Federal Trade Commission Proposes Rule to Ban Non-Compete Agreements
Intellectual Property Department – Notice to Clients and Friends, January 2023
Federal Trade Commission Proposes Rule to Ban Non-Compete Agreements
On January 5th, 2023, the Federal Trade Commission (“FTC”) proposed a new rule to prohibit non-compete agreements upon all workers, including independent contractors, founded on evidence that suggests that non-compete clauses can stifle new businesses and ideas, significantly reduce workers’ wages, and can further exploit workers, thus hindering their economic liberty. The new rule adopts a “functional test” that determines whether a contractual term is a non-compete clause because of the effect such clause would have on the worker and their employment mobility.
According to the FTC, a non-compete clause is a contractual term between an employer and a worker that prohibits the worker from seeking –or accepting– employment for a determined period, in a determined area or with a different person or business entity, prior to the termination of a labor or business relationship with the current employer. This proposed rule under Section 5 of the FTC Act requires employers to nullify existing non-compete clauses and inform their employees that these clauses have been revoked.
Pursuant to the Notice of Proposed Rulemaking (“NPRM”) published by the FTC, non-compete clauses –regardless of business justifications or reasonableness–, have been deemed an “unfair method of competition” which ultimately means that the rule would ban employers from imposing non-compete clauses with their workers. The FTC suggests imposing less restrictive methods in order to protect trade secrets, intellectual property and other valuable company investments.
The only contemplated exception to the rule that allows non-compete clauses or agreements is applicable when a person holds 25% or more in ownership interest, and when such an agreement is entered in connection with the sale of the business entity. However, non-compete clauses covered by this exception would remain subject to Federal antitrust law and other applicable law. Another crucial takeaway is that the FTC rule supersedes any State statute, regulation, order, or interpretation that is inconsistent with the rule, but intends to function as a regulatory base rather than a limit.
Considering that there has not been a judicial interpretation of the FTC rule, a less restrictive approach for businesses during this period of uncertainty should focus on reviewing the policies surrounding existing non-competing clauses and agreements and whether they remain necessary. In case that they do, the priority should be to document the reasons for their use and, as such, these should be well defined. For example, the proposed rule explicitly rejects the most common business justifications for said clauses, such as trade secrets and other proprietary and confidential information, which encourages employers to identify said sensitive informative and engage in alternative methods of protecting trade secrets that do not entail the negative effects the FTC claims non-competing clauses or agreements hold over workers.
In addition to the above-mentioned, the Federal Trade Commission has invited the public to submit comments on their official webpage, as the FTC will review and modify the rule subject to further analysis. This period will run for 60 days and will be open to the public until March 10th, 2023.
| Eugenio Torres Oyola | etorres@nullferraiuoli.com | Rafael Rodriguez Muriel | rrodriguez@nullferraiuoli.com |
| Maristella Collazo Soto | mcollazo@nullferraiuoli.com | Sheila M. Cruz Rodríguez | shcruz@nullferraiuoli.com |
| Víctor Rodríguez Reyes | vrodriguezreyes@nullferraiuoli.com | Melissa Bayona Torres | mbayona@nullferraiuoli.com |
| Jean G. Vidal Font | jvidal@nullferraiuoli.com | Claudia B. Alonso Ramos | calonso@nullferraiuoli.com |
| Cristina Arena Solís | carenas@nullferraiuoli.com |
