The Takeaway
Given the current regulatory environment, employers would be well-advised to review any existing restrictive agreements and consider alternative approaches to protect their interests and confidential information.
Introduction
In January 2023, the Federal Trade Commission (“FTC”) proposed a new rule that would effectively ban employers from using noncompete agreements. The FTC claimed that the rule “could increase wages by nearly $300 billion per year and expand career opportunities for about 30 million Americans.” Public feedback on the proposed rule was immediate and varied. Labor unions and consumer advocates spoke out in support of the proposed rule. On the other side, business groups, including the U.S. Chamber of Commerce, called on the FTC to withdraw the rule, arguing that the FTC lacked the legal authority for the proposed rule under the FTC Act, 15 U.S.C. §§ 41–58.
As a result of the overwhelming amount of public feedback, the FTC extended its public comment period on the proposed rule to April 19, 2023, a month after the original deadline. The FTC is now expected to vote on the final version of the proposed rule in April 2024, which is later than many expected. The FTC is likely to spend the next 10 months considering changes to the proposed rule based on the nearly 27,000 comments it received.
Analysis of the Proposed Rule
Under the proposed rule, the FTC would create a new Subchapter J in Chapter 16 of the Code of Federal Regulations. Within Subchapter J would be 16 C.F.R. part 910, titled the “Non-Compete Clause Rule.” The proposed § 910.1 defines a noncompete clause as “a 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 with the employer.” Therefore, the ban only applies to agreements between employers and workers, not between businesses, and does not affect restraints on a worker during employment. § 910.1 further provides examples of contractual clauses that will be considered a de facto noncompete clause, such as overly broad non-disclosure agreements.
The proposed rule would apply to most, if not all, business entities: partnerships, corporations, associations, LLCs, or other legal entities, including divisions or subsidiaries of these entities. The terms “employer” and “employment” are defined broadly and likely encompass any situation where a person is hired or contracted to perform work. The term “worker” is similarly broad and—except for a franchisee in the context of a franchisee-franchisor relationship, which is excluded—includes any natural person who works for an employer regardless of whether they are paid or unpaid.
Under proposed § 910.2, the rule would apply retroactively. This would require employers to rescind any existing noncompete agreements and provide notice of that to any affected worker. Proposed § 910.4 provides that the proposed rule “shall supersede any State statute, regulation, order, or interpretation to the extent that such statute, regulation, order or interpretation is inconsistent” with the proposed rule. Any state authorities that afford greater protections than the proposed rule would not be affected. If finalized, the rule would not become effective until 60 days after publication, and employers would have a 180-day compliance period.
The proposed rule is broad, and there are questions about whether the FTC has the legal authority to issue 16 C.F.R. part 910. As mentioned earlier, business interests have argued that while the FTC can sue companies for “unfair methods of competition,” it cannot issue regulations on the matter. FTC Commissioner Christine Wilson, the sole dissenting vote on the proposed rule, issued a statement echoing similar thoughts. According to Commissioner Wilson, the proposed rule would be vulnerable to legal challenges that: (1) the FTC lacks authority to engage in “unfair methods of competition” rulemaking, (2) the FTC lacks Congressional authorization under the “major questions doctrine” addressed by the United States Supreme Court, and (3) even if the FTC did have the authority to engage in such rulemaking, it is impermissible under the non-delegation doctrine. It is also not clear whether the proposed rule would apply to those entities that are exempted under 14 U.S.C. § 45 of the FTC Act (such as banks, savings and loan institutions, federal credit unions, air carriers, and common carriers), which the FTC cites to support the proposed rule.
Increasing Hostility Toward Noncompetes
Historically, noncompete agreements have been controversial, but criticism and efforts to eliminate them have increased in recent years:
- In his July 2021 Executive Order 14036, President Biden encouraged the FTC to “curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.”
- In February 2023, a bipartisan group of U.S. Senators again introduced the “Workforce Mobility Act of 2023,” which seeks to severely restrict the use of noncompete agreements. The bill had previously been introduced in 2019 and 2021.) Currently, there’s been no additional action on the bill.
- In his February 2023 State of the Union address, President Biden again expressed his intent to ban noncompetes.
- In May 2023, Minnesota became the fourth state to ban noncompete agreements.
- Several states, including Colorado, have recently banned noncompetes in certain instances (such as for employees who are not “highly compensated”).
- In May 2023, National Labor Relations Board General Counsel Jennifer Abruzzo released a memo asserting that noncompetes violate the National Labor Relations Act in most circumstances.
Comparisons of Missouri, Indiana, and Illinois Noncompete Laws
As things stand, noncompete agreements are valid under Missouri as long as they are “demonstratively reasonable” and are “no more restrictive than is necessary to protect the legitimate interests of the employer.” Whelan Sec. Co. v. Kennebrew, 379 S.W.3d 835, 841 (Mo. 2012). This standard seeks to “balance the competing concerns between an employer and employee in the workforce” — for example, the interest of employers in training employees without risk of losing business secrets versus the interest of employees in job mobility. Id.
Like Missouri, the law on noncompete agreements in Indiana is generally governed by common law — i.e., legal precedents established by judges throughout the state’s court system. The primary question asked by courts when determining whether a noncompete should be upheld is, again, the “reasonableness” of the agreement. Norlund v. Faust, 675 N.E.2d 1142, 1154 (Ind. Ct. App. 1997). This is determined by looking at the unique circumstances of each case and considering three factors: (1) whether the restraint on the employee is wider than necessary for the protection of the employer’s legitimate interest; (2) the effect of the restraint on the employee (particularly any geographic and temporal limits); and (3) the effect upon the public. Id. There is one area where Indiana differs from Missouri: beginning on July 1, 2023, under Senate Bill 7, any new noncompetes with primary care physicians (i.e., family medicine, general pediatric, and internal medicine physicians) will be banned. The new law also provides that any new noncompetes with non-primary care physicians will not be enforceable if the employer terminates the physician’s employment without cause, the physician terminates her own employment for cause, or the physician’s employment contract expires and all contract obligations have been fulfilled.
Illinois, on the other hand, takes a harder stance on noncompetes. The Illinois Freedom to Work Act (the “Act”), which is codified as 820 ILCS 90/ and went into effect on January 1, 2022, sets several restrictions on when employers can enter into noncompete agreements with employees. First, the Act prohibits noncompetes with any employee earning $75,000 per year or less. This salary limit is set to increase by $5,000 every five years through 2037 to account for inflation. In addition to the salary limit, noncompetes must also protect a legitimate business interest of the employer and be supported by “adequate consideration,” which the Act defines as requiring (1) two years of employment after the noncompete is signed or (2) some other consideration, such as professional or financial benefits. Any employee asked to sign a noncompete must be given 14 days to review the agreement and be advised in writing to consult with counsel before signing. Noncompetes for construction workers are generally void under the Act.
What It All Means
t’s not yet clear whether the FTC will ban noncompetes in their entirety or whether it even has the power to do so. However, based on increased criticism of noncompetes at both the federal and state levels, a future in which noncompetes are banned or limited is foreseeable. As such, it is important for businesses and employers to keep apprised of any updates.
To keep up to date on this and other employment-related issues that affect your business, please contact our Employment & Labor law team.
