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Could the FTC rein in noncompete agreements as anticompetitive?

On Behalf of | Jul 21, 2022 | Employment Law |

Noncompetes are inherently a restraint on trade, in that they prohibit former employees from taking new jobs with their former employer’s competitors. They limit a person’s choices in employment. In most states, however, including Kentucky, noncompetes are enforceable as long as they are reasonable in duration, geographic coverage and purpose, and as long as they are otherwise valid.

Noncompete clauses and agreements have traditionally been regulated by the states, but members of both parties have called for more federal regulation on the subject, according to the American Bar Association.

Congressional action on noncompetes may be unlikely, but President Joe Biden has already issued a 2021 executive order on antitrust, monopolies and unfair competition. It called on the Federal Trade Commission to address, among other issues, “unfair” noncompete agreements that “unduly limit workers’ ability to change jobs.”

Although at least one state (California) has essentially declared noncompete agreements unenforceable, the executive order’s wording does not appear to propose ending their use altogether. Instead, it appears to urge the FTC to promulgate new rules that protect workers from undue job mobility burdens. That suggests that this administration sees noncompetes as allowable where they do not impose an undue burden on the worker.

How might the FTC regulate noncompete agreements?

It seems likely that the Commission would look to what the states have done and determine a list of best practices.

For example, the ABA suggests that the FTC might look at state policies that level the playing field between employers and employees.

A noncompete is a contract and, as such, it requires consideration (benefits) on both sides. Some states, including Kentucky, have said that, in some circumstances, consideration beyond the mere right to keep your existing job is needed. (In Kentucky, no additional consideration is needed for new employees.)

Some other states have taken the position that noncompetes are more likely to be unreasonable when the employee involved is of a lower level. That makes some sense because lower-level employees are less likely to have a great deal to offer a competitor.

The FTC might, for example, review how these issues have been handled by the states and promulgate regulations bringing all states up to the level of those that have been most protective of the worker.

How might Kentucky’s current laws be affected?

Kentucky’s policies for noncompetes fall roughly in the middle of other states in terms of their protection of employees. Our courts balance the protection of legitimate business interests for employers against noncompetes that “impose undue hardship” on employees.

In Kentucky, noncompetes are only enforceable if a court finds that balance “reasonable.” To determine that, the courts look at three factors: the duration of the agreement, its geographic reach and its purpose.

Noncompetes are more likely to be found reasonable if they are relatively short in duration, have a limited geographic reach and a clear purpose of protecting a legitimate business interest.

This is not very different from most states. Any new FTC rules might change Kentucky law, for example, by placing hard limits on the duration and geographic scope of the agreements. Or, they might require courts to consider the relative market power of the employer and the employee when determining whether noncompetes should be enforced. That could make it harder to enforce noncompetes against lower-level employees.

What employers should consider now

It may seem natural to ask for the strictest noncompete you think you can get away with. But there are limits, and those limits could affect your ability to enforce such a strict noncompete.

It may be wiser to seek a noncompete agreement that is more obviously enforceable, even if it is less strict. Litigating a questionable agreement can be costly. Mediation is often a better choice when it comes down to a dispute.

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