The End of An Era: The FTC Proposal to Ban Noncompete Agreements

In a stunning proposal, the Federal Trade Commission (FTC) has proffered a universal ban on noncompete agreements. This proposal, albeit a considerable step away from the norm, was not necessarily unpredictable. Most recently, the FTC made a preliminary finding that noncompete agreements constitute an unfair method of competition and therefore violate Section 5 of the Federal Trade Commission Act, which prohibits “unfair or deceptive acts or practices in or affecting commerce.” If this proposal is enacted, it would have sweeping consequences in Massachusetts.

What is a Noncompete Agreement?

A noncompete agreement is precisely as it sounds. A noncompete agreement or noncompete clause is a contractual agreement or provision between an employer and a worker that bars the worker from working for a competing employer or starting a competing business. Noncompete agreements are typically within a certain geographic area and for a limited period of time after the worker’s employment ends.

Noncompete agreements have long been a source of controversy. The agreements tend to be a reliable scapegoat for stagnating the pay of middle-income workers, preventing such workers from switching jobs to secure a raise.

However, noncompete agreements are not necessarily perceived as all bad. These agreements protect established companies by limiting competition within industries to allow those companies to thrive and protect the products it sells to consumers.

Scope of the Proposal

The scope of the FTC’s proposal is quite expansive. Applicable to both employees and independent contractors, the FTC would require employers to withdraw existing noncompete agreements and to inform workers that they no longer apply. Likewise, employers would be precluded from entering into, attempting to enter into, and maintaining a noncompete agreement with a worker. Also, employers would not be able to imply that a worker is bound by a noncompete agreement when he or she is not.

For existing noncompete agreements, which cover a considerable portion of workers in the private sector, the proposal would require employers to affirmatively rescind existing noncompete agreements and notify workers that they are no longer subject to the agreement’s terms.

The proposed rule does provide for certain exceptions. If the proposed rule is enacted, an anticipated formidable exception is the sale-of-business exception for an owner, member, or partner who owns at least twenty-five percent of a business that is being sold. Specifically, the exemption also covers those who are “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.”

The proposal is likely to be enacted in some form, though the scope of the enactment is difficult to predict. As such, it makes sense to assume that existing noncompete agreements will be affected by this proposal. If you need help reviewing your noncompete agreement or discussing these proposed changes, contact the Rudolph Friedmann attorneys at (617) 723-7700.