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Your (Almost) Illegal Noncompete

Your (Almost) Illegal Noncompete

A proposed Federal Trade Commission rule outlaws noncompetition restrictions on workers, regardless of their job function or compensation level. Not only would new noncompetition agreements be prohibited, but employers would be obligated to cancel existing noncompetition agreements and notify workers that their non-compete is no longer effective. The FTC estimates 30 million employees would benefit and total worker’s earnings would increase by $250 to $296 billion per year.

Most state laws permit reasonable restrictions to protect the employer’s business goodwill and the worker’s employment rights. The FTC intends to preempt state law in this area with a rule eliminating this balancing test. As a limited concession, the FTC would permit nondisclosure and customer non-solicitation provisions provided they do not function as non-competes.

Allowing key employees to compete could be extremely destructive to business operations and the valuation of a business in a sale, especially if customer nonsolicitation and nondisclosure restrictions are nonexistent or unenforceable.

The FTC’s rule becomes effective in March 2023 unless withdrawn, modified or delayed. Some commentators expect a delay or modification. However, the FTC may not be so inclined since, in anticipation of fierce pushback, it devoted significant resources to analyzing the issues in its 216-page notice of proposed rulemaking.

All noncompete, nonsolicitation and nondisclosure provisions should be reviewed before their potential invalidation should the FTC proceed with this rule.

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