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Federal Governmental Agencies Are Putting Non-Compete Provisions In The Cross-Hairs

by | Jun 6, 2023 | Firm News |

Many employers that do business in California already know the state’s hostility to non-competition agreements or specific provisions that restrict an individual’s post-employment activities.  Since 1872, California has declared non-compete provisions, defined as any agreement by which anyone is precluded “from engaging in a lawful profession, trade or business,” void and unenforceable.” (California Business and Professions Code section 16600.)  While there are limited statutory exceptions to this nearly black and white law, California has long declared that employee mobility is paramount and that B&P section 16600 reflects California’s “fundamental public policy” in favor of employee mobility.  Currently, California, North Dakota, and Oklahoma are the only three states to completely prohibit enforcement on non-compete agreements.  Colorado, Illinois, Maine, Maryland, New Hampshire, Oregon, Rhode Island, Virginia and Washington state prohibit noncompete agreements unless the worker earns above a certain threshold.  Now, two federal governmental agencies have taken steps to prohibit/limit the use of  non-compete agreements at the national level. On January 5, 2023, the Federal Trade Commission (FTC) released a Notice of Proposed Rulemaking (NPRM) to prohibit employers from utilizing non-compete clauses, claiming the use of non-compete provisions constitute “unfair competition.”  On May 30, 2023, National Labor Relations Board (NLRB) General Counsel Jennifer Abruzzo issued a memorandum opining that most employment non-compete agreements violate the National Labor Relations Act (NLRA), impacting both unionized and non-unionized workers.  Both the FTC and the NLRB General Counsel are, for the first time, urging the federal government to prohibit the use of non-compete agreements nationwide.

The FTC’s NPRM , if adopted, would be nationwide in scope and would apply to almost all private employers, regardless of size or location. The proposed rule would define the term “non-compete clause” as including any 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. The proposed rule would, among other things, provide that it is an unfair method of competition for an employer to:

  • Enter into or attempt to enter into a non-compete clause with a worker.
  • Maintain with a worker a non-compete clause.
  • Under certain circumstances, to represent to a worker that the worker is subject to a non-compete clause.

In addition to prohibiting employers from attempting to impose non-compete restrictions upon workers going forward, the proposed rule also would require employers to rescind existing non-compete clauses with workers and actively and individually inform them that the clauses are no longer in effect. Under the proposed rule, employers also would be barred from entering into non-compete clauses with independent contractors.  However, the rule would not apply to a non-compete clause that is entered into by a person who is selling a business entity or otherwise disposing of all of the person’s ownership interest in the business entity, or by a person who is selling all or substantially all of a business entity’s operating assets, when the person restricted by the non-compete clause is 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. The rule also would not apply to a franchisee in the context of a franchisee-franchisor relationship.  Notably, the it has been reported that the FTC will not vote on this rule until April 2024, in light of the almost 27,000 public comments the agency received.

The NLRB’s General Counsel argues in the Memorandum argues that non-competes hinder employees from exercising their rights under Section 7 of the NLRA, which protects their ability to engage in concerted activities to improve working conditions.  Ms. Abruzzo identifies several ways in which she asserts non-compete agreements interfere with employees’ rights, such as restricting their ability to threaten to resign, seek employment with competitors, and encourage co-workers to work for a competitor as part of engaging in protected concerted activities. The memo notes that non-competes restricting managerial or ownership interests are likely not subject to the NLRA and suggests that employers may protect trade secret information, but identifies that such goals can also be accomplished through narrowly tailored proprietary information agreements.  The memo instructs regional offices to submit cases involving non-competes to the Division of Advice, which will evaluate whether complaints should be issued. For the memo’s legal position to become law, an NLRB decision or an administrative rule in line with the General Counsel’s position must be published.

The FTC’s proposed rule and GC Abruzzo’s memorandum are not current law and do not require employer’s to take any action.