On January 5, 2023, the Federal Trade Commission (FTC) proposed a regulation that would ban the use of non-compete agreements nationwide. The proposal is an attempt by the FTC to enforce and apply existing anti-trust laws in a much more expansive manner. The Biden administration has been signaling a tough stance on non-competes for years, with the FTC issuing guidance criticizing non-competes as anti-competitive and even bringing selective enforcement actions in certain cases. The new announcement, however, was startling in its breadth. The rule would ban all non-competes for any size employer anywhere in the country and would not be limited to low wage workers as some had speculated. As proposed, the ban is even retroactive and would require employers to notify employees with non-competes that the provisions have been rescinded. The proposed restriction even applies to independent contractors and bars non-disclosure agreements that have the effect of preventing competition. Non-solicitation of customer provisions would not be banned, however, nor would pure non-disclosure of confidential information protections. The proposed regulation bars non-competes in the sale of business context unless the business owner holds at least a 25% ownership in the business.
The proposed regulation currently reads as follows:
Section 910.1 Definitions.
(a) Business entity means a partnership, corporation, association, limited liability company, or other legal entity, or a division or subsidiary thereof.
(b) Non-compete clause.
(1) Non-compete clause means 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.
(2) Functional test for whether a contractual term is a non-compete clause. The term non-compete clause includes a contractual term that is a de facto non-compete clause because it has 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. For example, the following types of contractual terms, among others, may be de facto non-compete clauses:
i. A non-disclosure agreement between an employer and a worker that is written so broadly that it effectively precludes the worker from working in the same field after the conclusion of the worker’s employment with the employer.
ii. A contractual term between an employer and a worker that requires the worker to pay the employer or a third-party entity for training costs if the worker’s employment terminates within a specified time period, where the required payment is not reasonably related to the costs the employer incurred for training the worker.
(c) Employer means a person, as defined in 15 U.S.C. 57b-1(a)(6), that hires or contracts with a worker to work for the person.
(d) Employment means work for an employer, as the term employer is defined in paragraph (c) of this section.
(e) Substantial owner, substantial member, and substantial partner mean an owner, member, or partner holding at least a 25 percent ownership interest in a business entity.
(f) Worker means a natural person who works, whether paid or unpaid, for an employer. 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, the term worker includes a natural person who works for the franchisee or franchisor. Non-compete clauses between franchisors and franchisees would remain subject to Federal antitrust law as well as all other applicable law.
Section 910.2 Unfair methods of competition.
(a) Unfair methods of competition. 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; or represent to a worker that the worker is subject to a non-compete clause where the employer has no good faith basis to believe that the worker is subject to an enforceable non-compete clause.
(b) Existing non-compete clauses.
(1) Rescission requirement. To comply with paragraph (a) of this section, which states that it is an unfair method of competition for an employer to maintain with a worker a non-compete clause, an employer that entered into a non-compete clause with a worker prior to the compliance date must rescind the non-compete clause no later than the compliance date.
(2) Notice requirement.
(A ) An employer that rescinds a non-compete clause pursuant to paragraph (b)(1) of this section must provide notice to the worker that the worker’s non-compete clause is no longer in effect and may not be enforced against the worker. The employer must provide the notice to the worker in an individualized communication. The employer must provide the notice on paper or in a digital format such as, for example, an email or text The employer must provide the notice to the worker within 45 days of rescinding the non-compete clause.
(B) The employer must provide the notice to a worker who currently works for the employer. The employer must also provide the notice to a worker who formerly worked for the employer, provided that the employer has the worker’s contact information readily available.
(C) The following model language constitutes notice to the worker that the worker’s non-compete clause is no longer in effect and may not be enforced against the worker, for purposes of paragraph (b)(2)(A) of this section. An employer may also use different language, provided that the notice communicates to the worker that the worker’s non-compete clause is no longer in effect and may not be enforced against the worker. A new rule enforced by the Federal Trade Commission makes it unlawful for us to maintain a non-compete clause in your employment contract. As of [DATE 180 DAYS AFTER DATE OF PUBLICATION OF THE FINAL RULE], the non-compete clause in your contract is no longer in effect. This means that once you stop working for [EMPLOYER NAME]:
- You may seek or accept a job with any company or any person—even if they compete with [EMPLOYER NAME].
- You may run your own business—even if it competes with [EMPLOYER NAME].
- You may compete with [EMPLOYER NAME] at any time following your employment with [EMPLOYER NAME].
- The FTC’s new rule does not affect any other terms of your employment contract.
(3) Safe harbor. An employer complies with the rescission requirement in paragraph (b)(1) of this section where it provides notice to a worker pursuant to paragraph (b)(2) of this section.
Section 910.3 Exception.
The requirements of this Part 910 shall 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. Non-compete clauses covered by this exception would remain subject to Federal antitrust law as well as all other applicable law.
Section 910.4 Relation to State laws.
