There has always been a tension between two important competing principles that underlie American law when it comes to noncompete agreements. First, is the freedom to contract, which gives individuals the right to bargain with others over nearly any topic and come to a good, bad, or indifferent deal. For example, employers argue that they should have the right to contractually protect their trade secrets and the time and investments they make in developing customer relationships and goodwill. Second, is free trade and competition, which reflect the importance, in a democratic, free-market system, of allowing everyone to compete freely and fairly anywhere in the country. When you put the two concepts together, giving individuals the right to contractually agree to restrict the services they offer to the market; or, conversely, not allowing individuals to agree to restrict what services they offer when and where, the tension arises.
The perceived tension between these two legal concepts elevates when people view workers as not REALLY being free to choose whether to sign a noncompete agreement. Of course, no one can force workers to sign any agreement at any time, but depending on the labor market, the pressure to sign will ebb and flow with the number of opportunities they have for employment elsewhere.
While 2023 isn’t the first year that employee noncompete agreements have undergone scrutiny, this year is host to a concerted attack against noncompete agreements at the Federal Trade Commission (“FTC”), in Congress, and most recently, at the National Labor Relations Board (“NLRB”).
FTC January 2023
In 2022, President Biden issued an executive order encouraging the FTC to undertake necessary actions to “curtail the unfair use of non-compete clauses” which “may unfairly limit worker mobility.” The FTC took good notes. On January 5, 2023, the FTC announced a proposed rule that would generally prohibit employers from requiring their employees to enter into noncompete agreements and forbid employers from enforcing existing agreements.
The rule generally defines a noncompete clause as a “contractual term between an employer and a worker that prevents the workers from seeking or accepting employment with a person or operating a business after the conclusion of the worker’s employment with the employer.” The determination of whether any particular clause is a noncompete clause will be determined based upon its function (whether it has an anti-competitive “effect”), not specific verbiage that can be manipulated.
Not only would employers be prohibited from requesting or requiring their employees, contractors, and interns to enter into noncompete agreements, any existing agreements would need to be rescinded and employers would be prohibited from representing that its workers are subject to any enforceable noncompete provision. Inconsistent state statutes that would allow for noncompete agreements would be superseded and preempted by the rule.
The rule proposes one narrow exception. Some noncompete provisions may be enforceable in connection with the sale of a business, which would restrict “substantial” selling owners of the business from competing with the new owners for some period of time following the sale.
The FTC’s vote on the final rule is tentatively scheduled for April 2024. The FTC’s process was summarized in this excellent article, which largely criticizes the agency’s process and findings.
Companion Bills H.R. 731 and S.220
Shortly after the FTC announced its proposed rule, on February 1, 2023, the House and Senate introduced companion bills, House Bill 731 and Senate Bill 220, both entitled the “Workforce Mobility Act of 2023, that would also largely ban noncompete agreements across the United States, overriding conflicting state laws which would allow those agreements. The bills, if passed would make most noncompete agreements unfair or deceptive trade practices under federal law. The bills generally provide that, “Except as provided in [the law], no person shall enter into, enforce, or attempt to enforce a noncompete agreement with any individual who is employed by, or performs work under contract with, such person with respect to the activities of such person in or affecting commerce.” The federal government’s legislative website provides a summary of the exceptions:
This bill prohibits the use of noncompete agreements in the context of commercial enterprises except under certain circumstances. The first exception is that the seller of a business entity may enter into an agreement to refrain from engaging in a similar business in the geographic area where the business being sold has conducted business prior to the agreement. This exception extends to agreements by senior executive officials who have a severance agreement as part of the conditions of sale (i.e., a buyout provision). Second, a partner of an enterprise may enter into an agreement that, upon dissolution of the partnership or dissociation of the partner from the partnership, the partner will refrain from engaging in a similar business in the geographic areas where the partnership has conducted business prior to the agreement.
Commercial enterprises must post notice of the prohibition of noncompete agreements under this bill in a conspicuous area of the workplace and conduct a public awareness campaign to inform the public of the provisions of this bill. The Federal Trade Commission or the Department of Labor shall investigate or enforce the provisions of the bill. Individuals and state attorneys general may also bring civil actions to enforce the provisions of the bill.
Both bills have been referred to various committees and subcommittees and have not yet been released for a vote by either branch of Congress.
NLRB May 30, 2023
Finally, and not surprisingly, on May 30, 2023, the overzealous NLRB has thrown its weight behind these measures. In another “finding” that nearly every conceivable employment topic falls under the National Labor Relations Act in some way or another, the NLRB’s General Counsel, Jennifer Abruzzo, issued a memorandum maintaining that most noncompete agreements “reasonably tend to chill employees in the exercise of [NLRA] Section 7 rights.” Section 7 of the NLRA protects employees’ rights “to self-organization, to form, join, or assist labor organizations, to bargain collectively through representatives of their own choosing, and to engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection.” Specifically, Ms. Abruzzo argues that noncompete agreements discourage employees from:
1) “threatening to resign to demand better working conditions”;
2) “carrying out concerted threats to resign”;
3) “seeking or accepting employment with a local competitor to obtain better working conditions”;
4) “soliciting their co-workers to go work for a local competitor”; and
5) limiting employees from changing jobs to engage in union organizing (otherwise known as *“salting”).
While nothing is yet set in stone, noncompete agreements are in for very close scrutiny in the coming months. The NLRB can issue unfair labor practice charges against employers based on the General Counsel memo alone, and employers will be forced to defend themselves. Until a court with jurisdiction in your area decides the matter, a law is passed, or the FTC passes its proposed rule, employers will be in limbo regarding the continuing enforceability of employment noncompete agreements. Until the matter is decided, continue to make sure your agreements are narrowly tailored and restrict competition the least amount possible to protect your business interests. Please call us if you have questions.
*Salting is an organizing technique in which professional union organizers apply for jobs for the primary purpose of organizing the company’s workforce rather than the job duties for which the person is hired.
Comments 1
Excellent article. Thank you!