On January 5, 2023, the Federal Trade Commission (“FTC”) proposed a new rule which would effectively ban all non-compete agreements between employers and “workers” (defined under the rule to include employees, independent contractors, interns, and others). The proposed rule, which goes beyond President Biden’s 2021 directive to “curtail the unfair use of non-compete clauses,” would not only bar prospective non-compete agreements but also invalidate existing ones.
Importantly, though, the proposed rule now becomes subject to a lengthy public comment period, likely will be revised substantially, and may be subject to legal challenge altogether. As a result, it will be some time before any such rule will come into effect, if at all. Nevertheless, employers who utilize non-competes—and even non-solicits—should consider now the potential ramifications of the proposed rule.
The Proposed Rule
The proposed rule is based on the FTC’s preliminary finding that non-competes may constitute an unfair method of competition and therefore violate Section 5 of the Federal Trade Commission Act. The rule would make it unlawful for an employer to 1) enter into or attempt to enter into a non-compete with a worker; 2) maintain a non-compete with a worker; or 3) under certain circumstances, represent to a worker that the worker is subject to a non-compete. As mentioned above, the definition of “workers” would include not only employees, but also independent contractors and consultants.
The proposed rule does not seek to make unlawful customer non-solicitation clauses or non-disclosure agreements. However, the FTC does state that the proposed rule would apply to such restrictive covenants that are “so unusually broad in scope” that they effectively function as non-competes.
Recent History of Non-competes
Typically, non-compete agreements restrict employees from quitting their jobs and joining a rival company or starting up their own competing business – usually for a period between six months and two years following the end of their employment. As such, non-compete agreements are effective tools for employers to protect themselves against unfair competition, misappropriation of trade secrets, exploitation of customer goodwill, and loss of investment in training workers.
However, in recent years, there have been allegations that some employers were abusing non-compete agreements by deploying them in ways that go beyond preventing unfair competition or protecting trade secrets. The commonly cited examples include non-competes for sandwich shop workers and camp counselors. In response, some states, including Massachusetts, have prescribed certain limitations on the use of non-competes. Meanwhile, other states have restricted employers’ use of non-compete agreements with employees making less than certain compensation thresholds. Finally, there are some states, such as California, North Dakota, and Oklahoma, that have already banned noncompete agreements in their entirety. The FTC’s proposed rule would supplant state law on non-competes.
What’s Next?
Though sweeping and seemingly sudden, the proposed rule would not take effect immediately. At this time, the FTC has opened a 60-day public comment period. Following this period, the FTC could narrow the rule based on the comments and any potential alternatives they receive. Additionally, the proposed rule provides a grace period of 180 days after the rule is finalized for employers to comply. Importantly though, even if the FTC does issue a final rule purporting to ban non-compete agreements, it is likely that the FTC will face legal challenges to its authority to do so, which could delay the rule’s implementation beyond the 180-day grace period.
We will continue to monitor developments and provide updates on the regulatory and legal proceedings as they move forward, and we are available to assist employers think forward to planning for compliance.
