FTC Proposes Sweeping Ban of Employee Non-Competes

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:

• make it illegal under federal antitrust laws for U.S. employers to enter into, attempt to enter into, or maintain non-competes with any workers, including employees, independent contractors, interns, or volunteers, or represent that such workers are subject to covered non-compete clauses;
• ban agreements (other than certain agreements entered into in the sale-of-a-business context) between an employer and worker that restrict the worker from seeking or accepting employment or operating a business post-employment, including other restrictive covenants, such as nondisclosure agreements, that could be considered de facto non-competes; and
• require employers to rescind existing non-competes and actively inform workers that they are no longer in effect.

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.

Key Definitions

The proposed rule contains several key definitions.

• Employer: “Employer” is defined as any person or any business entity (including partnerships, corporations, associations, or other legal entities) that hires or contracts with a worker to work for that person or business entity.
• Non-Compete Clause: The proposed rule defines “non-compete clause” to include any contract between an employer and worker that prevents the worker from seeking or accepting employment with a person, or operating a business, post-employment with the employer. Other types of restrictive covenants, such as nondisclosure agreements, invention assignment, or non-solicits of employees or customers, would generally not be covered by the rule. The proposed rule states, however, that covered non-compete clauses would include any other restrictive covenants that could be used as de facto non‑compete clauses, such as nondisclosure agreements or clauses that require an employee to repay training costs if the employee terminates within a certain period after hire and the clause is not reasonably related to the training costs incurred by the employer.
• Worker: “Worker” is broadly defined to include any person who works for an employer, including employees, independent contractors, interns, volunteers, apprentices, and sole proprietors. “Worker” also includes any person who works for a franchisee or franchisor, but excludes non-competes entered into with franchisees in the context of a franchisee‑franchisor relationship.

Non-Compete Ban

The proposed rule would make it a violation of federal antitrust law for an employer to:

• “enter into or attempt to enter into” a covered non-compete clause with a worker;
• “maintain” a covered non-compete clause; or
• represent to a worker that he or she is subject to a non-compete clause, where the employer has “no good faith basis to believe” that the worker is subject to an enforceable non-compete clause.

Existing Non-Competes

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]:

• You may seek or accept a job with any company or any person—even if they compete with [EMPLOYER NAME].
• You may run your own business—even if it competes with [EMPLOYER NAME].
• You may compete with [EMPLOYER NAME] at any time following your employment with [EMPLOYER NAME].

The FTC’s new rule does not affect any other terms of your employment contract.

Exceptions

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:

• non-competes entered into by a person who is selling a business entity or otherwise disposing of all of the person’s ownership interest in the business entity, or by a person who is selling all or substantially all of a business entity’s operating assets; and
• non-competes entered into with a substantial owner of, or substantial member or partner (holding at least 25% ownership) in, the business entity at the time the person enters into the non-compete clause.

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.

Supersedes Less-Restrictive State Laws

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.

Potential Effective Date

The proposed rule would go into effect 180 days after publication of the final rule in the Federal Register.