In January, the Federal Trade Commission proposed a trade regulation rule that would prohibit employers from entering into, attempting to enter into, or maintaining non-compete clauses with their employees.

The FTC based its action on a preliminarily finding that non-compete clauses constitute unfair methods of competition under Section 5 of the Federal Trade Commission Act, affecting approximately 30 million employees.

While the proposed rule does not explicitly prohibit other forms of restrictive covenants, such as non-disclosure agreements or non-solicitation agreements, it cautions that those alternative restrictions can be broadly drafted to have the same effect as a non-compete and can be de facto non-compete agreements. The proposed rule prohibits the use of any form of agreement with the effect of prohibiting workers from seeking or accepting new employment, no matter what it may be labeled by the employer.

The proposed rule has limited exceptions. For instance, non-compete agreements restricting an owner, member, or partner holding at least a 25% ownership interest in a business entity would not be affected by the proposed rule. This is a significant issue for auto dealers since buyers of dealerships sometimes wish an outgoing general manager to be subject to a non-compete clause. It is not unusual for a general manager to have little or no equity interest in the dealership, making such a restriction unenforceable under the proposed TRR.

The FTC’s activities in this area are controversial. Critics have suggested that regulatory efforts affecting the relationship between employers and workers are best left to agencies of the federal government dedicated to labor issues. If the FTC TRR is finalized, it is likely to lead to significant legal actions about the Commission’s authority.

As the proposed rules are considered, here are some thoughts for dealership leaders when considering your policies on non‑compete clauses:

• Check applicable state law. Many states, including the District of Columbia and the Commonwealth of Virginia, have already passed statutes regulating the use of non‑compete agreements. First, comply with state law.
• Pay close attention to federal developments. There is likely to be some action at the federal level on non‑compete clauses.
• We have long counseled dealers to consider using non‑disclosure agreements and non-solicitation agreements instead of non-compete clauses. However, given the federal proposals, one must be careful in crafting such agreements. The prohibited conduct should be limited to protecting clearly identifiable interests of the employer, not generalized practices used by participants in an industry. Preventing disclosure of customer information or financial arrangements with suppliers would probably survive, but preventing disclosure of methods of conducting business that may be common in the industry may be seen as improperly burdening the employee’s ability to work elsewhere. That is the same with non‑solicitation agreements on customers of the employer through direct contact, but prohibition by general advertising might make it susceptible to challenge.
• Are you serious about your confidentiality and non-solicitation agreements? Then take steps to protect customer and employee information from being compromised. That requires compliance with an up‑to‑date and effective information safeguards program.
• The proposed TRR makes any agreement by an employee to repay training costs unenforceable unless they are reasonably related to what it cost to train the worker. Repayment agreements on training costs are often required by car dealers of technicians sent to specialized schools and courses if they fail to work for a minimum time. If you use such an agreement, be sure you are only seeking to recoup from the employee what you paid for the employee’s training.
• If you are engaged in a buy/sell, do not assume that you can enforce a non-compete with anyone other than a member of the seller’s control group (25% equity ownership). If the FTC TRR is finalized, any non-compete with a manager of a selling dealership without that minimum amount of equity may be unenforceable. What is not answered is how this will affect any separate compensation paid or allocated for such an agreement.

For more details, go to vada.com/blog/2023/02/14/the-last-days-of-non-compete-clauses/.