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February 21, 2023
By Anthony Cammarata Jr

Throughout President Biden’s term in office, his administration has made no qualms signaling an intent to eliminate employer-friendly policies while adding additional layers of pro-employee regulations and red tape. In keeping with these goals, the Federal Trade Commission (FTC) has recently proposed a sweeping ban that, if enacted, would virtually abolish all employee noncompete restrictions in the United States. The FTC’s proposal was made in direct response to an executive order issued by President Biden in 2021. While it is not yet clear in what form the proposal will actually move forward, or whether it would ultimately survive judicial scrutiny, employers would be wise to examine how such a rule could affect their businesses and start planning accordingly.

A noncompete clause is a contractual term between an employer and an employee that prohibits the employee from working for a competing company, or starting a competing business, usually within a certain geographic area and for a specific period of time after the employee’s employment ends. Opponents of noncompete provisions typically argue that they inappropriately restrain and exploit workers, that they suppress wages, and that they hamper competition and innovation. While that may be partially true of unreasonable or overreaching restrictive covenants, properly drafted and implemented noncompete provisions are a vital tool certain employers need in order to protect their valuable business interests. Moreover, Georgia law currently only allows employers to restrict “key employees”, and, as such, it does not affect the ability of lower tier employees to work for whomever they choose.

Should it be enacted, the FTC’s newly proposed rule would bar employers from entering into noncompete contracts with employees and would retroactively require employers to rescind any existing noncompete contracts previously executed. The FTC is now in the process of taking public comment on the proposed rule during a mandatory 60-day review period. After this period concludes on March 20, 2023, the submitted comments will be considered, and the FTC may issue a final rule based on those comments and the FTC’s further analysis of the matter.

While the FTC’s proposed rule on noncompete provisions is receiving national media attention, many outlets appear silent regarding just how wide-ranging the rule would be if it is enacted without changes. Not only would standard noncompete contracts be outlawed, but the proposed rule would actually recharacterize other contracts and agreements between employers and employees if they are determined, under the Rule’s definitions, to have “the effect of prohibiting 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.” By way of example, the following types of contractual terms, many of which are customary for employers, could be considered de facto banned noncompete clauses under the proposed rule:

• Nondisclosure agreements that are broadly written such that they could be interpreted as precluding an employee from working in the same field;
• Contractual terms between employers and employees that require employees to reimburse employers for training costs if the employee’s employment terminates within a specified time period; and
• Any other contractual provision which could be considered, under a “functional test” by the FTC, to restrict an employee from seeking or accepting employment with any other person or operating a business in any way after the termination of his or her employment.

Even an attempt to enter into any of these types of contracts, or otherwise representing to an employee that he or she may be subject to a noncompete provision, would be illegal under the proposed rule. Moreover, the FTC does not stop at just using its authoritarian hand to invalidate contracts that were freely-entered into between employers and employees. In fact, the proposed rule would apply to all “workers,” which the FTC defines as any natural person who works, whether paid or unpaid, for another person. This would include, without limitation, individuals classified as independent contractors, externs, interns, volunteers, apprentices, and even sole proprietors who provide a service to a client or customer.

Legal challenges to the FTC’s dictatorial ban are highly likely if changes are not made during the public comment period. The FTC has, however, indicated that it is specifically seeking comment on whether the proposed rule should apply to senior executives and other “highly paid or highly skilled” workers, raising speculation that the FTC may be entertaining the possibility of pursuing a substituted measure which would apply only to certain classes of workers.

It remains to be seen what the eventual rule issued by the FTC will look like, but employers should certainly stay abreast of developments as it goes through the public comment period. In the meantime, it may be beneficial for employers to begin to inventory their current agreements and prepare for the potential that such agreements may be banned. The attorneys at FCW can assist employers with such preparations and can provide further counsel on alternative steps employers can take to adequately protect their trade secrets, confidential information, and other business interests.

Anthony Cammarata Jr. is an attorney with Flint, Connolly & Walker, LLP currently assisting clients in various corporate and other civil matters. He is experienced in a range of legal issues affecting business owners and employers, including the enforcement of restrictive covenants and the protection of valuable trade secrets.