This article is not legal advice. It does not create an attorney-client relationship.
A careful reading of the FTC Non-Compete Ban shows that it has several serious flaws that are likely to lead to expensive litigation should the rule take effect. Below are a few thoughts on those problems.
Businesses May Have a Right to Reduce or Claw Back Some Compensation.
Part of the inherent flaw with the rule, is its retroactive application to existing relationships where bargained for consideration, including non-competes, has already been exchanged. The rule does not address whether an employer may have a right to reduce or claw back some compensation as a result of losing the value of the non-compete a business bargained for. I don’t know if the FTC would have had legal authority to even address that if it had chosen to do so, but I fully expect some businesses that paid for non-competes to assert a right to the return of some compensation.
Confidentiality and Non-Solicitation Provisions Are Still At Risk.
A prior version of the rule specifically added risk to the enforceability of confidentiality and non-solicitation provisions. The final rule includes an expansive definition of what constitutes a non-compete, and makes no reference to confidentiality nor non-solicitation. The definition of a non-compete begins with “A term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from…”
That language could be interpreted to include a broad confidentiality or non-solicitation provision. This is a huge potential issue especially when it comes to protecting trade secrets.
If the FTC had intended to preserve confidentiality provisions and non-solicitation provisions, it should have added language affirmatively doing so.
It May Still be Legal to Prohibit a Worker from Owning a Competing Business.
The rule prohibits a post-termination non-compete that restricts in part “operating a business in the United States after conclusion of the employment…”
This language leaves wide open the position that a post-termination ban on starting or owning a business is still legal under federal law.
It is also worth noting, that a post-termination non-compete restricting activity outside the US may still be legal under US law.
The Model Notice Language is Deeply Flawed and May Hurt Workers and Businesses.
The rule only requires that the substance of the notice to non-senior executive workers identify the party to the non-compete and state that “the worker’s non-compete clause will not be, and cannot legally be, enforced against the worker.” As written the model notice is likely to confuse workers, set unjustified expectations for workers, and perhaps expand the scope of the legal waiver provided by the employer.
The model notice exceeds the requirements of the rule, and leaves the significant question, if an employer relying on the model language, intending only to be bound by the minimum extent of the rule used the model language, and a worker justifiably relies on a plain English reading of the notice that exceeds the requirements of the rule, what happens when the employer takes an enforcement action that is not prohibited by the rule?
The deepest flaw is the failure to distinguish between the plain English usage of “non-compete clause” and the defined term provided in the rule, which is more narrow. This is bound to confuse workers and employers and lead to unintended consequences and unnecessary litigation that will harm workers and employers. It may also lead to unintended waivers of important legal rights by employers.
The model language creates the false implication that non-competes during the term are banned under the rule, which the law does not require.
The notice informs a worker “you may run your own” competing business. I don’t see how a lay person, particularly one unrepresented by counsel could conclude that language allows only operating a business and not owning a business.
The notice also states the legal conclusion that the rule “does not affect any other terms or conditions of your employment.” There is nothing in the rule to establish that is the case, and as I’ve noted previously, I expect someone to litigate whether an employer is entitled to recover some form of compensation as a result of the invalidation of a valuable part of the consideration they bargained for.
There are Difficulties Determining Who is a Senior Executive.
Existing post-termination non-competes applying to senior executives can continue to be enforced. What is not clear, is what constitutes an “existing agreement.”
If an agreement is amended, auto renewed, extended, beyond its terms as of the effective date of the rule, it’s unclear whether that is an “existing agreement” or not.
The rule is unclear whether officers in a multi-entity enterprise must have policy-making authority over the entire enterprise or not, and even if they did, whether that would be enough. This confusion could have been easily avoided by using “will” instead of “may”. I think a court would likely read “will” into the rule.
The rule is also not clear on whether a worker or the employer selects the year for purposes of determining compensation to evaluate whether the worker is a senior executive – this is due to the inconsistent use of “person” and “worker” within the rule. I think a court would most likely read this to apply to the business selecting the year, but the terminology is inconsistently used and not definitive.
The Bona Fide Sale Exception is Unclear.
The drafting uses the word “person” rather than “worker” to refer to the sale of the ownership interest in an entity. Throughout the rule, person is most contextually applied to the business, not the worker. That interpretation is completely at odds with the FTC’s other materials, such as the FTC’s small business guide which makes it clear it is intended to refer to the worker’s sale.
The rule also makes no distinction between a whole or partial ownership sale, leaving open the question of whether a non-compete would be enforceable if only a small part of the business were sold.
The language never makes specific reference to the non-compete being with the seller, creating ambiguity around whether non-seller workers could also agree to post-termination non-competes pursuant to a bona fide sale.