FTC again urges state noncompete bans

The FTC will soon (next month, we think1) be issuing its long-awaited rule on the use of noncompetes. Most people tracking the progress (me included) expect that the final rule will closely resemble the near-total ban on noncompetes that the FTC proposed last January (2023).

In that regard, the FTC has recently been sending signals suggesting that it has not changed its plan — or at least not materially.

In that regard, as you may recall, on November 28, 2023, the FTC sent a letter to New York’s Governor Kathy Hochul urging the governor to sign a bill banning all noncompetes in New York. As I noted at the time, based on the points in the letter, the FTC appeared to continue to believe that a full ban on employee noncompetes is the right approach.

The FTC just did it again.

On February 26, 2024, the FTC sent another letter, this time to an Oregon state senator (Senator Deb Patterson). The new letter relates to a bill (HB 4130) to ban physician noncompetes and states:

The FTC proposed a rule in January of 2023 banning non-compete clauses across sectors in its jurisdiction. In doing so, the FTC made several preliminary findings and received numerous comments that you may find informative as you consider this bill.

Like the letter to Governor Hochul, this letter then proceeds to restate the “preliminary” findings upon which the FTC based its January 2023 proposed rule to ban noncompetes.

Why did the FTC choose to send letters only to New York Governor Hochul and Oregon State Senator Patterson, and not to legislators in the dozens of other states in connection with the nearly 100 other noncompete bills pending last year or over 50 pending so far this year? I cannot answer that question, though it’s possible that the FTC has in fact sent many more similar letters, and we just have not seen them.

What does it mean?

Regardless of how many letters the FTC has actually sent, the takeaway is twofold.

First, the fact that the FTC continues to promote those same “preliminary” findings over a year after initially announcing them — and only a month before the anticipated issuance of its noncompete rule — one can only surmise that the FTC has not changed its opinion on the merits of a full employee ban.

Similarly, as I noted in connection with the FTC’s letter to Governor Hochul (as Max Perlman observed at the time), this latest letter also continues to suggest that the FTC is concerned about its power to ban noncompetes; if the FTC were confident in its power to issue the rule, it would not care what New York or Oregon does; its rule would supersede both states’ laws.

We will know soon enough. Stay tuned.

Steps to Take Now to Protect Your Company’s Information and Relationships

In the meantime, there are some steps companies can take to protect their trade secrets and customer relationships – regardless of what the FTC (or Congress or the states) do.

For example, although other restrictive covenants (e.g., nondisclosure agreements, nonsolicitation agreements, and no-recruit agreements) do not offer the same level of protection of a company’s trade secrets and customer goodwill offered by a noncompete, it would wise to review your existing covenants and ensure that they will (likely) survive the FTC’s anticipated ban. Remember that the FTC’s proposed rule includes a vague “functional test” that will create a tremendous amount of uncertainty about the scope and use of these other agreements.

Companies may also want to consider including “springing noncompete” language, i.e., a provision that requests a court to issue a noncompete as a remedy for a breach of one of the less-restrictive restrictive covenants. Though set out in the contract, springing noncompetes are a remedy issued by a court, not a contractual noncompete. They are designed to address misconduct, albeit only if and after that misconduct is discovered.

Companies will also want to make sure to supplement their agreements with appropriate policies and procedures, including in particular, policies governing the proper use of company-owned equipment and technology and personal devices (BYOD policies), trade secret and confidential business information policies, and codes of conduct, as well as appropriate trade-secret/nonsolicit-focused onboarding and off-boarding practices.

In addition, with all of the agreements, policies, and procedures in place, proper training will be even more critical than before.

It should start before a new employee walks in the door (even just providing a link to this video will help), continue throughout the employment cycle, and repeated at the end (where it starts for the new employer, who can share this video).

Training (which ideally would be live and repeated) will help ensure that policies and procedures are not merely symbolic statements, but are actually enforced. And doing so will help to prevent information from entering the company and contaminating the company’s existing information and research, as well as limit the risk that the company’s information and customer relationships are unlawfully used to unfairly compete.

Additional resources: 

We know how hard it is to keep up with the ever-changing requirements around the country. To help, we have created the following resources (available for free):

We hope you find all of these resources useful. More are coming.

And please note that we are grateful for all of the input we’ve received over the years, and welcome any suggestions for improvements that you may be willing to share.

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*A huge thank you to Erika Hahn for all of her extraordinary help in tracking and monitoring all of the bills around the country and helping me make sure that all of our resources are current and accurate.

 

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[1] Conventional wisdom is that the FTC will issue its rule in April. However, no one other than the FTC (and whomever they are talking to) actually knows. So, stand by: It can come at any time — this month, next month, or later.