Analyzing the FTC’s new regulation 

On July 9, 2021, President Joe Biden issued an executive order that, among other things, directed the Federal Trade Commission (FTC) “to curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.” Making good on (and, in fact, going significantly beyond) this directive, on Jan. 5, 2023, the FTC released its proposed regulation which declares most non-compete clauses, and other clauses which have the effect of prohibiting competition, an unfair method of competition. This proposed regulation has a wide-reaching impact and is analyzed more fully below.

The Regulation

The FTC’s proposed regulation seeks to add a new subchapter J, consisting of part 910, to Title 16, Chapter 1 of the Code of Federal Regulations. Section 910.2(a) of the proposed regulation declares: “[i]t is an unfair method of competition for an employer to enter into or attempt to enter into a non-compete clause with a worker; maintain with a worker a non-compete clause; or represent to a worker that the worker is subject to a non-compete clause where the employer has no good faith basis to believe that the worker is subject to an enforceable non-compete clause.” The term “worker” applies to both employees and independent contractors.

Section 910.2(b) of the proposed regulation requires employers to rescind existing non-compete clauses with their employees (current or past) within 180 days after the regulation is formally published and subsequently provide each employee notice of such recission within 45 days after rescinding the noncompete clause. Section 910.2(b)(2)(C) provides model notice language for employers to give to their current or past employees subject to non-competition obligations.

Section 910.3 provides a narrow exception to the ban on non-compete clauses, which permits a person who is a “substantial owner of, or substantial partner in” a business to enter into a noncompete agreement where that person is “selling a business entity or otherwise disposing of all of the person’s ownership interest in the business entity, or … selling all or substantially all of a business entity’s operating assets.”

Section 910.1(b)(1) defines a non-compete clause as “a contractual term between an employer and a worker that prevents the worker from seeking or accepting employment with a person, or operating a business, after the conclusion of the worker’s employment with the employer.” Section 910.1(b)(2) expands this definition to include “a contractual term that is a de facto non-compete clause because it has the effect of prohibiting the worker from seeking or accepting employment with a person or operating a business after the conclusion of the worker’s employment with the employer.” Such de facto non-compete clauses include a non-disclosure agreement “written so broadly that it effectively precludes the worker from working in the same field after the conclusion of the worker’s employment with the employer” and contractual terms “that require[] the worker to pay the employer or a third-party entity for training costs if the worker’s employment terminates within a specified time period, where the required payment is not reasonably related to the costs the employer incurred for training the worker.”

Section 910.4 of the proposed regulation purports to preempt state laws to the extent such state laws are inconsistent with the proposed regulation.

The Regulation’s Potential Impact

The FTC’s proposed regulation will have a wide-ranging impact on all manner of businesses, big and small, across all industries. The regulation, if adopted, unequivocally precludes classic non-compete clauses entered into as a condition of employment. In addition, the FTC’s broad definition of non-compete clauses, which includes “de facto” non-compete clauses, creates the potential that broadly drafted non-disclosure, non-solicitation, anti-poaching monetary penalty clauses and other types of restrictive covenants meant to protect trade secrets, confidential business information and/or the exploitation of customer relationships and goodwill could violate the FTC’s proposed regulation and be effectively nullified.

As a result, should the FTC’s proposed regulation go into effect, businesses will not only be prohibited from using non-competition clauses, but they must also carefully review (and, if necessary, revise) their employment and post-employment contracts to ensure that any non-disclosure, non-solicitation, anti-poaching or other agreements intended to protect the business are narrowly tailored to avoid potential nullification through the FTC’s proposed regulation.

Further, and regardless of whether the rule is finalized or challenged on rulemaking grounds, the legal position underlying the FTC’s announcement creates additional risks to employers seeking to implement and enforce non-compete agreements.

The Future of the FTC’s Proposed Regulation

Whether the FTC’s proposed regulation will ultimately go into effect remains to be seen. Initially, the proposed regulation faces a 60-day public comment period, during which the public is invited to comment on the proposed regulation, which may or may not impact the final regulation. Comments on the regulation proposal may be made up to 60 days after the Federal Register publishes the proposed rule. The public comment period will open soon.

Following the public comment period, the FTC will take another vote on the final regulation before final publication of the regulation. The final vote has not yet been scheduled.

The FTC’s proposed regulation is likely to generate significant and substantial litigation on various grounds, including, without limitation, that it exceeds executive authority and goes beyond the limited mandate of President Biden’s executive order. 

Conclusion

The future of non-compete clauses is murky. If the FTC’s proposed regulation goes into effect, non-compete clauses as we know them will be a thing of the past. However, the FTC’s proposed regulation will likely face many challenges in the weeks and months to come and may be tied up with legal challenges for the foreseeable future.

