Noncompete Agreements
On February 1, 2023, a bipartisan group of U.S. Senators reintroduced a bill aptly named the “Workforce Mobility Act of 2023”. The Act seeks to impose a nationwide ban on the use of noncompete agreements by employers, with a few limited exceptions. The reintroduction follows a controversial proposal from the Federal Trade Commission (“FTC”) in January, which proposed a blanket ban on most noncompete agreements, classifying them as an unfair or deceptive trade practice.
The Act was reintroduced by Senator Christopher Murphy (D) of Connecticut and Senator Todd Young (R) of Indiana and is co-sponsored by Senator Tim Kaine (D) of Virginia and Senator Kevin Cramer (R) of North Dakota.
The Act was first introduced in 2019 and 2021 but failed to attract congressional attention. Similar to the FTC proposal, the Act seeks to codify the use of employment noncompete agreements as an unfair trade practice under federal law.
Under the Act, noncompete agreements are agreements between a person or entity and an individual performing work that seeks to restrict the individual after the termination of the working relationship. This definition includes agreements that attempt to prohibit an individual from performing:
- Any work for a specified period of time;
- Any work in a specified geographical area; or
- Any work similar to the work performed for the person or entity that is part of the agreement.
While the Act applies to most noncompete agreements, the Act provides limited exceptions under specified conditions. These exceptions mainly concern the sale of specific interests in a business or the dissolution of or disassociation from partnerships. Therefore, these exceptions would not apply to most salary and hourly employee agreements.
The Act proposes one of the most substantial pieces of federal legislation against the use of noncompetes and, if passed, would:
- Drastically narrow the use of noncompete agreements to include only necessary instances of dissolution or sale of a business;
- Entrust the FTC and the U.S. Department of Labor with enforcement while also creating a private right of action in federal court;
- Require employers to make their employees aware of the limitations imposed on noncompetes by posting notice of the provisions of the Act in a conspicuous place alongside other notices to employees and applicants;
- Give the federal Department of Labor the right to make the public aware of noncompete limitations; and
- Require the FTC and the U.S. Department of Labor to submit a report to Congress on any enforcement actions taken.
While the primary enforcement authority rests with the Federal Trade Commission and the U.S. Department of Labor, the Act would also authorize State Attorney Generals and individuals to bring actions against employers seeking penalties, damages, injunctions, and other relief.
Notably, claims under the Act would be exempt from arbitration and joint-action waivers, including waivers of joint, class, and collective actions. Employers cannot, therefore, circumvent enforcement actions or lawsuits through carefully worded arbitration clauses or joint-action waivers.
Supporters of the Act argue that noncompete agreements stifle wage growth, career advancement, and innovation by unfairly limiting a worker’s job mobility, ultimately hindering economic growth. They say that by banning noncompetes as an employment practice, employees and entrepreneurs would be free to utilize their talents and skills where they’re in the greatest demand.
However, critics of the Act and the FTC proposal argue that noncompete agreements are necessary to protect trade secrets and valuable business relationships.
Although it wouldn’t apply retroactively, the Act’s broad definition of a noncompete, coupled with its robust enforcement mechanisms, should render future agreements illegal and unenforceable.
It remains to be seen whether the reintroduced Act will garner enough congressional attention, but the attention drawn to the issue by the FTC proposed rule may motivate lawmakers to act and provide some definitive legislation on the topic.
