FTC announces proposed ban on noncompete clauses

January 26, 2023
Public comment period ends in March, as groups such as the U.S. Chamber of Commerce vow opposition to new final rule on employment covenants.
FTC announces proposal ban on noncompete clauses

The Federal Trade Commission is proposing a new rule that would ban noncompete clauses between employers and workers, not unusual across U.S. industries, including optometry. Announced Jan. 5, the proposed ban is drawing opposition.

“Noncompete clauses are common in physician employment agreements, so AOA members will need to pay attention to the requirements of the new rule, whatever form the final version takes,” says Michael Stokes, J.D., AOA general counsel. “Employers will need to take steps to review their current employment agreements and notify employees of changed terms made necessary by the new rule.

“It will likely be necessary to recontract with employees to remove contract terms disallowed by the new rule and add terms to address legitimate confidentiality concerns,” he adds. “Doctors who are employed will want to take note of the new rule and what it means for their ability to pursue future job opportunities. The exact parameters of the rule are not set yet, so for those who will be affected by the change and wish to submit comments to the FTC, there is time to do that.”

What is the FTC proposing?

The FTC is proposing a new rule that would generally ban employers from imposing noncompete clauses on workers, arguing that they are “often exploitive,” suppress wages and job mobility, hamper competition, and violate section 5 of the Federal Trade Commission Act. The clauses are used across various industries and jobs—they are not unusual in optometry.

Under the FTC’s proposed rule, it would be illegal for employers to:

  • Enter into or attempt to enter into a noncompete with a worker.
  • Maintain a noncompete with a current worker.
  • Represent to a worker, under certain circumstances, that the worker is subject to a noncompete clause.

The proposed rule generally does not apply to other types of employment restrictions such as nondisclosure agreements, the FTC says. Yet, it might be applied to other types of employment restrictions if they are overly broad in scope.

“The freedom to change jobs is core to economic liberty and to a competitive, thriving economy,” FTC Chair Lina M. Khan said. “Noncompetes block workers from freely switching jobs, depriving them of higher wages and better working conditions, and depriving businesses of a talent pool that they need to build and expand. By ending this practice, the FTC’s proposed rule would promote greater dynamism, innovation, and healthy competition.”

The FTC estimates that lifting the clause will increase worker wages by nearly $300 billion a year, impacting about 300 million or 18% of American workers.

An exception to the rule?

“For doctors of optometry who are either selling or purchasing a practice, it should be noted that the proposed FTC rule contains an exception for noncompete agreements that are part of the sale of a business,” Stokes says. “It will still be permissible for the purchaser to require the seller to agree not to open a new business to compete with the purchaser in a specific geographic area for a period of time.”

What is a noncompete clause and why do employers use them?

According to the FTC, a noncompete clause is a “contractual term between an employer and a worker that prevents the worker from seeking or accepting employment with a person, or operating a business, after the conclusion of the worker’s employment with the employer.”

The clause is typically tucked inside an employment agreement. The reasoning behind it is to protect a business, including optometric practices, when an employee leaves the business for another opportunity, potentially taking with them learnings and even patients from that former employer. A clause can spell out conditions for competition, such as time and distance, which will protect the former employer from competition.

The FTC is currently seeking public comment on the proposed rule, which the agency says violates Section 5 of the Federal Trade Commission Act. After the comment period, the FTC will review the comments and may make changes for a final rule, based on the feedback and further review. The comment period is open through March 20, 2023. Once the rule is final, it could take 180 days for it to go into effect.

Has the proposed ban drawn any reaction?

The proposed ban has drawn fire from the U.S. Chamber of Commerce and others. In response, chamber CEO Suzanne Clark wrote in an opinion piece in the Wall Street Journal editorial pages that her organization would challenge the new rule in court.

Wrote Clark, according to an article in The Hill: “If the FTC can regulate noncompete agreements without authorization from Congress, there is no aspect of employment or commercial arrangements that it doesn’t have the authority to regulate or ban arbitrarily.

The American Hospital Association (AHA) was working on a longer response but says: “AHA believes that questions regarding noncompete agreements’ enforceability should continue to be left to the states. It plans to comment on the rule and work with the U.S. Chamber of Commerce to challenge the proposal.”

“I think the FTC's proposed rule is overbroad,” says Sharon Markowitz, an attorney and partner at the Stinson law firm, where she advises clients regarding noncompetition, nondisclosure and nonsolicitation agreements and represents both plaintiffs and defendants in litigation related to those agreements. “As to some industries and jobs, the (current) rule would have the positive effect of prohibiting noncompete agreements that are unreasonable and already unenforceable under state law. But, in some industries and jobs, the proposed rule would make it very difficult for employers to protect their confidential information and trade secrets.

“Many employees have access to confidential information (including client lists and prices) and trade secrets, and they keep that information in their heads,” she says. “So, if they leave to do similar work for a competitor employer, it will be very difficult (if not impossible) for them not to use that confidential information in their new jobs.”

What can doctors do now?

Plenty, says attorney Markowitz. Doctors can:

  • Talk to a lawyer about submitting comments to the FTC. “The FTC rule is not final, and the FTC will consider public comments. So, if you think you have a good case for why the ban is too broad as applied to you, talk to a lawyer about how you can make your case to the FTC.”

  • Take nonlegal steps to protect your confidential information. “For instance, put technological restrictions on your confidential information so that it is only shared with employees who really need the information. Remind employees of their confidentiality obligations throughout their employment and particularly when they leave. Create policies and technology restrictions that prevent employees from copying documents from work onto external devices, personal email, etc.”

  • Improve employee loyalty in case they leave for one of your competitors. Consider increasing wages. Make your office a great place to work.

    And if the ban goes into effect?

  • Have a lawyer assess all your noncompete, nondisclosure/confidentiality, and nonsolicitation agreements. Your lawyer can help you comply with the law and revise your agreements to meet your needs to the maximum extent possible under the law.

  • If you hire employees from your competitors, take steps to make sure they comply with their nondisclosure and non-solicitation obligations. “Ask to see new employees' nondisclosure/non-solicitation agreements. Talk about their contractual obligations in your offer letter, during the onboarding process and throughout their employment. Then be on the lookout for red flags that a new employee might be violating his/her contractual obligations.”
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