Feb. 15, 2023

This paid piece is sponsored by Woods, Fuller, Shultz & Smith PC.

By David C. Kroon, shareholder

Noncompete clauses commonly are used in employment contracts to prevent employees from working for a competitor or starting their own competing business for a certain period of time within a defined geographical area after leaving their current job. They often are used to protect the employer’s trade secrets and business interests.

But that could change because of a proposed ban on noncompete agreements by the Federal Trade Commission. The FTC announced its sweeping proposal Jan. 5, arguing the move will protect workers from unfair labor practices, reduce litigation costs and help promote competition in the labor market.

The proposed ban offers limited exceptions, including contracts necessary to protect trade secrets, contracts related to the sale of a business and contracts necessary to protect the employer’s legitimate interests.

The FTC argues the imposition of noncompete clauses is an “exploitive practice” that negatively impacts the labor market by preventing workers from moving to higher-paying jobs, reducing wages, suppressing entrepreneurship and reducing the number of jobs available. The proposed ban is an effort to address these issues.

Opponents argue the ban is detrimental because it will reduce employers’ ability to protect their trade secrets and business interests. If implemented, the rule undoubtedly will result in legal challenges, including from the U.S. Chamber of Commerce, which says it will fight the ban in court.

Even if the proposed noncompete rule ultimately is enacted, it would not limit the use of confidentiality agreements between employers and employees.  It is always a good practice for employers to consider confidentiality agreements with employees to protect trade secrets and other proprietary information.

The FTC is seeking public comment on the proposed ban. After the comment period closes, the commission will review the comments and decide whether to make changes before implementing the final rule.

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