Federal Trade Commission Proposes Complete Ban on Non-Compete Provisions
On January 5, 2023, the Federal Trade Commission (“FTC”) issued a proposed rule that would apply retroactively and prohibit employers from utilizing non-compete clauses with employees. If this proposed rule were to pass, it would require that all employers rescind all existing non-competes and provide notice to all of its current and former employees that the employees’ former non-compete clauses are no longer in effect. Under the proposal, there would be a narrow exception for circumstances where the individual restricted by the non-compete clause was a “substantial” owner, member, or partner in the business entity at the time the person entered into the non-compete clause. The definition of “substantial” is to be determined as the rule is currently up for public comment.
A violation of the proposed rule would theoretically result in the filing of a complaint by the FTC. In the event a complaint is filed, the respondent would have the opportunity to contest the charge in front of an administrative law judge (“ALJ”) in a trial-like proceeding. The ALJ judge would then issue an initial decision setting forth findings of fact and conclusions of law and either a recommendation for a “cease and desist” order in favor of the employee or alternatively result in the dismissal of the complaint. The FTC and the respondent would then have the opportunity to appeal the ALJ’s decision to the full Commission. After the Commission issues its final decision, the matter may be appealed in court. Once a cease and desist order is finalized, the Commission may seek a wide variety of remedies in court including civil penalties, restitution, damages, injunctive relief, orders of rescission or reformation of contract and may even make referrals to the U.S. Department of Justice for criminal prosecution.
The FTC’s inspiration behind the proposal is that it believes non-compete clauses negatively affect competition in labor markets by suppressing wages and labor mobility, and by preventing new businesses from forming, stifling entrepreneurship, and preventing novel innovation that might otherwise occur if workers were not restricted from sharing their ideas. While this may be true, if the rule is passed it will have a significant impact on both employees and employers all over the country, including those in the healthcare space. At a minimum, employers would have to abide by the rescission and notice requirements and revisit the language of their employment contracts in order to protect their trade secrets and confidential information. This will likely be a significant undertaking, especially in the health care industry.
If you are an employee or an employer who has any questions or concerns regarding the proposed rule and how it may affect you or your business’ non-compete agreement, please do not hesitate to contact the experienced attorneys at Nicholson & Eastin. We will be monitoring the progression of the proposal and would be happy to discuss the development of the proposal with you at any time.