Federal Trade Commission Proposes Rule Banning Nearly All Non-compete Agreements
- Jan 5, 2023
- Non-Compete Agreements
- Grant T. Collins
A few hours ago, the Federal Trade Commission (or FTC) announced a proposed rule banning nearly all noncompete agreements and voiding existing noncompete agreements. The sweeping rule would have substantial impact on businesses and workers in states like Minnesota, which have long enforced noncompete agreements.
Specifically, the FTC’s proposed rule finds that, in nearly all cases, noncompete agreements with “workers,” including independent contractors, are “an unfair method of competition” and, as a result, a violation of Section 5 of the Federal Trade Commission Act (“FTC Act”). There is a limited exception in the “sale of business” context, which would exempt companies that want to require an owner or partner selling a business from immediately re-entering the field.
FTC Proposed Rule
The FTC’s proposed rule would define the term “non-compete clause” as a contractual term between an employer and a worker that prevents the worker from seeking or accepting employment with a person, or operating a business, after the conclusion of the worker’s employment with the employer. The proposed rule would also clarify that whether a contractual provision is a non-compete clause would depend not on what the provision is called, but how the provision functions.
As the FTC’s proposed rule makes clear, “the definition of non-compete clause would generally not include other types of restrictive employment covenants—such as non-disclosure agreements (“NDAs”) and client or customer non-solicitation agreements—because these covenants generally do not prevent a worker from seeking or accepting employment with a person or operating a business after the conclusion of the worker’s employment with the employer.” However, the FTC’s proposed rule makes clear that the “definition of ‘non-compete clause,’ such covenants would be considered non-compete clauses where they are so unusually broad in scope that they function as such.”
The FTC’s proposed rule provides:
It is an unfair method of competition for an employer to enter into or attempt to enter into a non-compete clause with a worker; maintain with a worker a non-compete clause; or represent to a worker that the worker is subject to a non-compete clause where the employer has no good faith basis to believe that the worker is subject to an enforceable non-compete clause.
There is no exemption for high-wage workers or for specific industries. Again, the only exception is in the sale-of-business context.
In addition to prohibiting employers from entering into non-compete clauses with workers starting on the rule’s compliance date, which is 180 days after the final rule is published, the proposed rule would require employers to rescind existing non-compete clauses no later than the rule’s compliance date.
Under the FTC’s proposed rule, affected employers must provide notice to any affected worker of the rescission. The proposed rule also includes the following sample communication that would comply with the proposed notification requirement:
A new rule enforced by the Federal Trade Commission makes it unlawful for us to maintain a non-compete clause in your employment contract. As of [DATE 180 DAYS AFTER DATE OF PUBLICATION OF THE FINAL RULE], the non-compete clause in your contract is no longer in effect. This means that once you stop working for [EMPLOYER NAME]:
- You may seek or accept a job with any company or any person—even if they compete with [EMPLOYER NAME].
- You may run your own business—even if it competes with [EMPLOYER NAME].
- You may compete with [EMPLOYER NAME] at any time following your employment with [EMPLOYER NAME].
The FTC’s new rule does not affect any other terms of your employment contract. For more information about the rule, visit [link to final rule landing page].
The proposed rule also expressly preempts “any State statute, regulation, order, or interpretation to the extent that such statute, regulation, order, or interpretation is inconsistent with [the proposed rule].”
The proposed rule will be published in the Federal Register and will have at least a 60-day comment period. The FTC will then review any comments before any final rule can be published. Even then, any final rule could not be effective for 60 days after publication.
The FTC’s proposed rule would be a sea change in states like Minnesota where noncompete agreements have long been enforced. The proposed rule is not limited to low-wage workers and preempts any conflicting state or local laws. Not only does the proposed rule prohibit new noncompete agreements (except in the sale-of-business context), but it also voids all existing noncompete agreements and requires employers to notify workers within 180 days of any final rule.
The proposed rule is not final. It also will certainly be subject to legal challenge. Nevertheless, because the FTC’s proposed rule is so sweeping, it is important that employers take note and begin planning for any potential final rule.
We will continue to monitor this situation as it develops.