On January 5, 2023, the Federal Trade Commission (“FTC”) proposed a far-reaching rule that would bar employers in the United States from imposing noncompete agreements on their employees. If adopted, this new rule would effectively make noncompete agreements a thing of the past, causing employers to seek alternative methods to protect themselves. As a business owner, what do you need to know?
What does the proposed rule ban?
Under the FTC’s proposed rule, a non-compete clause would be defined 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 entirely prohibit employers from requiring employees to sign a non-compete agreement. In addition, the proposed rule would also require employers to rescind existing non-compete agreements. The rule would require an employer that rescinds a non-compete clause to provide notice to the worker that the non-compete clause is no longer effective and cannot be enforced against them.
Accordingly, the FTC’s proposed rule would make it illegal for an employer to:
- Enter into or attempt to enter into a noncompete with an employee;
- Maintain a noncompete with a worker; or
- Represent to a worker under certain circumstances that the worker is subject to a noncompete.[1]
Are there any exceptions to the proposed rule?
The proposed rule contains a narrow exception for when an individual is selling a business. For this exception to apply:
- the owner, member, or partner subject to the non-compete agreement must hold at least a 25 percent ownership interest in the business entity at the time they entered into the non-complete clause, and
- be selling either their ownership interest or substantially all of the business entity’s assets.
When would this rule go into effect?
The FTC is currently accepting public comments on the proposed rule, which can be submitted here. The FTC voted to extend the public comment period until April 19, 2023. The original deadline for submitting comments was March 20. Once the comment period is closed, the FTC will review the comments and make any changes they deem necessary, then move to make the rule final. If the rule is finalized, it will go into effect 180 days after the final version is published.
Is the rule expected to face legal challenges?
It is anticipated that the proposed rule will the be the subject of legal challenges. Coinciding with the FTC’s recent statement which “restore[d] the agency’s policy of rigorously enforcing the Federal Ban on unfair methods of competition,”[2] the FTC has utilized Section 5 of the Federal Trade Commission Act as its justification for the proposed rule. While Section 5 does allow the FTC to regulate “unfair methods of competition,” this section has historically been utilized by the FTC on a case-by-case basis. Here, the FTC is attempting to use Section 5 for the creation of a broad rule that will impact employers across the country. Accordingly, it can be expected that the proposed rule will be challenged by employers arguing that the FTC overstepped its authority in the creation of the rule. Further, a dissenting member of the FTC provided various ways that the proposed rule will be challenged.[3]
How would the rule be enforced?
If the proposed rule is finalized and takes effect, the FTC can enforce the rule by issuing a complaint in situations in which it believes it has been violated.[4] The respondent may either elect to settle or contest the charges. If contested, the complaint is adjudicated in front of an administrative law judge (“ALJ”). Once the adjudication is concluded, the ALJ will issue an “initial decision” setting forth their findings, and recommending either entry of an order to cease and desist or a dismissal of the complaint, which either party may appeal. If the order is finalized and violated, the FTC may seek several remedies in court including civil penalties, injunctions, and such other and further equitable relief as deemed appropriate.
What can you do as a business owner?
Although the proposed rule would likely do away with non-compete agreements, there are other tools a business owner can use to protect their goodwill, confidential information, and other business relationship and interests. Please contact us for more information and guidance.
For additional information visit:
https://www.ftc.gov/news-events/news/press-releases/2023/01/ftc-proposes-rule-ban-noncompete-clauses-which-hurt-workers-harm-competition
The authors would like to acknowledge Joseph Townsend for his research and writing assistance.
[1] FTC Proposes Rule to Ban Noncompete Clauses, Which Hurt Workers and Harm Competition, Federal Trade Commission (Jan. 5, 2023), https://www.ftc.gov/news-events/news/press-releases/2023/01/ftc-proposes-rule-ban-noncompete-clauses-which-hurt-workers-harm-competition.
[2] FTC Restores Rigorous Enforcement of Law Banning Unfair Methods of Competition, Federal Trade Commission (Nov. 10, 2022), https://www.ftc.gov/news-events/news/press-releases/2022/11/ftc-restores-rigorous-enforcement-law-banning-unfair-methods-competition.
[3] Dissenting Statement of Commissioner Christine S. Wilson Regarding the Notice of Proposed Rulemaking for the Non-Compete Clause Rule, Federal Trade Commission (Jan. 5, 2023), https://www.ftc.gov/system/files/ftc_gov/pdf/p201000noncompetewilsondissent.pdf.
[4] A Brief Overview of the Federal Trade Commission’s Investigative, Law Enforcement, and Rulemaking Authority, Federal Trade Commission (May 2021), https://www.ftc.gov/about-ftc/mission/enforcement-authority.