On January 5, 2023, the Federal Trade Commission (FTC) issued a proposed rule broadly seeking to ban non-compete agreements with nearly all U.S. workers, with only limited exceptions. The proposed rule would:
The proposed rule is subject to a 60-day notice and comment period after publication in the Federal Register.
This sweeping rule will almost certainly face political pressure and legal challenges. Whether it will withstand such challenges remains to be seen. Indeed, as reflected in FTC Commissioner Christine Wilson’s January 5, 2023, Dissenting Statement to the proposed rule, the FTC’s rulemaking authority on this issue may even be a source of challenge:
The NPRM is vulnerable to meritorious challenges that (1) the Commission lacks authority to engage in “unfair methods of competition” rulemaking, (2) the major questions doctrine addressed in West Virginia v. EPA applies, and the Commission lacks clear Congressional authorization to undertake this initiative; and (3) assuming the agency does possess the authority to engage in this rulemaking, it is an impermissible delegation of legislative authority under the non-delegation doctrine, particularly because the Commission has replaced the consumer welfare standard with one of multiple goals. In short, today’s proposed rule will lead to protracted litigation in which the Commission is unlikely to prevail.
Prior to today’s announcement, non-compete agreements were traditionally evaluated under antitrust law by balancing the restrictions they imposed on the ability of employees to work elsewhere against the employer’s pro-competitive justifications for the agreements, such as the protection of their confidential information. This standard often meant that employers were successfully able to use non-compete agreements consistent with antitrust law.
The FTC’s proposed rule follows the recent trend of federal and state lawmakers and regulators seeking to limit the use of non-competition and other restrictions on employee mobility. The Department of Justice (DOJ)’s Antitrust Division has been actively pursuing no-poach and stand‑alone non-solicitation agreements between businesses, reaching somewhat mixed results in court. The FTC and DOJ have also recently signed MOUs with various federal labor agencies seeking to advance the directive in President Biden’s July 2021 Executive Order to promote competition in labor markets. The Freedom to Compete Act pending before Congress seeks to ban most non-compete agreements with non-exempt employees covered by the Fair Labor Standards Act. At the state level, there has been a growing trend of states (including Massachusetts, Washington, Illinois, District of Columbia, and Colorado) issuing laws placing limits on the use of non-competes, such as prohibiting non-competes for low-wage workers.
None of those recent laws and enforcement efforts, however, have outlawed or sought to outlaw all non-compete agreements with all workers. The FTC’s proposed rule would go much further by transforming the antitrust treatment of non-competes from a case‑by‑case analysis to a per se prohibition on all non-competes with all workers, except for limited exceptions relating to the sale of a business.
The proposed rule also follows on the heels of the FTC’s January 4, 2023, announcement that it entered into groundbreaking consent orders with three companies, requiring them to release thousands of employees from non-compete agreements that the FTC found violated antitrust law. The order marks the first time that the FTC has entered into consent orders with companies barring them from having employee non-competes.
We are continuing to digest and monitor both of these developments and will follow up soon with further context and thoughts on the potential implications of these developments. For now, we have provided a summary of the proposed rule below. We recommend that interested parties strongly consider submitting comments to the proposed rule.
The proposed rule contains several key definitions.
The proposed rule would make it a violation of federal antitrust law for an employer to:
The proposed rule would require employers to rescind any covered non-compete clause that was entered into before the effective date for the final rule. In addition, employers would be required to provide a written notice to the worker that the non-compete clause is “no longer in effect and may not be enforced against the worker.” Within 45 days of rescinding the non‑compete clause, employers would also have to provide the notice to current and former workers in an “individualized communication” sent in either paper or digital format, such as email or text message.
The proposed rule provides the following model notice that employers can (but are not required to) use:
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]:
The FTC’s new rule does not affect any other terms of your employment contract.
The proposed rule would not apply to certain non-competes entered into in the sale-of-a-business context. The proposed rule contains the following sale-of-a-business exemptions:
The proposed rule also exempts non-compete clauses entered into with franchisees in the context of a franchisee-franchisor relationship. These non-compete clauses would remain subject to compliance with federal antitrust law as well as all other applicable law.
The proposed rule states that it would supersede “any State statute, regulation, order, or interpretation” that it is “inconsistent” with the proposed rule. However, any such law that affords workers greater protections than the proposed rule would not be superseded.
The proposed rule would go into effect 180 days after publication of the final rule in the Federal Register.