The UK perspective on the FTC ban on US non-competes

Operation of non-competes in the UK

The starting point for the current legal position in the UK is that non-compete provisions are prima facie void and unenforceable restraints of trade. However, an employer can generally rebut that presumption of unlawfulness if it can show that the non-compete protects a legitimate business interest, and that the clause goes ‘no further than necessary’ to protect that legitimate interest.

To support a finding that a clause is reasonable, the following is likely to be relevant:

• Reasonableness is assessed at the time that the non-compete clause is agreed between the parties, not when the employer is seeking to enforce it.
• The clause should expressly state the business interests that the business is reasonably seeking to protect.
• The duration of the restriction, and its geographical bounds, will be critical to demonstrating proportionality. The prohibited activities also need to be clearly defined and appropriately limited.
• To determine the duration of the restraint, the employer may consider the ‘shelf life’ of information that the employee may hold. For example, if an employee potentially has knowledge of customer pricing strategies, these may only have a limited shelf life of six months if the prices are reviewed and altered in that period. On the other hand, even if the ‘shelf life’ may be a much longer period, this still needs to be considered on balance with the restrictions being placed on the employee and the extent of consideration the employee has been provided.
• Typically, non-compete restraints should be reserved for the most senior employees, on the basis that these employees are most likely to be privy to the most sensitive information and therefore present the greatest risk to the company’s interests. However, this may not always be the case.
• Employers need to show that the employee has been given adequate consideration for the restraint, and that the employee was given a fair opportunity to take legal advice in respect of the clause and negotiate as appropriate. ‘Equality of bargaining’ has become an increasingly important consideration for courts.

Employers should remember that every aspect of their non-competition restraint will be scrutinised if an employee disputes its enforceability, so employers need to be prepared to justify these carefully. Generally, a ‘standard’ clause that is adopted across all staff will be difficult to justify in this way.

UK government’s proposals on non-compete reforms

Back in 2020, the Conservative-led UK government consulted on proposed reforms to non-compete clauses. Broadly, it proposed two options which it sought views on in consultation:

1. to ban non-compete clauses entirely; or
2. to require that an employee be paid throughout their post-employment non-compete period.

Sometime later, on 12 May 2023, the government published its response on the 2020 consultation.^[2] It noted that 60 per cent of the 104 responses were in favour of the second option, with many respondents of the view that it appropriately struck the balance between preventing widespread use of non-competes and allowing businesses to protect their legitimate interests.

However, despite this being the most favoured of the two options presented, the government said that it would not legislate to require businesses to pay throughout the non-compete period, as this would be a substantial cost to businesses at a ‘critical juncture of economic recovery’ and present a disadvantage to smaller employers who may not be in a financial position to bear that burden.

Aside from the two main options that it consulted on, the government had also asked for views on ‘complementary measures’, including on whether a maximum time limit should be introduced for non-competes. Apparently, 60 per cent of the respondents supported this approach.

Having determined that it would not be appropriate to make businesses pay throughout the duration of the non-compete, the government announced that it would instead legislate to allow non-compete provisions, but only if they are for no more than three months. It said that this would ‘boost competition and innovation’ and ‘deliver on [its] commitment to build a high skilled, high productivity, high wage economy’. It added that this would bring benefits to individuals who seek to start new businesses or find alternative work. There has been no explanation as to why three months is seen as the appropriate period.

The response document claimed that ‘by introducing a statutory limit of 3 months, the Government is leading the world in cracking down on the use of non-compete clauses’. We have not seen any draft legislation since this was announced over a year ago, and it appears that the US has since taken the lead in cracking down on non-competes. The government had planned to introduce the new restrictions on non-competes ‘when Parliamentary time allows’. With the recent change of government, it appears that this may have slipped off the ‘to do’ list, with neither the Conservative or the Labour party having expressly mentioned this in their policies leading up to the election. However, in the Labour manifesto for 2024, there may be a signal that this has not been forgotten after all, with a brief reference to the barriers that people face when trying to move to a better job.^[3] In any event, this would not appear to be a priority, and it seems somewhat unlikely that the UK will see any legislative change in this area in the immediate future.

