On January 5th the Federal Trade Commission (FTC) released a Notice of Proposed Rulemaking indicating that they intend to adopt a rule which, if adopted in its current form, would prohibit with only a few exceptions, private businesses from entering into or enforcing non-competition agreements with their workers. Non-competition agreements typically prevent workers from joining competitors or starting their own company for a certain period after leaving employment. The proposed rule applies both prospectively- businesses could not enter into future non-competition agreements- and retroactively- meaning businesses would need to rescind all existing agreements. While the regulation and enforceability of non-competition agreements has historically been governed by state law, this new rule would overrule state law to the contrary. While no one is surprised by the fact that the FTC issued a proposed rulemaking on this subject, what has surprised many is the breadth of the proposed rule.
Businesses use non-competition agreements to ensure that an employee who has access to company information will not take that knowledge gained from their business only to use that information to start/work at another competing business. In Wisconsin and Minnesota there are existing requirements that all non-competition agreements must be reasonable in scope (the activity prohibited), duration (the number of months after employment where the prohibition applies), and location (how far the prohibition extends). This proposed rule would bring significant changes to Wisconsin and Minnesota businesses and their employees, which have a long-standing history of enforcing reasonable non-compete agreements.
The FTC believes that the practice of having employees sign a non-competition agreement constitutes an “unfair or deceptive acts or practices in or affecting commerce” because they are believed to hinder employees from better pay and being more productive in their professions because they are denied opportunities after signing. The FTC also believes that non-competition agreements reduce innovation and entrepreneurship which ultimately can lead to poor work product and rising prices.
The Commission invites the public to submit comments on this proposed Rules and the comment period is open through March 10, 2023.
We anticipate a host of comments and legal challenges to the proposed rule given how broad the scope of the proposed rule is. That being said, we encourage businesses to take a look at their existing non-competition agreements to consider the potential impacts of the proposed rule and to think creatively about other ways to protect proprietary business information such as confidentiality agreements and/or non-solicitation agreements (although it is not clear whether non-solicitation agreements would fall under the FTC’s proposed rule). Businesses may also want to consider limiting the number of employees who have access to highly sensitive business information.
We encourage you to reach out with any questions concerning the proposed rule and how it may impact you or your business. We will continue to keep you informed of this rule and any changes.