As we reported back in January, the US Federal Trade Commission is consulting on a proposed new rule that would essentially ban all non-compete agreements between employers and employees in the states. The consultation runs until March 20 and, by all accounts, there have been a big response so far with requests to the FTC to further extend the consultation for another 60 days. But if a ban is enacted, and non-compete clauses are employment contracts are effectively rescinded, where does that leave the rest of the agreement? We’ll consider that.
As we have highlighted a number of times, there remains a lot of uncertainty around this whole subject because the FTC’s initial proposal - to ban virtually all non-competes - is likely to change in light of comments they receive during the consultation and, even then, the FTC is just an agency so any rule to comes up with is almost certainly going to face legal challenge. Nonetheless, businesses in the US, and employment lawyers advising them, are tracking this closely.
Scott LeBlanc is an employment lawyer at US law firm Husch Blackwell in Milwaukee and he is currently advising a number of clients in the state of Wisconsin. Earlier he joined me by phone to discuss the impact any new law might have which, he said, would not only ban the future use of non-competes but also invalidate prior non-compete clauses as well:
Scott LeBlanc: “Right, so at a basic level the FTC rule right now, as it has been proposed, would actually look backward. That's one of the really unique things about this is it wouldn't just be the rule going forward with any agreements that employers enter into in the future but it would also negate any prior non-competes that employers have entered into, which opens up sort of a whole Pandora's box of what is that going to look like if that actually goes into effect? One of the unique parts of the rule is that an employer can be held liable for failing to inform their employees that the non-competes that they have previously entered into are now non an unenforceable. So they could be fined, or potentially penalised from the FTC in other ways, for failing to even inform their employees that they're subject to a non-compete that's now unenforceable. So one of the reasons that we're telling employers to go out and figure out what non competes they have out there is, a number of our clients, you know, may have entered into non-competes, 20, 15, 10, years ago, they may not have a full grasp over what agreements are out there and there may come a point, if this rule goes into effect as it's currently proposed, where they're going to have to reach out to those employees and inform them that those agreements are no longer enforceable.”
Joe Glavina: “What the FTC is proposing seems very wide indeed. So, a law that looks back in time as well as forward, and requires employers to notify workers they are no longer bound by them. How would that be enforced?”
Scott LeBlanc: “It remains to be seen. The FTC is not an agency with unlimited resources. There are hundreds of thousands of employers in the United States that have entered into non-competes so they clearly don't have the ability to be able to police every employer to make sure that they're actually going out and doing this. They’re counting on employees to be aware of this rule and to, sort of, ‘rat out’ the employers who don't who don't do this and then the question is going to be, even if they receive all those complaints, are they going to be able to follow up on all those, or are they going to be looking for the big fish, your Apples, your Googles your Facebooks that kind of stuff? So I think that's one question and there is going to be some strategic discussions, I think, with our clients if this rule goes into effect about, you know, do we feel like we're a target for the FTC and if so, you know, what are we going to do about that?
Joe Glavina: “If we assume this new law is enacted at some point, and non-competes are banned, so existing non-competes in contracts of employment fall away, where does that leave the rest of the contract? In other words, what’s the status of prior agreements which contain banned non-compete clauses?”
Scott LeBlanc: “I think the question about what happens to prior agreements that have entered been entered into that have non-competes in them? And how are they affected by this role, it’s a really interesting one that we really don't have any idea about. The FTC has sort of danced around that by saying, well, it's just the part of the agreement that has the non-compete in it that's unenforceable but, of course, US contract law is very similar to the contract law in the UK where if you take away a non-compete then do we still have the same level of consideration under the agreement and do the parties still get what they bargained for under those circumstances, and is that going to open up the floodgates to a bunch of other litigation about whether these other parts of these agreements, beyond the non-compete part of it, are still enforceable?”
Scott has written a couple of articles on this subject which you may be interested in reading. One deals with the FTC’s proposed rule, as we’ve just been discussing. The other is an interesting development. Aside from the FTC’s route to new law, a number of Senators are pushing forward legislation that would ban non-compete agreements. We’ve put a link to both of articles in the transcript of this programme.
- Link to Husch Blackwell article on FTC’s proposed rule
- Link to Husch Blackwell article on Senators efforts to ban non-compete clauses