FTC Cracks Down on Non-Compete Agreements: Helping Workers or Hindering Businesses?

In News by Anne E. Zachritz, J.D.

On January 5, 2023, the Federal Trade Commission (“FTC”) proposed a rule to ban employers from imposing non-competition agreements (“NCA” or “NCAs”) on their workers. Although the proposed rule will likely not take effect until the end of this year, employers should take steps now to protect themselves if the proposed rule passes.

The FTC’s proposed rule would prohibit employers from using NCAs or non-compete clauses in agreements with their workers. Under the proposed rule, the term “worker” is defined to include “an employee, individual classified as an independent contractor, extern, intern, volunteer, apprentice, or sole proprietor who provides a service to a client or customer.” If the proposed rule passes, employers will be in violation of the rule if they enter or attempt to enter into a NCA with a worker, maintain a NCA with a worker, or represent to a worker that they are subject to a NCA. The proposed rule is retroactive and will require employers to withdraw any existing NCAs and inform current and former workers that they are no longer bound to the terms of their existing NCAs. The proposed rule does not apply to non-disclosure agreements or non-solicitation agreements unless these agreements are overly broad and function as de facto NCAs.

Oklahoma already has a statute in place which can render NCAs unenforceable. Generally, Oklahoma law allows for agreements that have reasonable and valid uses if they do not overly restrict former employees from pursuing anything in the specific field in which the employee has developed specific skills and training. Specifically, Oklahoma law allows employees to compete with their former employer as long as the former employee does not “directly solicit the sale of goods, services or a combination of goods and services from the established customers of the former employer.” However, any provision in a contract to the contrary is void and unenforceable. Oklahoma makes some exceptions for partners and for the sale of goodwill. The proposed FTC ban, by comparison, categorically ban all NCAs.

The proposed FTC rule has faced criticism because it does not have an exception for trade secrets. Many businesses, especially those in technology, pharmaceutical, and other intellectual-property-heavy industries, hold trade secrets as one of their most valuable assets and utilize NCAs to protect them. The FTC argues that there are other methods of protecting trade secrets, such as pursuing a civil cause of action through the Uniform Trade Secrets Act (“UTSA”) and the Defend Trade Secrets Act of 2016 (“DTSA”). However, NCAs are used to prevent a former employee from sharing trade secrets while the USTA and DSTA only offer remedies once the trade secrets have been shared with a third party. If the only available remedy is to sue after the trade secrets have been shared, this functionally defeats the purpose as the value of trade secrets lies in their secrecy.

Further, the proposed rule is receiving significant pushback from the U.S. Chamber of Commerce. In a response letter to Senators Warren and Whitehouse, the Chamber claims that the FTC does not have the constitutional or the statutory authority to propose this rule and enacting substantive rules that define unfair methods of competition is outside the power granted to the FTC. The Chamber states that it is prepared to sue the FTC over this overreach of power if the proposed rule is not stricken after the comment period ending on April 19, 2023.

Even if the FTC proposed rule is successfully challenged by the Chamber, there will likely be NCA reform in the near future enacted by either the FTC or Congress. Any modification to current unfair competition legislation will likely have far reaching effects and businesses and employers should start taking steps now to protect their trade secrets. These businesses should take the following steps:

Be proactive.

The FTC has begun taking legal action against employers who are violating the proposed rule. Taking steps now to comply with the proposed rule may save your business costly litigation fees.

Review and revise.

Start reviewing the standard contract for employees for any NCAs, non-disclosure agreements and non-solicitation agreements. Remove any NCAs to conform with the proposed rule and state law. Carefully review NDAs and non-solicitation agreements to determine if they are overly broad and function as de facto NCAs. Narrowly tailor these clauses to only include the specific confidential information and trade secrets you wish to protect.

Consider other protective measures.

  • Implement protective policies:
    Consider introducing workplace training that emphasizes data protectionist policies. Do not allow employees to log into personal accounts, particularly email and cloud software, on company devices or use personal devices at work. Stress the importance of keeping former employer’s trade secrets to emphasize the seriousness of the issue and to also avoid being sucked into a lawsuit by the former employer. Additionally, consider limiting access of confidential information to need-to-know employees and implementing a file-tracking software.
  • Implement effective hiring and exit practices:
    Creating an effective exit process that emphasizes the importance of trade secrets might dissuade a former disgruntled employee from doing so. Stress that misappropriation can and will result in litigation. Additionally, ensure all company owned devices, access cards, and keys are returned. Disable the employee’s access to computers, cloud systems, and any email accounts as soon as possible and ensure that you have access to their devices and accounts. Remember that although severance pay is not mandatory in Oklahoma, employers have the option to make severance payment contingent on keeping trade secrets.
  • After the exit interview, if you are concerned that the former employee may have misappropriate trade secrets, promptly conduct a thorough investigation and take appropriate next steps.

Consult with Resolution Legal Group.
Employment laws are constantly changing and staying proactive is the best method to handle any disruptions. Our legal team can help your business remain in compliance with any changes in regulation.