If you’ve ever worked in an industry where private company information, customer relationships, and technical skills are vital to an organizations’ success, then you have probably seen or signed a noncompetition agreement (NCA). Historically, these agreements have been put in place by employers to protect proprietary information, resources (employees), clients, suppliers, etc. from being taken to a competitor by a former employee. However, NCAs have come under increasing threat in recent years as a number of states have moved to limit the enforceability of NCAs in employment and separation agreements.
The federal government is now part of this trend. President Biden signed an Executive Order (EO) on Promoting Competition in the American Economy on July 9, 2021. More recently, on January 5th, 2023, the Federal Trade Commission (FTC) issued a Notice of Proposed Rulemaking to prohibit employers from imposing noncompete clauses on workers. The proposed rule would make it illegal for an employer to:
- Enter into or attempt to enter into a noncompete with a worker;
- Maintain a noncompete with a worker; and
- Represent to a worker, under certain circumstances, that the worker is subject to a noncompete.
The FTC maintains that by preventing workers across the labor force from pursuing better opportunities that offer higher pay or better working conditions, and by preventing employers from hiring qualified workers bound by these contracts, noncompete clauses hurt workers and harm competition (see FTC Fact Sheet below).
- Noncompete clauses significantly reduce workers’ wages by restricting free movement of workers.
- Noncompete clauses stifle new businesses and new ideas by preventing entrepreneurs from forming new businesses and inhibiting workers from bringing ideas to new companies. Fewer new entrants and greater concentration in markets result in higher prices.
- Noncompete clauses can exploit workers because workers often have less bargaining power than employers who may coerce workers into staying in jobs workers would prefer to leave.
- Employers have other ways to protect trade secrets and other valuable investments that are significantly less harmful to workers such as non-disclosure and non-solicitation agreements.
Government contractors often use confidential information such as methodologies, trade secrets, technical specifications of product, etc. Should the proposed rule be adopted, there could be shifts in the ability of contractors to differentiate themselves in the market. There may also be an uptick in legal cases and battles in the court between employers and former employees.
For more information, see link below. The FTC extended the comment period for this proposed rule through April 19, 2023.
What Every Federal Contractor Should Know About the FTC’s Proposed Rule to Void Noncompete Agreements Nationwide—and What to Do About It | Government Contracts Law