FTC’s Proposed Ban on Non-competes Would Preempt Washington State Law
In prior blog posts we examined Washington law on noncompete agreements: the current statutory scheme that curtails the use of noncompete agreements in certain contexts [here] and [here], and how Washington courts evaluate the reasonableness of a noncompete agreement to determine its enforceability [here].
A recently proposed rule by the Federal Trade Commission would upend this Washington law.[1] Under the proposed FTC rule, a noncompete agreement with an employee or an independent contractor would constitute an “unfair method of competition” under the FTC Act. Only agreements executed as part of the sale of a business are exempted. The proposed rule would also require companies to rescind any existing noncompete agreements. The failure to do so and provide the requisite notice would likewise constitute an “unfair method of competition.” Businesses that engage in an “unfair method of competition” are subject to government civil enforcement actions, penalties, and may be exposed to potential follow-on state law claims.
The intent of the proposed rule is to free up workers in pursuing employment opportunities. To achieve this goal, the FTC has attempted to head off potential work arounds by using a “functional” test to determine what constitutes a “noncompete” in violation of the rule. Under this test, any agreement that has the effect of prohibiting a worker from seeking or accepting employment would be construed as a noncompete, including non-disclosure and pay-for-training agreements where they would prevent a person’s ability to seek or obtain work.
The proposed rule has been published for public comment under FTC rulemaking procedures. The comment period is open through March 10, 2023.[2] If the proposed rule becomes final as written, it will preempt state law on noncompete agreements by imposing a sweeping ban. It is possible that the final rule is pared back, for example to allow noncompete agreements for C-Suite executives. And whatever version it takes, the new rule is likely to face legal challenges. What is clear, however: the future of noncompete agreements is uncertain. As a result, now more than ever businesses should be implementing strategies to protect their competitive advantages (such as trade secrets) without relying upon the use of a noncompete.
[1] https://www.ftc.gov/legal-library/browse/federal-register-notices/non-compete-clause-rulemaking
[2] Comments can be submitted here: https://www.regulations.gov/document/FTC-2023-0007-0001
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