Q: My agency’s agreements with employees and independent contractors (ICs) contain “noncompetes”; i.e., clauses stating that the employee or IC cannot work for or with another travel agency in my area for a year after they leave. I have heard that these clauses are unenforceable in California and a couple of other states, but can I enforce them in other states?
A: For the time being, you can enforce noncompetition covenants (aka noncompetes) in most states if the clauses are reasonable in time, scope and area. However, in January, the Federal Trade Commission (FTC) issued a sweeping proposed rule that would outlaw all noncompetes nationwide.
Outlawing all noncompetes has been one of the administration’s goals for a year, so the proposal doesn’t come as a surprise. However, some of the details are surprising.
If adopted, the proposed rule would apply not only to employees but also to ICs, which moves the proposal well beyond the scope of the California law. The rule would pre-empt (i.e., make unenforceable) any state or local laws or court precedents that allow noncompetes under some circumstances.
Going even further, the proposal would require an organization to rescind existing noncompete obligations. Companies would have to notify current and former workers in an “individualized communication,” on paper or in digital format, that such provisions or agreements are no longer in effect.
The FTC defines a noncompete as “a contractual term between an employer and 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 word “worker” is used instead of “employee” to signify that ICs are covered, too.
However, the rule would apply only to noncompetition covenants; it would not apply to nonsolicitation or nonhandling provisions, nondisclosure agreements or trade-secret-protection agreements, unless those provisions are so broad in scope that they function as a de facto noncompetition agreement. So, if the rule is adopted, you can change your noncompetes to nonsolicitation or nonhandling covenants, if the applicable state law allows such clauses.
Finally, the proposed rule would not apply in the context of selling a business or ownership interest, if the owner owns at least a 25% interest in the business. Nor would the rule apply to franchisor-franchisee relationships.
The proposed rule, which can be found at by searching for “noncompete clause rulemaking” at www.ftc.gov/legal-library, is open for comments through March 10. You can file comments using the link at the bottom of that page.
The FTC will probably adopt the rule by midyear. Then, companies will have 180 days to rescind existing noncompete agreements, whether embedded in an employment or IC agreement or standalone, and they would then have 45 days of rescission to notify current and former workers that they are no longer bound.
However, companies will certainly file court appeals, and the rule may well be stayed until a court rules. If the court upholds the FTC, you can expect the rule to go into effect sometime next year.
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