This Part 910 shall supersede any State statute, regulation, order, or interpretation to the extent that such statute, regulation, order, or interpretation is inconsistent with this Part 910. A State statute, regulation, order, or interpretation is not inconsistent with the provisions of this Part 910 if the protection such statute, regulation, order, or interpretation affords any worker is greater than the protection provided under this Part 910.
Will the Regulation Actually Take Effect?
Never before has such a sweeping ban on non-competes been seriously contemplated. This aggressive move largely reflects the zeal of one person: FTC Chair Lina M. Kahn. If passed as proposed and enacted, this administrative regulation would have a huge impact on businesses and employees in Minnesota. Will this regulation be enacted? Not anytime soon. First, the proposal is subject to comments and input from the public for 60 days and will likely be modified and watered down in some form. Even then, there will almost certainly be a court challenge asserting that the so-called regulation is actually legislation and only Congress can pass laws. Challenges to administrative rule-making by federal executive agencies have become increasingly common in recent years as presidential administrations from both parties have tried to make policy changes without going through a paralyzed Congress. The U.S. Supreme Court has demonstrated a repeated willingness to strike down administrative rules on this basis. The federal courts in this situation would therefore be likely to view this effort by the FTC as a law disguised as a rule as well. At a minimum, federal litigation would result in a stay of implementation and the appeal process could take several years. So it is almost impossible to imagine non-competes being banned by the FTC in 2023 or even 2024.
A Brief History of Non-Compete Reform
What is really going on here? It is estimated that at least one in five Americans in the workforce is subject to a non-compete agreement. Cancelling 30 million non-compete contracts in one fell swoop would be quite an emancipation. Employers assert that these restrictions are necessary to protect investments in legitimate business interests such as customer goodwill, confidential information, and trade secrets. The U.S. Chamber of Commerce points out that non-competes have been used for 600 years (going back to English law arising out the guild system). The Chamber could take a leading role in challenging the FTC proposal in court. Detractors assert that non-competes prevent employee mobility and actually stifle healthy competition.
Each state has its own law regarding non-competes and the the approach varies considerably from state to state. California already bars their use. Minnesota recognizes the enforceability of non-competes but considers them “disfavored” and subject to scrutiny. Litigation regarding non-competes in Minnesota expanded starting the 1990s as Minnesota-based medical device companies often battled each other over the departure of key salespeople and scientists. Since then, the use of non-competes in almost every industry has increased although Minnesota courts have become increasingly skeptical as to their enforcement.
In the 21st century, many states from coast to coast, as well as the District of Columbia, have enacted legislation to limit the use of non-competes. These new laws often bar non-competes for “low wage” workers or certain professions, they may place limits on the duration of such provisions, or they may require the payment of “garden leave” to employees forced to sit on the sidelines. Although similar legislation has been proposed in Minnesota it never went anywhere during the years that the legislature was divided politically. A DFL-controlled legislature in 2023 could take up a proposal this session, however, as interest in this topic increases. Recently re-elected Minnesota Attorney General Ellison has also expressed interest in this topic. It is quite possible, therefore, that we could see non-compete reform at the state level first before any proposed regulations take effect.
Change is Coming
Many will cheer the FTC’s decision to throw down the gauntlet. There are instances where companies have legitimate business interests to protect, however, and non-competes can serve an important role in protecting fair competition. Like many policy questions, a middle of the road approach may be preferable than an absolute ban. More clarity as to their application would be in the public interest. A fast-track resolution process would also be beneficial because it can often take a year to litigate a dispute over a non-compete that only lasts a year. And limiting the use of non-competes for low wage workers, which has been popular in other states, makes sense.
Eventually businesses in Minnesota and other states may need to transition to the use of more precise restrictions on solicitation of customers and protection of confidential information rather than the relatively cruder tool of a non-compete. Calls for reform of non-compete laws have been gaining momentum for several years but the FTC’s proposal has cast a spotlight that will be hard to extinguish. Change, in some form, is coming.
If readers would like to submit comments to the FTC either in favor or against this proposal, they can do so at https://www.regulations.gov.
Update (as of February 10, 2022)
The time period for comments is set to end on March 20, 2023 although a request has been made to extend the time period. Comments submitted thus far can be viewed here.
The Minnesota House of Representatives is considering a bill, H.F. 295, that would void non-competes for employees earning less than “the median family income for a four-person family in Minnesota” and for enforcement against employees above that income level would require payment (garden leave) of 50 percent of the employee’s base salary. A companion bill in the Minnesota Senate, SF 405, would completely ban non-competes in Minnesota.
At the national level, a bipartisan group of U.S. Senators introduced a bill called the Workforce Mobility Act of 2023. This proposal would also ban non-competes. President Biden also mentioned non-competes in his state of the union address on February 7, 2023.
About the Firm: The Minnesota non-compete attorneys of Trepanier MacGillis Battina P.A. can be reached at 612.455.0500. TMB is a business law firm located in Minneapolis, Minnesota.