Will the FTC Ban Non-Compete Agreements?

An employee signing a non-compete agreement

The Federal Trade Commission (FTC) has signaled its intent to outlaw non-compete agreements, a rule that would affect businesses nationwide. The proposal comes amidst aggressive FTC action against non-competes in general. Once finalized, this rule will almost certainly come under legal attack and may not ultimately survive.

Regardless, if you’re a business owner and employer, you need to understand this regulation and its implications for your organization. The New York business lawyers of Rosenbaum & Taylor have you covered.

The Basics of Non-Compete Agreements Under New York Law

For now, non-competes remain legal, despite strict scrutiny from state and federal courts and regulators. A non-compete agreement restricts an employee’s ability to leave a business and compete with his or her former employer. Executives as well as rank-and-file employees are often required to sign non-competes. As a basic rule, a non-compete must further an employer’s legitimate business interests.

But there are other limitations you should understand and which a New York business lawyer can explain. For instance, non-competes must be reasonable in geographic scope and duration. A permanent, nationwide ban on competing with a former employer would clearly be too extreme to ever be enforceable. But a more temporary restriction on a smaller geographic scale may be approved by a reviewing court.

A non-compete also cannot impose an undue hardship on the former employee. If it prevents the employee from being able to acquire gainful employment, it likely will not withstand legal scrutiny. Finally, the non-compete cannot be detrimental to the public interest. A restriction that deprives individuals of lifesaving medical services, for instance, will likely be struck down.

Understanding the FTC’s Proposal

The FTC views non-competes as a form of unfair competition under the Federal Trade Commission Act. Using this approach, the agency has taken a hard line against these agreements. New York has also gone after non-competes and has even prosecuted the abuse of them.

Recently, the FTC proposed a nationwide rule to prohibit all businesses from entering into non-competes with their employees. The rule would also require rescinding existing non-compete agreements.

Undoubtedly, this rule would trigger potentially substantial court action. And businesses have compelling arguments against the FTC proposal to ban non-competes. To begin with, it’s not clear that Congress ever intended the FTC to have such broad regulatory power.

Also, smaller businesses would likely suffer from a ban on non-competes. When training a new employee, certain information is imparted to that individual. Even with a non-disclosure agreement, it’s impossible to force the employee to unlearn certain information.

If the employee leaves the company, the information could be used to compete against the former employer. The non-compete agreement exists to restrict, at least for a while, said competition. This enables the small business to thrive.

How Should Your Business React?

The FTC rule hasn’t gone into effect yet. A lawsuit would probably lead to a temporary injunction against enforcement. Then the courts would need to sort out the matter, which could take months or years.

Nonetheless, this is a good time to familiarize your organization with the rules that govern non-competes. If you use or are contemplating the use of non-competes in your company, they’ll need to meet the above criteria. Our New York business lawyers can review your agreements and advise you. We can also explain recent FTC actions against non-competes so you can adjust your business practices accordingly.

Do you have questions about the FTC’s rule or non-compete agreements in general? Let Rosenbaum & Taylor answer them. Call us today to schedule your consultation.

Further Reading...

Get a Free Consultation