FTC May Ban Non-Compete Agreements
In 2022, Illinois significantly restricted the use of non-competition agreements. The new Illinois law, the Freedom to Work Act, restricted the use of non-competition agreements (aka “covenants not to compete”) and other related agreements in several ways. Notably, the Act prohibited non-competition agreements for workers making less than $75,000 (adjusted upwards every five years), prohibited non-solicitation agreements for workers making less than $45,000 (again, adjusted every five years), required certain notices to accompany non-competition and non-solicitation agreements, and restricted the use of such agreements for many COVID-related layoffs and for most construction workers and for public workers or educators covered by collective bargaining agreements.
In addition, the Act essentially codified the reasonableness test used by courts to determine if non-competition agreements are enforceable. This included specifying that such agreements must be accompanied by “adequate consideration,” and that meant continued employment for at least two years after the employee signs an agreement (i.e. the employer can’t enforce the agreement if they don’t keep the worker around for at least two more years) – OR – the employer gives the worker additional professional or financial benefits to sign. The Act also provided for attorneys’ fees remedies for workers who prevail on non-competition or non-solicitation claims brought by their former employers and empowered Judges to reform problematic non-competition and non-solicitation provisions.
In January 2023, the Federal Trade Commission announced that it may go ever further than what Illinois and some other states had done and ban the use of non-competition agreements altogether, nationwide. According to the FTC, “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 proposed rule is up for public comment and the final rule will likely not go into effect for some time. It is likely that the FTC will still permit the use of non-compete agreements in very limited circumstances, such as those agreed to at arms-length by an owner during the sale of a business. The proposed ban on non-competes is not likely to affect the enforceability of other agreements like non-disclosure, confidentiality, or trade secrets agreements.
Workers subject to an existing non-competition, non-solicitation, non-disclosure, confidentiality, trade secrets or any other restrictive agreement with their current or former employer should contact an attorney before engaging in any conduct that could violate such agreements, even if they believe that such agreements are not (or soon will not be) enforceable.