Should the FTC’s proposed regulation go into effect, employers will need to take steps to comply with the regulation. [That includes] reviewing their employment and post-employment agreements to identify whether they contain any non-compete clauses and, if so, rescind such clauses and provide the necessary notice to employees. 

In addition, employers should immediately consider, in anticipation of the regulation going into effect, having their non-disclosure, non-solicitation, anti-poaching, and other types of agreements reviewed. If necessary, [the agreements should be] revised, to better ensure they are no broader than necessary to protect against the use and disclosure of confidential and trade-secret information or the exploitation of customer relationships and goodwill.        

Bradley A. Hoppe is a member (partner) in the Buffalo office of Syracuse–based law firm Bond, Schoeneck & King PLLC. He is a litigation attorney who handles a wide range of business, commercial and municipal matters at the trial and appellate levels in both state and federal court. Contact Hoppe at bhoppe@bsk.com. Kevin G. Cope is an associate in Bond’s Buffalo office. He is a litigation attorney who assists a wide range of clients in resolving pending matters, or, when possible, to avoid litigation through implementing measures to mitigate or avoid potential exposure. Contact Cope at kcope@bsk.com. This article is drawn and edited from the law firm’s website.

Dear Rusty: I lost my wife several years ago and I qualified for Social Security spousal benefits. Unfortunately, because of my income, I have not been able to take advantage of this benefit. I am currently 64 and still working. I believe I have until the age of 70 to receive this. Is there any way to claim any of this before I start taking my Social Security in a couple of years?

Signed: Working Widower

Dear Working Widower: Your entitlement to surviving spouse benefits from your wife actually never expires so, you can wait until you stop working full time, or until you reach your full retirement age (FRA), to claim your benefit as a widower. 

Social Security’s “earnings test” lasts until you reach your FRA, which, for you, is 66 years and 8 months. That is the age at which your earnings from working will no longer affect your Social Security (SS) benefit. So, you can simply defer claiming your survivor benefit until you reach your FRA, or until you stop working full time and won’t exceed the annual earnings limit (the earnings limit changes yearly; for 2023 it is $21,240). But there is no way to avoid the earnings test if you’re collecting SS benefits of any kind before you reach your full retirement age. If you collect your surviving spouse benefit early and exceed the earnings limit, the Social Security Administration will take away benefits equal to $1 for every $2 you are over the limit (half of what you exceed the limit by), and if your work earnings are high enough it can temporarily disqualify you from receiving SS benefits. The penalty for exceeding the earnings limit is also less severe in the year you reach your FRA.

You might take some comfort in knowing, anyway, that taking your survivor benefit before your FRA would mean it would be reduced (by 4.75 percent for each full year early) but waiting until you reach your FRA to claim it would mean you’ll get 100 percent of the survivor benefit you’re entitled to (the same amount your wife was entitled to when she died). And you can claim your survivor benefit (only) first and collect that, while allowing your personal SS retirement amount to continue to grow, up to age 70 if you wish. You should strive to maximize whichever benefit will be highest — your own, or your survivor benefit — and collect that benefit for the rest of your life. If you choose to claim your survivor benefit at your FRA and switch to your own higher amount at 70, your personal SS retirement benefit at 70 will be almost 27 percent more than it will be at your full retirement age. That would be a good way to avoid the earnings test, maximize both benefits, and secure the highest possible Social Security benefit for as long as you live. 

Whether waiting until 70 to claim your own SS retirement benefit makes sense depends on whether it will be higher at age 70 than your survivor benefit at your FRA, and on your life expectancy. Average life expectancy for a man your current age is about 84 and you would break even moneywise at about age 81 if you wait until age 70 to claim your own SS retirement benefit. So, you’d get the most in cumulative lifetime benefits by waiting until your FRA to claim your survivor benefit and — if it will be higher — waiting until you’re 70 to claim your own SS retirement benefit. The choice is yours to make but longevity is the key, so you should carefully assess your potential life expectancy, including your family history, your current health, and your lifestyle to help you decide.      

Russell Gloor is a national Social Security advisor at the AMAC Foundation, the nonprofit arm of the Association of Mature American Citizens (AMAC). The 2.4-million-member AMAC says it is a senior advocacy organization. Send your questions to: ssadvisor@amacfoundation.org.

Author’s note: This article is intended for information purposes only and does not represent legal or financial guidance. It presents the opinions and interpretations of the AMAC Foundation’s staff, trained and accredited by the National Social Security Association (NSSA). The NSSA and the AMAC Foundation and its staff are not affiliated with or endorsed by the Social Security Administration or any other governmental entity.