BREAKING: FTC Moves to Ban Noncompetes and Overly Broad NDAs
by Paul H. Derrick
January 5, 2023, a day that will live in infamy! Too dramatic? Maybe not.
Yesterday, the Federal Trade Commission issued a proposed rule banning employers nationwide from requiring their workers to sign noncompetes. I’ll pause a moment to let that sink in…
Friends, it’s still the first week of 2023, and this may be the most significant employment law news of the entire year. No doubt you have questions. Well, some of the proposed rule is just clear enough to be murky, but here are a few highlights (or lowlights, depending on your aspect) that stand out:
- The proposed rule would make it illegal for an employer to enter into or attempt to enter into a noncompete agreement with a worker. It also purports to ban other agreements that amount to de facto noncompetes, including “overly broad” nondisclosure agreements;
- “Worker” means a natural person who performs work for an employer, whether paid or unpaid. The term includes, without limitation, an employee, individual classified as an independent contractor, extern, intern, volunteer, apprentice, or sole proprietor who provides a service to a client or customer. The term “worker” does not include a franchisee in the context of a franchisee-franchisor relationship; however, it does include a natural person who works for the franchisee or franchisor. Noncompetes between franchisors and franchisees would remain subject to antitrust law.
- Despite banning “overly broad” NDAs, the FTC provides absolutely no guidance on what makes an NDA overly broad;
- Virtually all employers, regardless of size, would be covered by the rule;
- Existing noncompetes would become unlawful and must be rescinded no later than a compliance date that would be 180 days after publication of the final rule; and
- The proposed rule is silent about non-solicitation agreements.
If you’d like to read the proposed rule, here’s a link. (It’s only 216 pages long). A public comment period is open for 60 days after publication in the Federal Register. During that period, or shortly after, the FTC could change the rule, such as allowing noncompetes for senior executives or creating different standards for low- and high-wage workers. Likewise, the agency could do nothing and leave the rule exactly as it now stands.
I suspect many lawsuits will be filed over the rule, and whether it or some variation of it actually gets implemented is anyone’s guess. Regardless, savvy employers should ask, “Is there anything we should be doing right now to minimize our risk in the event the rule takes effect?”
Well, in fact, there is! Because noncompetes would be banned under the rule, employers should initially focus on their NDAs. There are at least three things every employer can do to lessen the chance their NDAs might be deemed overly broad and, in effect, noncompetes. Regardless of the outcome of the proposed rule, you should take these steps anyway.
First, don’t define “confidential information” so broadly as to include every possible category of information (e.g., marketing strategies, financial information, customer information, etc.), especially if the employee never had access to it. To the extent possible, limit the NDA to the job description of the particular employee.
Second, NDAs should make an express exception for information publicly available or generally known within the industry. If what you are trying to protect is not confidential information you own, it cannot be protected by an NDA. Don’t be greedy and try to overreach. Likewise, the general skills and knowledge that an employee brings to a new employer are not protectable and should be expressly excluded from the NDA.
Finally, whether and how an employer enforces its NDAs likely will prove critical. A de facto noncompete could, as a practical matter, be determined by its effect on the employee, so employers should be careful how they enforce such agreements. During exit interviews, remind employees of their obligations under the NDA and talk with them about the scope of it. Later, if a violation is suspected, don’t rush to a burn-the-field litigation strategy. A professional cease-and-desist letter, followed by an earnest attempt to resolve the issue mutually, looks far less like a de facto noncompete than lining up the big guns and vowing to take no prisoners.
Although this bombshell announcement by the FTC won’t play out for at least a couple of months, it already has introduced even more uncertainty into the ever-evolving employment law landscape. We will keep you updated with the latest developments as they occur.
In the meantime, if you have questions about noncompetes or NDAs, or if you would like assistance reviewing, revising, and/or enforcing any agreements you currently have, please contact one of the workplace attorneys at Barnwell Whaley.