Enforceability of noncompete agreements

On Behalf of | Aug 21, 2023 | Business Law |

The existence of noncompete agreements has long served to help companies protect themselves from the threat of unfair competition and to keep their valuable trade secrets within the organization. To that end, businesses rely on the law to facilitate their ability to enforce noncompete agreements.

However, a proposition from the Federal Trade Commission in January 2023 may affect the enforceability of noncompete agreements going forward. Business leaders with important trade secrets to consider can make strong decisions in the future by understanding how a rule change proposed by the FTC might affect competition.

What did the FTC propose in regard to the enforceability of noncompete agreements?

On January 5, 2023, the FTC proposed a rule change that would ban employers from imposing non-competes on their workers, with limited exceptions. Employers affected by this new rule would be unable to enter or attempt to enter into a noncompete agreement with a worker, maintain an existing noncompete agreement with a worker or claim to the worker that they are under a noncompete agreement.

Why did the FTC propose this rule change?

According to the FTC, findings indicate that noncompete agreements constitute an unfair method of competition that violates Section 5 of the FTC Act. These findings also apply to any agreement that might serve as a “de facto” noncompete. The rule proposed by the FTC would also apply to independent contractors as well as any other individual working for an employer whether paid or unpaid.

Employers who utilize restrictive covenant agreements such as noncompetes can take steps toward maintaining compliance with newly proposed laws by staying abreast of any developments.