Federal Trade Commission Proposes Banning Noncompete Clauses

On January 5, 2023, the Federal Trade Commission (FTC) proposed a radical and unprecedented rule that would prohibit employers from entering noncompete clauses with their workers. This follows the initiation of a landmark FTC enforcement action aimed at noncompete clauses and a larger crackdown on what the FTC perceives as unfair restrictions on competition. According to the FTC, approximately 30 million American workers are currently bound by noncompete clauses. The agency asserts that these clauses harm workers, whether they are subject to a noncompete agreement or not, because the practice allegedly hinders competition, discourages employees from leaving their jobs, and drives down wages.

Restrictions and Exceptions

The proposed rule broadly prohibits employers from entering, attempting to enter, or maintaining noncompete clauses with their employees, paid and unpaid workers, interns, externs, independent contractors, volunteers, and apprentices. For purposes of the rule, the FTC defines noncompete clauses as contractual terms between an employer and employee that prevent the employee from seeking or accepting alternate employment, or running a business, after the termination of their relationship with the employer. The rule does not seek to ban other restrictive employment covenants such as non-disclosure agreements or non-solicitation agreements; however, any agreement that is written broadly enough to effectively prohibit the employee from working in the same field with a different employer would be prohibited.

In addition to banning future noncompete clauses and agreements, the proposed rule is also retroactive, meaning it would force employers to rescind existing noncompete clauses and notify workers that any current noncompete clause or agreement will not be held against them. These notifications must be in individualized communications transmitted no later than 45 days after the rescission of the noncompete clause. The only one exception to the proposed rule would allow non-compete clauses between a seller and buyer of a business or business interest, so long as the restricted person is a substantial owner, member, or partner of the business when they execute the noncompete agreement. The rule defines a substantial owner, member, or partner of a business entity as one who holds at least 25% ownership interest.

Bottom Line

Before this rule becomes effective, it must first go through a public comment period. The FTC will accept feedback on the rule for 60 days following its publication in the Federal Register. Though the rule may yet undergo changes, it is important to be aware of the FTC’s increased focus on unfair competition and the impact that this rule could have on business and employment going forward.

It is very likely that the proposed Rule will be challenged in the courts and it appears on its face to go well beyond the authority of the FTC. The fact that the rule would abrogate the laws of almost every state and have a retroactive effect also makes its legality highly questionable. With that being said, prudence dictates that employers should prepare for the worst and assume this rule will go into effect. Employers should immediately seek to strengthen their non-solicitation provisions and non-disclosure agreements. Employers such as pharmaceutical and technology companies where the risk of trade secret theft are high should limit the number of employees who have access to trade secrets as best as they can.

For more information and guidance to deal with labor, employment, and related regulatory matters, please contact Partner Harris S. Freier, Esq. via email here or call 973.230.2079.