Proposed Rule From the FTC Would Ban Non-Compete Agreements in Most Circumstances
By Anne-Marie L. Storey, Esq.
Currently, the general test for determining whether a non-compete agreement is enforceable depends on several factors, including (1) whether the agreement protects a legitimate business interest; (2) whether the time limitation is reasonable; (3) whether the geographic limitation is reasonable; and (4) whether the worker receives some tangible benefit for signing the agreement. In Maine, we have some additional limitations and restrictions on non-compete agreements, including a salary threshold.
In early January, 2023, the Federal Trade Commission issued a proposed rule that would ban employers from using non-compete agreements. This would apply to any person who works for an employer, paid or unpaid. It would also apply to independent contractors. The effect of the proposed rule would be to (1) rescind existing non-compete agreements by a date to be determined, and (2) to require employers to take proactive steps to inform workers that existing non-compete agreements are no longer in effect. For purposes of the proposed rule, non-competes are defined as a contractual term that blocks a workers from working for a competing employer, or starting a competing business, within a certain geographic area and period of time after the worker’s employment ends. The proposed rule would supersede any inconsistent state law, so even though Maine allows non-competes within some limitations, this rule would control.
It should be noted that this proposed rule does not necessarily apply to other types of employment restrictions, such as non-disclosure agreements. However, the intent of the proposed rule appears to broadly cover any hindrance on competition and so these other kinds of restrictions may violate the proposed rule if they were so broad in scope that they function as non-competes. There are a few exceptions to the proposed rule, such as agreements entered into in the context of a sale of a business.
The FTC had originally set the comment period for the proposed rule for early March, but they have recently extended it to April 19. Any employer who operates with non-compete agreements and will be directly impacted by the rule should strongly consider providing comment to the FTC. Regardless of the comment period, the rule will become effective 180 days after publication, unless it is affirmatively altered by the FTC in that time period. Since it was published in early January, the rule would become effective in early July.
We will continue to keep you updated on the status of the Rule.