FTC Proposes Rule Banning Non-Compete Agreements

Last week, the Federal Trade Commission (FTC), issued a Proposed Rule that, if finalized, would broadly prohibit U.S. employers from using non-compete agreements. While many states have previously enacted legislation prohibiting or limiting non-compete agreements to some degree, the Proposed Rule is notable for its national scope and severe limitations.

The Proposed Rule specifically prohibits the following: (1) entering into or attempting to enter into a non-compete clause with a worker, (2) maintaining a non-compete clause with a worker, and (3) representing to a worker that the worker is subject to a non-compete clause where the employer has no good faith basis for the representation. A “non-compete clause” is defined by the Proposed Rule 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 apply broadly to most employers, though there may be some types of employers not encompassed by the FTC’s jurisdiction.

The FTC’s Notice of Proposed Rulemaking (“NPRM”) states that the definition of a non-compete clause would generally not include other types of restrictive covenants, such as non-disclosure agreements and client non-solicitation agreements, because those covenants generally do not prevent a worker from seeking or accepting subsequent employment. The NPRM also suggests that the Proposed Rule does not affect the enforceability of employee non-solicitation agreements. However, the Proposed Rule does specify that a non-compete clause would include a contractual term that functions as a de facto non-compete by having the effect of prohibiting the worker from seeking or accepting employment or operating a business after leaving employment with the employer. For example, a nondisclosure provision or non-solicitation clause that is written so broadly that it effectively precludes the worker from working in the same field after employment may be a de facto non-compete prohibited by the Proposed Rule.

The Proposed Rule defines “worker” broadly to mean a natural person who works, whether paid or unpaid, for an employer. A worker includes an employee, independent contractor, extern, intern, volunteer, apprentice, or a sole proprietor who provides a service to a client or customer. There are two limited exceptions in the Proposed Rule: non-competes would still be permissible between a franchisee and franchisor and if entered into by certain parties attendant to the sale of a business.  

If the Proposed Rule is finalized, non-compete agreements entered into prior to effective date of the rule would also be unenforceable. Specifically, an employer that had previously entered into a non-compete clause with a worker prior to the rule taking effect would be required to rescind the non-compete clause and provide notice to the worker that the non-compete is no longer in effect and is unenforceable. The notice obligation would apply to current workers and former workers, provided that the employer has the contact information for the former worker readily available.

The Proposed Rule is seen as a key pilar of President Biden’s competition policy agenda, and President Biden specifically called on the FTC to undertake rulemaking on non-compete clauses. Last week the FTC also announced enforcement actions against several employers over their use of non-compete agreements, further signaling that non-compete agreements are an enforcement priority for the FTC.

However, at this stage it is unclear whether, and in what form, the Proposed Rule will be finalized.  The FTC will be soliciting public comments on the Proposed Rule for 60 days following publication of the Proposed Rule in the Federal Register. The FTC has specifically requested public comments on the following topics: (1) whether senior executives should be exempt from the non-compete prohibition; (2) whether instead of a categorical ban, all non-competes should be subject to a rebuttable presumption of unlawfulness, like many state laws on the topic; and (3) whether low-wage and high-wage workers should be treated differently under the rule, which is also an approach taken by some state non-compete legislation. 

Once the Proposed Rule is finalized, compliance would be required within 180 days of the publication of the final rule. The Proposed Rule will likely be revised to some degree following the receipt of public comments, and also may potentially be subject to legal challenge on procedural grounds. As a result, employers should consider waiting to adjust their non-compete agreements until the Final Rule is published. However, employers would be wise to begin evaluating the areas of their operations where the enforcement of non-competes would be the most vital should changes be required and consider reviewing other restrictive covenants, such as non-solicitation and confidentiality agreements, to ensure they are adequately and appropriately protecting key business interests.

We will continue to monitor for developments regarding the Proposed Rule. If you have any questions regarding your restrictive covenants, please contact Amanda M. Baker at abaker@fglawllc.com, or any attorney at the firm.

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