A Nation Without Non-Competes

• Jurisdiction: United States,Federal
• Law Firm: Ford & Harrison LLP
• Subject Matter: Antitrust/Competition Law, Employment and HR, Antitrust, EU Competition , Contract of Employment, Unfair/ Wrongful Dismissal, Employee Benefits & Compensation, Employee Rights/ Labour Relations
• Author: Mr Brendan C. Horgan
• Published date: 12 June 2023

The non-competition clause may not be long for this world. On January 5, 2023, the Federal Trade Commission (FTC) announced a proposed rule to ban non-competes for most workers nationwide,¹ which underwent a 90-day public comment period that ended April 19, 2023.² The ball is now in the FTC's court to publish a final rule and announce an effective date. Much remains uncertain. It is unclear when the final rule will become effective. It is unclear whether the FTC will publish the rule in its proposed form or if the FTC will amend the final rule based on public comments. Although the final rule will almost certainly face stiff legal challenges, it is not clear whether those challenges will succeed, or if any federal court will issue a nationwide stay of the final rule while the challenges play out in court.

Employers, workers, and their respective counsel are left to guess what comes next. The non-competes' future is uncertain, although legal consequences for misapplying the law remain. Regardless of the outcome of the FTC process, what is clear is that this is a good time for employers to explore other measures to protect business interests.

The non-compete, generally.

At its core, a non-compete is a contractual provision between an employer and worker that restricts the worker from competing against the employer after the relationship ends. A properly tailored non-compete is an effective tool for businesses to protect confidential information, business expectancy, and customer goodwill. An overly broad non-compete, however, unnecessarily restricts workers from earning a living without justification.

Like courts in many states, Virginia courts disfavor non-competes.³ In Virginia, the employer bears the burden to prove a non-compete is enforceable. To meet this burden employers must show that the restriction (1) is no broader than necessary to protect the employer's legitimate business interests, (2) is not so severe as to restrict the workers ability to find work or earn a living, and (3) does not violate Virginia public policy.⁴ Virginia courts assess non-competes on a case-by-case basis, and, based on the unique circumstances of each case, consider several factors to determine if the non-compete is properly limited to legitimate business interests. These factors are (1) the functional scope (the activity prohibited), (2) geographic reach, and (3) duration of the restriction.⁵

Also important, Virginia courts will not rewrite a non-compete to make it enforceable, otherwise known as "blue penciling."⁶ If a non-compete prohibits too much activity, covers too large an area, or lasts too long, it will likely fail in Virginia. If an employee can articulate any activity prohibited by the non-compete that the employer has no legitimate interest in restricting, a Virginia court will likely decline to enforce it.

What does the FTC's proposed rule prohibit?

Although the date of publication of the final rule is not known...