By:  Ty Hyderally, Esq., Francine Foner, Esq., and Tom Daly

On January 5, 2023, the Federal Trade Commission (“FTC”) released a Notice of Proposed Rulemaking to prohibit employers from imposing non-compete clauses on their workers. The FTC’s principal mission is the enforcement of civil antitrust law and the promotion of consumer protection. 15 U.S.C. § 41 et seq. The FTC actively combats unfair and deceptive trade practices at a federal level and has been influential in the passage of landmark legislation dating back to the early 1900s. Noncompete clauses are often found in employment contracts and serve to prevent an employee from working for their employer’s competitor, or starting a competing business after the employment relationship ends. Non-competes vary by industry, though receive similar judicial scrutiny to ensure they are reasonable.

At common law, a non-compete agreement must be reasonable in scope and in duration. New Jersey courts have used broad parameters for determining whether a noncompete agreement is enforceable. Whitmyer Bros., Inc. v. Doyle, 58 N.J. 25 (1971); Solari Indus., Inc. v. Malady, 55 N.J. 571 (1970). Under the Solari/Whitmyer test, a noncompete agreement is enforceable “if it simply protects the legitimate interests of the employer, imposes no undue hardship on the employee and is not injurious to the public.”  Ingersoll–Rand Co. v. Ciavatta, 110 N.J. 609, 628 (1988) (quoting Whitmyer, 58 N.J. at 32–33). Legitimate employer interests include customer relationships, trade secrets, and confidential business information. Coskey’s Television & Radio Sales & Serv., Inc. v. Foti, 253 N.J. Super. 626, 636 (App. Div. 1992). Courts will look for a nexus between the employer’s legitimate interest and the consideration offered to an employee in exchange for signing a non-compete. Non-competes have been held unenforceable where the primary purpose is clearly its anticompetitive effect and where the employer did not condition signing on consideration logically related to a recognized legitimate interest. Coskey’s, 253 N.J. Super. at 635-36; ADP, LLC v. Rafferty, 923 F.3d 113, 123 (3d Cir. 2019). When determining whether a non-compete causes undue hardship, a court will consider the likelihood that the employee will find work in their field, and the burden of the restriction on the employee. Cmty. Hosp. Grp., Inc. v. More, 183 N.J. 36, 59 (2005). In a healthcare industry context, courts have balanced a hospital’s interest in protecting its referral bases with the potential public harm in preventing a neurosurgeon from working in an area with a neurosurgeon shortage. Cmty. Hosp., 183 N.J. at 57-62.

Non-compete agreements have a long history of harm.  Studies conducted by the FTC have shown the agreements significantly reduce workers’ wages, stifle new business and new ideas, exploit workers and hinder economic liberty. Non-competes are already considered unenforceable contract provisions in California, North Dakota, and Oklahoma, where industries that depend on trade secrets and other key investments have nonetheless continued to  flourish. It is clear that employers have other ways of protecting these interests without placing a restriction on an employee’s post-termination professional conduct. The FTC’s proposed rule would provide that non-compete clauses are an unfair method of competition. In addition, the proposed rule would ban employers from entering non-compete clauses with their workers, including independent contractors. The proposed rule would apply retroactively, requiring employers to rescind existing non-compete clauses and actively inform their employees that the contracts are no longer in effect.

Employment seekers are already in an unfair bargaining position when they enter employment contracts, and employers take advantage of this frequently. Employment seekers and employees alike should review employment contracts carefully, and seek legal counsel if a non-compete appears in an agreement. Even without the FTC’s proposed rule, New Jersey courts hold these agreements to a high standard and may sever the clauses as unreasonable restrictions on employee’s professional freedom. Contact a Hyderally & Associates attorney today if you have any questions about the FTC’s proposed rule, or if you think your employment agreement imposes an unfair burden on your future employment prospects.

To read a fact sheet on the FTC’s proposed rule, click here: https://www.ftc.gov/system/files/ftc_gov/pdf/noncompete_nprm_fact_sheet.pdf.

To read the full text of the FTC’s proposed rule, click here: https://www.ftc.gov/system/files/ftc_gov/pdf/p201000noncompetenprm.pdf.

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