One of the most dynamic areas of the law that is of keen concern to federal contractors is the issue of employee noncompetition agreements (NCAs). Historically, NCAs were a common and valuable tool employers used to protect their businesses from unfair competition or misuse of confidential company information; NCAs prevented former employees from leveraging their on-the-job training and introductions to key customers in order to poach those same customers if the employees moved to a competitor or launched a rival business. But in recent years, a number of states have increasingly limited the enforceability of NCAs in employment and separation agreements. Last year, the District of Columbia joined California, North Dakota, and Oklahoma in essentially banning outright the use of NCAs in most circumstances. There has also been a gradual trend in many other states (e.g., Virginia, Maryland, Nevada) to limit or void noncompetes for low-wage or hourly workers. Hawaii passed a law in 2015 that specifically prohibits including a noncompete clause in the employment contract of an employee of a “technology business,” defined as any business that derives most of its gross income from the sale or license of products or services resulting from its software and/or information technology development. Everywhere you look, NCAs are increasingly under threat in most jurisdictions across the country.
Now the federal government is also weighing in. On July 9, 2021, President Joe Biden signed the Executive Order on Promoting Competition in the American Economy. That order covers a number of competition issues, but relevant to NCAs, it encourages the Federal Trade Commission (FTC) to use its statutory rulemaking authority “to curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.” Executive Order, Section 5(g). On January 5, 2023, the FTC issued a sweeping Notice of Proposed Rulemaking that essentially bans noncompete clauses and invokes its statutory authority under Section 5 of the FTC Act to categorize NCAs as an “unfair method of competition.” Specifically, the FTC’s new 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
- Represent to a worker, under certain circumstances, that the worker is subject to a noncompete
The proposed rule would apply equally to independent contractors and employees, whether paid or unpaid. If adopted, this FTC rule would also require employers to rescind all existing NCAs and provide individualized notice to current, as well as former, employees that such agreements are no longer valid.
The proposed FTC rule banning NCAs could present considerable challenges for government contractors in an industry where confidential information and key personnel are often critical to success. Contractors often depend on keeping key personnel in place to maintain continuity in federal customer relationships over multiyear contracts; losing critical staff to competitors can mean the difference between winning or losing a recompete bid or even facing a Termination for Convenience (TforC) from a frustrated federal customer. Without such agreements in place, rival contractors could be emboldened to poach key technical and sales staff, proposal writers, or even senior executives with the deepest knowledge of a company’s most valuable strategic and commercial information.
Banning the use of practically all noncompetes would have a major effect on the economy and workforce that is not simply limited to government contracting. The U.S. Chamber of Commerce and a host of trade associations are already gearing up for a major battle in the courts if this rule takes effect in anything like its proposed form. Because the FTC Act doesn’t specifically discuss the use of noncompetes, it’s not hard to imagine a conservative U.S. Supreme Court invoking the major questions doctrine, the nondelegation doctrine, and/or core principles of federalism to reach a conclusion that the FTC has exceeded its legal authority (in the absence of an express pronouncement from Congress) to issue a national ban on a category of restrictive covenants that have been the subject of private contract and judicial enforcement under various state regimes for many decades. But a definitive ruling from the Supreme Court on such issues could take many months, if not years. In the meantime, what can contractors do?
Even if the rule is adopted and NCAs are severely curtailed or voided nationally, contractors are not without remedies and tools to prevent employees from taking to competitors a company’s trade secrets, customers, or other confidential information. Non-solicitation agreements (restrictive covenants that prevent a former employee from soliciting a former employer’s customers, vendors, or employees for a defined period of time) are outside the ambit of this proposed rule and should remain enforceable pursuant to the relevant state laws under which they are construed. The FTC’s proposed rule on NCAs generally would not apply to other types of employment restrictions, like nondisclosure or confidentiality agreements. (Of course, nondisclosure agreements can be difficult to enforce because it’s not always apparent that someone shared pricing or other confidential data with a competitor; NCAs often present a cleaner way to prevent the spread of competitively sensitive information.) There are many other state and federal laws concerning misuse and misappropriation of trade secrets, unfair competition, and equitable theories like unjust enrichment and breach of the duty of loyalty that employers may also use to prevent former employees from unfairly benefiting a new employer at a former employer’s expense. Indeed, an unintended consequence of this rule may be that it encourages substantially more litigation against former employees and the competitors that hire them away for tortious interference with prospective business advantage or other causes of action.
The FTC has extended the comment period for this proposed rulemaking through April 19, 2023. If you are concerned about how this rule could potentially impact your business, we are happy to help you prepare comments for submission prior to that deadline. We can also help you review and tailor your employment, non-solicitation, and confidentiality agreements, and work with you to maximize the protection of your trade secrets and other confidential information against misuse or improper disclosure through practical safeguards such as enhanced data security protection measures, employee training, and the development and consistent enforcement of security and confidentiality policies.