The Consumer and Markets Authority’s views on non-compete provisions

In the US, we have seen the regulator removing this task from the legislature and taking action on non-competes of its own accord. Whether this wide-sweeping change will endure remains to be seen, but we have considered whether regulatory intervention may be another course of action for the UK. In short, this would seem unlikely, despite being an area of interest for the UK Competition and Markets Authority (CMA).

Contrary to the FTC, which broadly confirmed that non-competes were unfair methods of competition, the CMA has indicated that a non-compete provision would not breach UK competition law. Rather, in the UK, these provisions are dealt with under an established body of employment law. The CMA has said that its enforcement powers do not extend to matters within an employment contract or an industrial agreement. As such, we consider it unlikely that we will see CMA taking action in the UK.

In any event, in January 2024, the CMA announced that it would be considering the impact that the labour market has on competition, providing a different lens on competition and its effect on the economy than the CMA has historically focused on. In its research, the CMA found that non-compete clauses are used widely across all industries, regardless of how much a given worker is paid, and in some cases for employees where there are unlikely to be specific and legitimate business areas to protect.^[4]

The CMA’s view was that employment law ‘may need updating’ in this respect. However, as mentioned, this is unlikely to be much more than a gentle nudge in the direction of the government, given the CMA’s inability to directly alter employment laws.

Alternative mechanisms to protect business interests

Whether or not we see any changes to non-competes at a legislative level in the UK, there are several other tools that employers can use in order to protect their legitimate business interests.

There are currently no indications that an employer may be prevented from using non-solicitation, non-dealing or non-poach clauses in their employment contracts, even if non-competes are limited or banned. These provisions seek to prevent employees from encouraging their colleagues or clients to follow them to another organisation when they leave, or to prevent the employee from working (dealing) with clients that the former employer has relationships with. These are important ways in which employers can minimise the potential damage to their business when an employee leaves, without undue restrictions on the employee’s ability to find another job. Typically, they will also be easier to justify in any legal challenge when compared to a non-compete.

In addition, a well-drafted confidentiality provision should be common in most employment agreements, as it generally places a broad prohibition on the employee taking or using the employer’s information in any circumstances (including before termination, and perpetually). If it becomes apparent that there is a real risk of misuse of confidential information, the employer may seek to injunct (stop) the employee from doing so. Of course, once the information has already been taken or misused, it can be difficult to put the cat back in the bag. In those situations, an employer may be able to seek a ‘springboard injunction’. This is a rare type of injunction which attempts to limit the ‘head start’ that the employee may have had by spring-boarding off the employer’s confidential information. It is different to a usual injunction, as ordinarily, an employee cannot be prevented from doing something if the cat has already left the bag.

Employers can also consider the use of garden leave for all or some of the employee’s notice period, meaning that the employee remains bound to the company and prevented from joining any other employer throughout (not just competitors). Some employers may be reluctant to use garden leave on the basis that they would be paying for the employee to ‘sit around doing nothing’. However, it can be valuable in ensuring that the employee is not readily able to access the company’s confidential information, and that any confidential information ‘in their mind’ may largely be forgotten by the end of the notice period. To this end, information that has a longer ‘shelf life’ may also justify using a longer notice period, coupled with a garden leave provision, to ensure greater protection in the absence of a non-compete provision. Employers should note that they cannot require an employee to go on garden leave unless there is an express entitlement to do so in the employment agreement.

Conclusion

The increased scrutiny on non-competes in the US and the UK has created a bit of a stir. However, as above, it is difficult to see if the plans to reform these provisions will stick. It is possible that the FTC ban may fall away after legal challenges, and it is currently not expected that we will see any abrupt changes to the laws in the UK despite recent consultations.

While there does not appear to be any immediate need for changes to employment practices, it would seem prudent for all employers, particularly those with a US element, to undertake a careful review of their covenants to ensure they will withstand scrutiny in case of challenge.