February 2023 Business Litigation Update

In January 2023, the Federal Trade Commission (FTC) released its proposed plans for a ban at the federal level on non-compete provisions in employment agreements. While some states have bans in place, no federal ban currently exists. Not surprisingly, the FTC’s proposal has drawn mixed responses, and threats of litigation.

Non-compete agreements have long been used in a variety of industries to ostensibly protect company trade secrets and other confidential information by preventing an employee from going to work for a competitor. While many view this as a reasonable restriction, others consider a non-compete provision to be an unfair restraint of trade. Indeed, states such as California, North Dakota, and Oklahoma have banned the use of non-competes (with some narrow exceptions), while other states, including Colorado, Illinois, Oregon, and Virginia, prohibit non-compete agreements unless the worker earns above a certain threshold.

Under Texas law, a non-compete agreement is enforceable if it is (1) “ancillary to or part of an otherwise enforceable agreement at the time the agreement is made” and (2) “contains limitations as to time, geographical area, and scope of activity … that are reasonable and do not impose a greater restraint than is necessary to protect the goodwill or other business interest” of the business / employer. Tex. Bus. & Comm. Code § 15.50(a).

Given the varying state laws in this area, many Texas companies are likely already working in some form or fashion with restrictions related to non-competes if they have employees operating across state lines. But what would a federal ban on non-compete agreements look like?

According to the FTC announcement, the proposed rule would make it illegal for any employer to engage in the following:

• enter into or attempt to enter into a non-compete agreement with a worker;
• maintain a non-compete agreement with a worker; or
• represent to a worker, under certain circumstances, that the worker is subject to a non-compete agreement.

The FTC’s proposed rule would apply to independent contractors and anyone who works for an employer, whether paid or unpaid. It would also require employers to rescind existing non-competes and actively inform workers that they are no longer in effect.

However, the proposed rule would generally not apply to other types of employment restrictions, like non-disclosure, non-solicitation, or confidentiality agreements, unless the agreement is so broad in scope that it essentially functions as a non-compete. Nor would the rule apply to non-compete agreements related to the sale of a business or the sale of a person’s ownership in a business as long as the ownership stake is at least 25%.

The FTC is soliciting comments and feedback through May 10, 2023. After that, the FTC will issue a “final” rule, which would then become effective 60-days later. Employers will have 180 days to comply.

Immediate legal challenges are expected when the rule is implemented. Although the FTC has said it is confident its proposal will survive judicial review, the U.S. Chamber of Commerce has come out against the rule, stating that it is unlawful and oversteps the Congressional authority delegated to the FTC.

Although it is likely that the debate and litigation over the FTC’s proposed rule will last throughout 2023, it would be prudent – at least for now – to begin taking a close look at your company’s employment agreements to evaluate whether they contain non-compete provisions or any other type of restrictions that might fall within the scope of the FTC’s proposed rule. Now is the time to analyze your existing agreements and begin planning for a world where the enforceability of non-competes is further restricted or eliminated altogether.

As this issue develops, we will continue to keep you informed.