Proposed Non-Compete Regulation Change

Are you or your employees subject to a “non-compete” agreement? Are you aware of recent changes in Virginia law limiting the use of non-compete agreements? If not, be sure to review our blog posts from 2020 covering those changes:

This blog post focuses on further proposed restrictions by the US Federal Trade Commission (FTC) that would ban most non-compete agreements and require the parties to a non-compete agreement to revoke and rescind the agreement, as employers would be required to inform current and former employees (and other parties to any such agreement) that the agreement is null and void.

The Draft Rule

The draft rule simply bans non-compete agreements outright (as well as any agreement that would have the same effect of a non-compete), for most employer/employee relationships – including some non-compete agreements embedded in business purchase and sales agreements. The only limited exceptions would be if a selling shareholder owns at least 25% of the entity being sold. Others not covered by the rule include franchisees and businesses that are not subject to the Federal Trade Commission Act (e.g., federal banks, savings and loan institutions, federal credit unions, common carriers, and the like, and some tax-exempt entities).

In fact, the rule extends to unpaid employees, independent contractors, and volunteers.

Public policy and business ramifications of this rule change are yet not fully understood, but parties who relied upon such agreements and negotiated the terms of employment, engagement of an independent contractor, or the sale of a business would lose the benefit of that reliance and negotiation. For example: salaries, fair market business valuations, employee benefit packages, and business planning models that incorporate the benefits and obligations of such agreements would be lost for parties who are currently under such agreements and would be denied to parties of future employer-employee relationships, business sales, and the like. Potential impacts may involve the structure of future executive (and other high earning) employee compensation packages, compensation tied to retention, and other similar calculations.

FTC Seeking Public Comments

The FTC published the rule recently and is asking for public comment through March 10, 2023. Such public comment can be submitted at https://www.regulations.gov/. If you would like to discuss this or other similar business matters, or would like to work with us to prepare and file a comment, please contact us for a consultation at Cook, Craig & Francuzenko, PLLC.

Christopher T. Craig