administration, it is widely expected that the rule will undergo substantial changes before implementation due to comments and legal challenges. 

The FTC’s recent enforcement actions also highlight the agency’s commitment to proceed against companies that misuse non-compete agreements. The FTC has actively looked for instances of what it deems overreaching in the use of non-competition agreements and has successfully negotiated several tentative consent agreements.

Additional Prohibitions:

In addition to the FTC actions, several states have also taken positions against non-compete agreements enacting general prohibitions against non-compete agreements. Notable examples include:

  • California
  • North Dakota
  • Oklahoma
  • Minnesota

Exempt Employee Requirements:

Other states have taken a more limited approach, permitting non-compete agreements only for exempt employees or employees making more than a statutory minimum. These minimum salary thresholds vary by state and, by limiting the protections to lower-wage workers, appear to recognize the legitimate goals of employers protected by non-compete agreements. Some of these thresholds include:

  • Colorado: $112,500
  • District of Columbia: $150,000
  • Illinois: $75,000
  • Maine: $58,320
  • Maryland: $46,800
  • Oregon: $108,575.64
  • Rhode Island: $36,450
  • Virginia: $69,836
  • Washington: $116,593.18

Prohibitions on Forum Selection and Choice of Law Clauses:

To protect employee rights and promote fairness, an increasing number of states are also prohibiting employers from including forum selection and choice of law clauses that designate jurisdictions other than the state in which the employee works. States like California, Colorado, Massachusetts, and Washington are at the forefront of this trend.

Payment During Restricted Period:

Several states have also enacted laws that prohibit employers from enforcing non-compete agreements without providing compensation to employees during the restricted period. Some states also impose restrictions when an employer terminates an employee without cause. Notable examples include Massachusetts and Oregon.

Ensuring Protection of Confidential Information:

Considering these changes, it is crucial for businesses, including federal contractors, to take measures to ensure robust protection of confidential information and trade secrets without relying entirely on non-compete agreements. As the future of non-compete agreements remains uncertain, it is essential to navigate this shifting terrain with vigilance, compliance, and a focus on protecting both business interests and the rights of workers. With a multitude of legal challenges and revisions expected, the road ahead promises continued evolution in the realm of non-compete agreements. 

Source: https://www.ftc.gov/news-events/news/press-releases/2023/01/ftc-proposes-rule-ban-noncompete-clauses-which-hurt-workers-harm-competition