To be sure, the business sector has reacted with a fair degree of alarm to the FTC's January 5, 2023 proposed ban on noncompetes. And yes, the vast majority of attorneys who operate in that space, including me, have counseled their clients on both sides of the noncompete aisle to take a deep breath and relax, because nothing has come to pass yet, and we are at the outset of the public comment period.
All of that being said, the FTC's proposed nationwide federal ban on noncompetes cannot be viewed in a vacuum, because even if it doesn't pass - and there's substantial reason to doubt that it will - there is a substantial possibility of a domino effect of the proposed legislation at the State level, which could yield a far more profound effect on businesses.
The Potential Domino Effect of the Proposed Noncompete Ban at the State Level
All, or nearly all, 50 states have various forms of statutes on the books that prohibit deceptive business practices, and which empower local governmental agencies to bring legal action to enforce those statutes. By design, those statutes are broadly (and vaguely) worded in order to afford those governmental agencies wide latitude. And aside from providing civil penalties for violations of these statutes, these laws often have provisions that allow individuals, i.e., non-governmental agencies, to bring private causes of action for violations of these laws.
In light of the strong stance being taken by the FTC, it is certainly foreseeable that local law enforcement agencies will take their cue from the proposed legislation and seek to bring legal actions against employers for overreaching with their restrictive covenants with employees; it is also certainly foreseeable that employees seeking to extricate themselves from noncompete agreements may raise purported violations of their state's deceptive business practice statutes as either a defense to a claim that they violated their agreement, or even affirmatively, asking a court to declare their agreement unenforceable on its face.
And here's why employers should take particular note of it: these state laws also often carry penalties whereby they can be held liable for treble damages and attorneys' fees.
What Employers Should Do Now
At present, following are the two (2) things that smart employers should have at the top of their list to do now, while the proposed ban remains in the public comment phase:
(1) Have your existing noncompete agreements reviewed by an attorney knowledgeable in this area of the law to assure they don't grossly overreach, and are focused on protecting your legitimate business interests, and to the extent that they may run afoul of these parameters, having your attorney revise those agreements to be more closely aligned with non-solicitation and trade secret protection interests rather than a pure noncompete;
(2) From this point forward, make sure that your new agreements are in line with what is set forth in the preceding paragraph.
