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A few months ago, I took my family to the Disney California Adventure theme park for the Oogie Boogie Bash. My son is a huge 鈥渂ad guy鈥� fan. We walked through the gates and were peppered by questions about whether that was Captain Hook (and if a crocodile was coming), why Cruella de Vil was young (as a 4-year-old he has not watched the Emma Stone film), and if Oogie Boogie was going to catch him (turns out a 4-year-old wearing an Oogie Boogie outfit really gets the cast members going). I guess with all these questions we should have dressed him up as the Caterpillar (but the pacing of his questions would do the Caterpillar misjustice). These were all questions I anticipated, and so my wife and I were prepared. It is easy to prepare for something when you know the activity or event will have a major impact.

While the Federal Trade Commission (FTC) is no theme park operator, it recently proposed rules that will have a major ripple effect across America related to noncompetition agreements. After all, noncompetes have become a commonplace strategy for businesses of all types and sizes, and this rule would not only prevent employers from entering into new noncompetes but also require them to rescind those currently in place.

The good news is that like for my son at Disneyland, I am here to help answer some common questions.

What happened?

The FTC issued a proposed rule on Jan. 5, 2023, that would prohibit employers from using noncompete clauses with workers. The proposed rule, if adopted in its current form, would require employers to:

• rescind all existing noncompetes no later than the rule’s compliance date (not determined yet); and
• provide notice to current and former workers that their noncompete clauses are no longer in effect. The proposed rule provides model language employers can use to satisfy this notice obligation.

The proposed rule defines 鈥渘oncompete clause鈥� as a contractual term that blocks a worker 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.

Would the proposed rule prohibit non-solicitation, non-recruit, or confidentiality clauses?

Generally speaking, no. However, employers will need to proceed with caution with restrictive covenants such as customer non-solicitation, employee non-recruit, or confidentiality provisions. While the rule’s definition of a 鈥渘oncompete clause鈥� does not mention other types of covenants, there could be trouble ahead. That’s because the FTC has made clear that the title of any given clause is not outcome determinative. To that end, the agency will use a 鈥渇unctionality test鈥� to make this determination.

What is the functionality test?

The title of a contractual provision will not dictate whether it is a noncompete clause. If a covenant is so broad that it serves as a de facto noncompete, it would not be permitted under the proposed rule.

What are the potential penalties for violations of the proposed rule?

The FTC may send a cease-and-desist order (if it finds a violation). The agency can also seek an array of remedies in court, including civil penalties, restitution, damages, injunctive relief, orders of rescission, or reformation of contracts. The FTC may also make referrals to the U.S. Department of Justice for criminal prosecution.

Will the proposed rule be retroactive?

Yes, the rule would invalidate prior noncompete clauses. In addition to prohibiting the future use of noncompetes, the proposed rule would prohibit employers from 鈥渕aintaining鈥� noncompetes with workers. It would require employers to rescind such clauses and notify workers they are no longer bound by them.

Would the retroactive provision of the proposed rule invalidate an entire existing agreement containing a noncompete clause, or just the noncompete clause itself, leaving other restrictive covenants intact?

Only the noncompete clause (or de facto clause) would be impacted by the proposed rule. The model language for notification to workers of rescission contained in the proposed rule includes the following: 鈥淭he FTC’s new rule does not affect any other terms of your employment contract.鈥� The proposed rule states that an employer can comply with the rule by rescinding prior noncompete clauses no later than the compliance date, which would be 180 days after the date of publication of the final rule.

Does the proposed rule preclude all non-competes?

The proposed rule would not apply to a noncompete clause entered into in a sale-of-business context. This exception applies only when the person restricted by the noncompete clause is a substantial owner of, or a substantial member or substantial partner in, the business entity at the time the person enters into the noncompete clause.

Does the proposed rule preclude noncompetes with independent contractors?

Yes, the proposed rule would apply to independent contractors, as well as anyone who works for a business, whether paid or unpaid.

Oregon has a statute that allows noncompetes. What effect would the proposed rule have on that law?

The proposed rule states that it supersedes any inconsistent state statute, regulation, order, or interpretation. State statutes, regulations, orders, or interpretations that afford greater protection to workers would be allowed. For example, a state law prohibiting noncompetes and non-solicitation provisions would be permissible; a state law allowing noncompetes would not.

Will the content of the proposed rule change? What alternatives to a complete ban on noncompetes are being considered by the FTC?

The FTC is considering alternatives to a complete ban on noncompetes even though the agency has preliminarily concluded that a uniform ban on noncompetes would best advance the proposed rule’s objectives and better ensure that workers are aware of their rights.

When would the proposed rule become effective?

There will be a 60-day notice and comment period during which the public can provide input concerning the proposed rule. This period could be extended past the current due date of March 20, 2023.

Even if enacted as is, once finalized, the rule would not become effective until 60 days after publication of the final rule in the Federal Register. In addition, there would be a 180鈥慸ay compliance period (running from the date of publication) during which employers would be allowed to work toward compliance.

What should we do now?

It is far from clear what the final rule, if any, will look like and whether it will survive legal challenge. However, consider taking these preliminary steps:

• Revisit restrictive covenants 鈥� including non-solicitation and confidentiality provisions 鈥� to ensure they are reasonably tailored to protect your legitimate interests.
• Ask whether your company’s noncompetes are necessary to protect your legitimate interests.
• Consider whether your interests can be protected with a less burdensome covenant, such as a properly tailored customer non-solicitation or confidentiality provision.
• Get your trade secrets house in order. This is perhaps more important now than ever. The FTC cites the availability of trade secret protection as a factor that mitigates the harm of abrogating noncompetes.
• Identify your trade secrets and put proper policies and procedures in place. For example, limit trade secret access only to those who need it; train employees how to handle trade secrets and protect against theft; and implement suitable technological controls.

Conclusion

All good things must come to an end, or at least that is what I told my kids when leaving Disneyland. Regardless of your stance on noncompetition agreements, the FTC currently has these agreements in its crosshairs. Now is the time to develop a plan should the rule pass as written.

Stephen Scott is a partner in the Portland office of Fisher Phillips, a national firm dedicated to representing employers’ interests in all aspects of workplace law. Contact him at 503-205-8094 or [email protected].

The opinions, beliefs and viewpoints expressed in the preceding commentary are those of the author and do not necessarily reflect the opinions, beliefs and viewpoints of the Daily Journal of Commerce or its editors. Neither the author nor the 91视频 guarantees the accuracy or completeness of any information published herein.