De Facto Noncompetes Could Vastly Widen FTC Rule’s Reach

March 14, 2023 – Media Mention

Herrick partner, John H. Chun, spoke to Law360 about the Federal Trade Commission's ("FTC") plan to expand the scope of their proposed ban on noncompete agreements for employers to also include prohibiting "de facto" noncompetes.

The article notes that the FTC'S initial ban on noncompetes was put in place to combat employment restrictions that may lead to limited wage increases and job mobility for employees. The commission's plan to also forbid "de facto" noncompete agreements would be to prevent employers from finding loopholes in the current ban. As written; the FTC's proposed rulemaking offers an open-ended definition of what could count as a de facto noncompete.

John explained that trends in state courts, which for years have been ruling on what kinds of employment agreements are reasonable and which are not, could serve as a guide for what the FTC might count as a de facto noncompete.

"Those give us a pretty good idea of ... what the FTC may ultimately deem an overbroad [agreement]," John highlighted. 

John similarly said companies will turn to NDAs. He said they'll do it to defend corporate secrets rather than restricting employee mobility.

"Employers have a legitimate interest in protecting their confidential information and protecting their goodwill," John said. If the FTC bans noncompetes, "I would expect that employers would turn to alternative sources to protect those interests."