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Congress Takes Aim at Noncompete Agreements

Congress Takes Aim at Noncompete Agreements

A little over a month after the Federal Trade Commission (FTC) proposed to end the use of noncompete agreements for most employment relationships, bipartisan bills have been introduced in the Senate and House, which, if enacted, would effectively ban employers’ use of noncompete agreements.

ILMA is conducting an anonymous survey to gather information on members’ use of noncompete clauses and other restrictive covenants. Your response will inform our comments on the FTC’s proposed rule, as well as any action taken with Congress.

The “Workforce Mobility Act of 2023” has been introduced in the Senate, with the companion measure introduced in the House. The primary difference between the Senate bill and the FTC’s proposed rule is that the legislation would not apply to noncompete agreements entered prior to the legislation’s enactment.

 “This is the third time in four years that a noncompete ban has been introduced on Capitol Hill,” said ILMA CEO Holly Alfano. “While the legislation has failed to gain traction in the past, this time could be different because of the attention being paid to the FTC proposal and developments at the state level.”

The Senate bill provides that “no person shall enter into, enforce, or attempt to enforce a noncompete agreement with any individual who is employed by, or performs work under contract with, such person with respect to the activities of such person in or affecting commerce.”

There are three exceptions to the bill’s blanket prohibition:

  1. The sale of a business’ goodwill or an ownership interest in a business.
  2. The dissolution or disassociation of a partnership.
  3. In connection with a sale of goodwill or ownership interests, a buyer or seller can enter into a severance agreement with senior executives that includes a noncompete provision of up to one year, limited to the geographic region in which the company previously operated and a guaranteed severance payment of at least one year’s salary or compensation in the event that employment is terminated. 

The legislation would not apply to nondisclosure agreements that prohibit employees from sharing trade secrets, including agreements that continue after employment. The Senate bill’s impact on non-solicitation agreements is uncertain. Notably, the bill would make pre-dispute arbitration agreements and pre-dispute joint-action waivers unenforceable with respect to claims arising under the legislation.

Employees with successful violation claims would be entitled to recover actual damages and attorneys’ fees. State attorneys general would also be allowed to bring claims against employers for violations.

“Regardless of whether the bill becomes law, employers need to keep in mind that many state and local jurisdictions currently have restrictions on and requirements for noncompete clauses and other post-employment restrictive covenants,” said ILMA General Counsel Jeff Leiter.

Bills are pending in Minnesota, Missouri, New Jersey and Texas to join the 12 jurisdictions (ME, NH, MA, RI, MD, DC, VA, IL, CO, NV, OR and WA) with income minimums for noncompete agreements. In California, North Dakota, Oklahoma and the District of Columbia, noncompete agreements are banned or are effectively unenforceable.

“Because of the importance of employment restrictive covenants to protect ILMA members’ trade secrets and intellectual property, the Association is highly engaged on this issue,” Alfano said. “We have sent out a member survey for ILMA’s comments to the FTC, and we need all members to respond.”