We recently wrote about the Federal Trade Commission’s (FTC or the Commission) controversial new Proposed Rule that would largely ban non-compete agreements between employers and “workers.”[1] The Proposed Rule would ban not only explicit non-competes, but also “de facto” non-competes such as unduly restrictive “non-disclosures” and employment contracts with onerous training reimbursement provisions. It has only one, narrow exception for any “person who is selling a business entity” or “disposing” of a “substantial” “ownership interest in the business entity,” which is defined as a 25 percent ownership interest. The Proposed Rule would also require employers to rescind existing non-competes within 180 days of adoption of a final rule and to notify current and former employees of the rescission. The Proposed Rule follows the FTC’s recent Policy Statement, which set out a novel, expansive interpretation of its enforcement authority in cases involving “unfair methods of competition” under Section 5 of the Federal Trade Commission Act, which we also wrote about last year.[2]

Both the Policy Statement and the Proposed Rule are part of the Biden administration’s aggressive and unprecedented approach to antitrust enforcement, which we continue to monitor. Earlier this month, President Biden became the first president to discuss antitrust issues in a State of the Union address since 1979. A week later, Commissioner Christine Wilson resigned from the FTC because of Chairman “Lina Khan’s disregard for the rule of law and due process”—citing, among other things, the Policy Statement and Proposed Rule. Commissioner Wilson dissented from the FTC’s Policy Statement, stating that it provided little guidance to businesses and gave the FTC “authority to summarily condemn essentially any business conduct it finds distasteful.”

The Proposed Rule has already received over 10,000 public comments, many of them critical. Given the enormous impact it would have on businesses and workers alike, BakerHostetler attorneys conducted a webinar on February 9 to answer questions on the Proposed Rule.[3] Below is a summary of some of those questions and answers.

Q:       What is the FTC’s motivation for the Proposed Rule?

A:        The FTC is concerned with harm that non-competes purportedly inflict on (1) workers whose compensation and mobility are stymied by non-competes and (2) new business enterprises that find it difficult to break into an industry where skilled labor is locked into existing employment arrangements.

Q:        How far back does the notice requirement go for former employees?

A:        The Proposed Rule does not say, but the limit would likely be based on the time limitations that are already imposed by state law restricting the temporal scope of non-compete agreements—usually about two years, or based on the stated time restriction in the employer’s agreement with the former employee.

Q:       Will this impact pending private lawsuits seeking damages?

A:        It should not. The Proposed Rule does not create a private right of action or affect the well-established standards for Sherman Act claims. The Proposed Rule would affect only actions by the FTC seeking injunctive relief under Section 5, which does not authorize the FTC to seek damages or other forms of monetary relief. Monetary sanctions would currently only be available if a party violated a prior FTC cease and desist order banning conduct related to non-competes. One potential impact on private lawsuits could be that a party opposing enforcement of a non-compete uses the Proposed Rule in its favor to claim an injunction violates public policy (although the Proposed Rule is not the policy of Congress or even the White House).

Q:       What industries are impacted?

A:        The Proposed Rule is not limited to certain industries, but some industries are generally beyond the FTC’s jurisdiction, such as the banking industry.

Q:       If the Proposed Rule is passed, will it be vulnerable to challenge?

A:        Yes, there are a number of potential challenges, including that: (i) the Commission lacks authority to engage in “unfair methods of competition” rulemaking, (ii) the Commission lacks clear congressional authorization to ban non-competes, as required by the “major questions” doctrine the Supreme Court decided just last year in West Virginia v. EPA, and (iii) it would violate the legislative non-delegation doctrine, rooted in Article I of the U.S. Constitution, even if Congress did authorize the FTC to engage in “unfair methods of competition” rulemaking.

Q:       What kind of agreements would the Proposed Rule affect?

A:        The Proposed Rule clearly applies to contracts that explicitly restrict a departing worker’s ability to work for another company or start a business, as well as “de facto” non-compete agreements that have the effect of preventing the worker from seeking employment elsewhere, for example, a non-disclosure agreement “that is written so broadly that it effectively precludes the worker from working in the same field.” This prohibition on “de facto” non-competes will likely drive a lot of private trade-secret litigation going forward because employers will no longer be able to rely on non-compete agreements to protect trade secrets.

Q:       How will the Proposed Rule affect deals in which part of a company’s worth was based on employees who are subject to non-compete agreements?

A:        In an M&A transaction, the Proposed Rule could lower the value of the company in those circumstances. But retention arrangements could help mitigate this issue by reducing the risk that the worker will leave in the first place.

Q:       What will happen under the Proposed Rule where an employer specifically paid valuable consideration to the employee in exchange for the non-compete clause?

A:        The non-compete agreement would be unlawful under the Proposed Rule, regardless of whether consideration was paid. But there might be private litigation over whether employers are entitled to a return of some of that consideration. Moreover, the Proposed Rule applies only to “workers,” and it explicitly excepts those who are selling their interest in the company and own 25 percent or more in the company. Additionally, the FTC has specifically asked for comments on whether and how the Proposed Rule would apply to C-suite and other high-level workers.

Q:       Are there exceptions for smaller companies or companies that need non-competes for their business to survive?

A:        There are no de minimis or necessity exceptions in the Proposed Rule.

Q:       Does it apply to independent contractors?

A:        Yes, the Proposed Rule explicitly includes independent contractors.

Q:       Does it apply to non-profits?

A:        The Proposed Rule does not have any exceptions on its face for non-profits, and the antitrust laws generally apply to non-profits as they do to other businesses.

Q:       What happens if there is a change in presidential administrations?

A:        Presidents are permitted to appoint three FTC commissioners (out of five total) from their own party. Future commissioners appointed under a different president could repeal the Rule. Lawsuits brought by the FTC, however, cannot easily be withdrawn merely because a new president is elected.

Q:       What about non-competes in client agreements that prohibit staff on a particular account from working with the client’s competitors?

A:        It is unclear whether the Proposed Rule would apply to this situation. If it does, allowing the worker to work for a competitor can raise other antitrust issues under the Sherman Act, particularly if the worker is sharing confidential information with the competitor.

Q:       How can interested companies and individuals submit comments to the FTC on the Proposed Rule?

A:        There is an online submission form.[4] The FTC has also posted a webpage with instructions on how to comment and a link to current items that can be commented on.[5]

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