Federal Trade Commission Cracks Down on Non-Compete Agreements
By: Jon Olafson
In three separate actions and with a recent proposed rulemaking, the Federal Trade Commission (FTC) challenged the use and enforceability of non-compete agreements (NCAs). First, the FTC took action against three separate companies with regard to their use of NCAs. Generally, the FTC complained that the NCAs used were overly broad, applied to lower wage and unskilled workers, and were used in concentrated markets. The FTC labeled the applicable NCAs as “coercive and exploitative” and said that the NCAs “negatively affect competitive conditions.” As for the basis of its legal authority, the FTC argues that NCAs are a “method of competition” pursuant to 15 USC § 45, subjecting them to FTC scrutiny.
Then, on January 5, 2023, the FTC released its proposed rule on NCAs. If this proposed rule is given the green light, it will prohibit both prospective and existing NCAs. Pursuant to the proposed rule, NCAs are defined as any agreement that 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.” This broad rule potentially implicates many common employer measures to protect their businesses, including non-disclosure and non-solicitation agreements. The proposed rule, however, does exclude agreements related to the sale of a business. This proposed rule is now in a 60-day comment period.
The FTC’s actions are part of a larger trend for governmental entities at various levels drafting greater restrictions against the enforceability of NCAs. For example, pursuant to Colorado law, it is unlawful “to use force, threats, or other means of intimidation to prevent any person from engaging in any lawful occupation at any place he sees fit.” CRS § 8-2-113(1.5). Enforceable NCAs in Colorado now only apply to “highly compensated” employees who meet certain salary requirements, are for the protection of trade secrets, and must not be broader than reasonably necessary for the protection of trade secrets. CRS § 8-2-113(2)(b). Furthermore, Colorado employers must follow detailed notice requirements for an NCA to be enforceable. CRS § 8-2-113(4)(a).
Takeaway for Employers
Given these current trends, employers should be wary of their use of NCAs and should use them judiciously. While each state has its own specific laws, a few general principles should be kept in mind:
- Those asked to execute a NCA should be those who are in genuine positions of influence in the company and are among the most highly compensated.
- The protection of trade secrets is often an important consideration. Ensure that the employee you ask to execute an NCA is an employee who genuinely receives and uses trade secrets.
- The scope of your NCA should be narrow and easily defendable. The temporal aspect should be related to your business/sales cycle, and your geographic component should be related to that particular employee’s sphere of influence. Overly broad restrictions are generally unenforceable.
- Proper consideration must be given and must be related to the particular restrictions. Each state has their own parameters regarding consideration. Compliance with consideration factors is critical.
- Follow your state’s laws on the enforceability of an NCA. Each state has their own nuances, so ensure compliance with those requirements.
NCAs can still be a valuable tool for employers. However, both federal and state agencies are taking a more narrow view on the enforceability of NCAs. We recommend speaking to legal counsel about your company’s program for the protection of its trade secrets and its business assets to ensure legal compliance.
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