FTC Issues Proposed Rule Eliminating Non-Competition Agreements
Last week, the Federal Trade Commission (“FTC”) issued a proposed rule to eliminate all non-competition agreements with employees subject to limited exceptions. While some states, like California, have already nearly abolished non-competition agreements, this rule would impose a significant change on nearly every other state in the nation.
The proposed rule has been posted for public comment and may undergo some changes. Additionally, even if enacted it is expected to be challenged in the courts potentially further delaying its enforcement. Nonetheless, employers should continue to keep tabs on its development because, as described in more detail below, the rule would not only prevent all future non-competition agreements but it would also invalidate current non-compete agreements with employees.
Effect Of The Proposed Rule
If finalized in its current form, the proposed rule would eliminate almost all employment non-compete agreements as unfair methods of competition. Specifically, the proposed rule would ban employers from entering, attempting to enter (presenting a non-competition agreement to an employee), or maintaining a noncompete clause with a worker, as well as representing to a worker that they are subject to a noncompete clause. “Worker” includes anyone—paid or unpaid, employee or contractor—doing work for an employer, regardless of title or seniority. The rule would also require employers to rescind any existing noncompete agreement within 180 days of the rule becoming final and to provide notice to each of its workers that it had done so.
Importantly, the proposed rule not only prohibits non-compete clauses, but also de facto non-compete clauses—provisions that have the “effect of prohibiting the worker from seeking or accepting employment with a person or operating a business [post-employment].” For example, confidentiality (non-disclosure) agreements, non-solicitation agreements, no-recruit agreements, liquidated-damages provisions, and training-repayment agreements may qualify, depending on their scope and effect.
There are a few narrow exceptions listed in the proposed rule: (1) It applies only to the employment relationship (i.e., between an employer and a “worker”), (2) It exempts persons (with at least 25% ownership) who are selling their business, (3) it does not apply to anyone who is not covered by the FTC Act (e.g. non-profit entities, governmental entities acting in sovereign capacities, certain lending institutions, and certain common carriers, and (4) it does not apply to franchisees.
What Should Employers Do Now?
For now, the rule is still in its early stages. Depending on their jurisdiction, employers can continue to enter into non-competition agreements for the time being. However, if the rule becomes final and is upheld by the courts, any agreements entered into will no longer be enforceable unless they meet one of the listed exceptions.
Employers may also submit public comments on the proposed rule on the FTC's Website. All comments are due by March 10, 2023.
We will continue to keep employers aware of any updates or changes to proposed rule as well as provide guidance on compliance when the time comes.
