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January 16, 2023

Non-Compete Ban Will Lead to Litigation Explosion

Non-Compete Ban Will Lead to Litigation Explosion

Non-compete lawyers have been known to whisper darkly about how their practices would be impacted if non-competes were ever to be outlawed. Now that the FTC is actually pushing for a nationwide ban, has doomsday arrived?

These lawyers needn’t worry. If the ban is enacted, a hornet’s nest of practical questions about its scope and import will need to be resolved in court.

For example:

1. The FTC says that overly broad non-disclosure agreements will count as impermissible non-competes. Given that the proposed rule purportedly would dissolve all existing non-competes, what will happen to trade secrets protected by NDAs that are deemed too broad? Could those secrets then be disclosed freely?

2. Garden leave agreements work like non-compete agreements, except that the employer continues to pay the employee until the restricted period expires. But they still impose modest limits on mobility in that an employee typically cannot line up another job and then quit. Would the ban cover these agreements?

3. Severance agreements, which employees voluntarily sign upon their departure in exchange for additional compensation, commonly incorporate non-compete agreements. Would these be banned, too?

4. Employees undertake non-competes as part of negotiated pay arrangements, at least in some instances. Will employers fire or reduce the pay of employees whose non-competes are dissolved by the FTC’s action? And would the FTC be able to prevent this without effectively dictating the terms of private agreements?

5. Depending on the next election, the next presidential administration could appoint new FTC board members who decide to reverse the non-compete ban. Would or could the cancelled non-competes be revived in that instance?

6. In a non-compete lawsuit, a court will sometimes enter an injunction enforcing a non-compete agreement against a defendant who has violated its term. If the proposed ban is passed, would those court orders remain in effect?

7. The FTC warns that “de facto” non-competes (i.e., agreements that function like non-competes even if they are called something else) would be prohibited under the rule. When is an NDA or a non-solicitation agreement a de facto non-compete? Precisely what test will courts use to determine this?

These are just some of the practical questions that will inevitably be litigated if the proposed rule is enacted—and we have not even considered the slew of broader questions regarding the FTC’s rulemaking authority that will also be raised.

Litigators will do just fine if the non-compete ban goes through. Unfortunately, the ban would likely generate more uncertainty and cost for businesses.

Maxwell Goss is a trade secret, intellectual property, and business litigation attorney. Max counsels clients regarding non-competes and represents clients in non-compete litigation and dispute resolution matters.