Non-Compete Agreements Falling Out of Favor With the Federal Government

Published in New Hampshire Business Review
August 11, 2023
View Article https://www.nhbr.com/non-compete-agreements-falling-out-of-favor-with-the-federal-government/

Courts in New Hampshire have long been critical of employers’ use of “non-compete” agreements to restrict competition with former employees who depart to work for a competitor. Such agreements typically appear in employment contracts, shareholder agreements, or other contracts intended to define the parameters of the employment relationship. A non-compete clause is often incorporated into various “restrictive covenants” in such a contract, and is designed to prevent employees from seeking or accepting future employment within the same industry for a specified period of time and in specified geographic areas. While not illegal under New Hampshire law, such provisions must be narrowly drafted to protect legitimate business interests, and must pass a reasonableness test.

Earlier this year, the Federal Trade Commission (FTC) issued a new proposed rule purporting to further regulate non-compete agreements on the federal level. The FTC has a broad mandate to prevent unfair and deceptive trade practices in commerce. The proposed rule deems non-compete contracts to be an unfair method of competition, and would set a national standard regarding their legality. If adopted, and assuming it survives likely court challenges, the new FTC rule would effectively ban all non-compete agreements, except in limited circumstances. The new rule would also supersede all contrary state laws, rendering much of New Hampshire’s less restrictive approach inapplicable.

In addition to prohibiting employers from entering into, enforcing, or attempting to enforce non-compete agreements, the proposed rule would also prohibit “de-facto” non-compete agreements. Any contractual provision that has a “de-facto” effect of prohibiting other employment could be deemed unfair competition in violation of the new FTC rule. For example, a contractual term that requires an employee to repay certain training costs if employment terminates within a specified time period may soon be deemed a “de-facto non-compete agreement” in violation of the new FTC rule. If the proposed rule goes into effect as written, employers will be required to rescind existing non-compete agreements and provide individualized notice to current and former workers who were previously covered by a non-compete agreement that the agreement is no longer in effect.

The FTC is not alone in its effort to curtail use of non-compete agreements on the federal level. In May, the General Counsel of the National Labor Relations Board (NLRB) issued an internal memorandum urging the Board to adopt the position that non-compete agreements in most circumstances amount to an unfair labor practice prohibited by the National Labor Relations Act (NLRA). While the NLRA is commonly regarded as the federal “union” law, its provisions apply to private employers, even if their employees are not unionized. While the memorandum does not have the force of law, the current NLRB has recently issued a number of employee-friendly decisions and could adopt the General Counsel’s reasoning.

New Hampshire employers who use non-compete agreements should prepare for the potential scenario of a nationwide ban on most non-compete agreements in the near future. The FTC has indicated that it will likely vote on the proposed rule in April 2024, and, if approved, it would take effect 180 days later. In the meantime, employers should review their existing non-compete agreements to ensure that they comply with existing state law.

As an attorney at Drummond Woodsum, Nicholas Blei devotes his practice to advising private and public entities on a full spectrum of employment matters, including collective bargaining negotiations, contract administration, and grievance and arbitration proceedings before state and federal administrative agencies.