Banning Non-Competes Will Alter, But Not Likely Reduce, Anti-Competition Litigation

By Kyle Yaptangco and Kunal Shah

On January 5, 2023, the U.S. Federal Trade Commission (“FTC”) proposed a rule banning companies from requiring its workers (including employees, independent contractors and interns) to sign non-compete agreements as a condition of employment. The rule also proposes to ban some training repayment agreements where workers are required to reimburse the company for training if they leave within a certain time period. The FTC reasoned that non-compete agreements “block workers from freely switching jobs, depriving them of higher wages and better working conditions, and depriving businesses of a talent pool that they need to build and expand.”

The rule would require companies with existing non-competes to rescind the provision and notify current and past employees that such restrictive covenants have been invalidated. Additionally, the rule would effectively nullify litigations predicated on breach of a non-compete. The rule does not disturb litigations involving breach of non-solicitation agreements and trade secret misappropriation per se, but could invalidate restrictions that effectively discourage, dissuade, or prevent an employee from leaving.

The U.S. Chamber of Commerce is considering suing to stop the rule as it does not believe the FTC has statutory authority to issue rules relating to competition. Another challenge includes determining whether the power delegated to the FTC from Congress encompasses banning anti-competitive practices. Whether the rule will survive these legal challenges is ultimately a waiting game, but those challenges may very well end up being successful.

The rule is subject to public comment for 60 days before the FTC can move to make the rule final. The proposed rule seeks public comment including whether franchisees should be covered by the rule, if senior executives should be exempt from the rule, and whether the employee’s level of wages should impact the rule.

If the new rule were to go into effect as proposed, litigants would be forced to dismiss lawsuits predicated on violations of a non-compete. What this will likely lead to is an uptick in trade secret misappropriation litigation. In a lawsuit claiming trade secret misappropriation, a former employer is suing, and often times requesting injunctive relief, to prevent the outgoing employee from further use of its former employer’s trade secrets at his/her new place of employment.  Though claims for misappropriation can be more difficult to prove because they require a showing of both (1) ownership of trade secrets and (2) actual misappropriation, it may be the most viable avenue left for employers to prevent or discourage employees from leaving for a competitor.

Employers should continue to include confidentiality provisions in employment agreements, and more importantly, identify with specificity the types of information it considers to be trade secrets and take active measures to keep that information secret in order to maintain a suit for misappropriation.