CLIENT ALERT
Robert R. Lucic, Esq.; David W. McGrath, Esq.
January 27, 2023
On January 5, 2023, the Federal Trade Commission (FTC) announced a proposed rule banning non-competes and other types of restrictive covenants. Employers took notice and many are understandably concerned about when and how this might affect their businesses.
The first thing to know is that nothing will happen any time soon. As required by federal law, the FTC is currently accepting comments until March 10, 2023, but the rulemaking process may extend into 2024, and the language of the proposed ban could change significantly between now and then. Also, even if the proposed ban becomes a rule, litigation may further delay its enforcement. Employers may, however, need at some point in the future to rescind prohibited restrictions before the ban’s specified compliance date (currently set at 180 days after publication), and provide a specific, written notice to current and former workers within 45 days of rescission.
In addition to the timing of all this, it is important to understand the scope of the proposed rule. As written, it would prohibit the use of certain “non-competes” (or other post-employment restrictions that function like “non-competes”) in existing and future employment agreements with workers that operate broadly to prevent former workers from seeking or accepting employment with a competitor, or operating a competitor business. Critically, the label a business uses to describe the restrictive agreement, such as Non-Compete, Non-Solicit, or Non-Disclosure, would not matter much. Rather, what would matter is whether or not the restrictions, regardless of labeling, function in a way that prevents, prohibits, or precludes the former worker from seeking employment with, or becoming employed by, a competitor business. It does not appear that the FTC intended the proposed ban to apply to all post-employment restrictions that limit but do not explicitly or functionally prevent competition. Therefore, reasonable restrictions that protect an employer’s legitimate interests in customer good-will, trade secrets, or other confidential business information would not seem to violate the proposed rule because they narrowly limit, but do not prevent, prohibit, or preclude competition.
Finally, businesses should remember that the proposed federal rule would create a floor, not a ceiling – states would be allowed to provide greater employee protections. In nearly all circumstances, New Hampshire courts already refuse to enforce post-employment restrictions that outright ban employees from competing. As is the case in many states, in New Hampshire such “blanket” non-compete restrictions that effectively stop an employee from working for a competitor are rarely upheld. Additionally, other legal safeguards already provide substantial protection to New Hampshire employees, including (a) certain low-wage earners who cannot be bound to non-compete restrictions, and (b) all new employees who must be shown a copy of reasonable, narrowly drafted non-compete agreements before employees accept offers of employment. These and similar laws in New Hampshire and other states that govern restrictive employment agreements will not likely be affected by the proposed federal ban.
Employers who are interested in submitting formal comments to the FTC or are concerned about how the proposed ban might eventually affect their employment agreements should consult with counsel.