The FTC Proposes a Rule Banning Most Non-Compete Agreements in the United States

On January 5, 2023, the Federal Trade Commission (FTC) voted 3-1 on proposed regulations that, if upheld, would ban employers from imposing non-competition agreements on their employees. Relying on Section 5 of the FTC Act, the FTC concluded that “non-compete clauses reduce competition in labor markets, suppressing earnings and opportunity even for workers who are not directly subject to a non-compete.” Commissioner Wilson dissented, stating that the FTC lacks the authority to engage in rulemaking, particularly with consequences of this significance. 

Non-compete agreements are defined in the proposed rule as “contractual terms between an employer and a worker that prevent 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.”  These types of agreements are regularly used by businesses, particularly in the government contracting industry, to protect the business from employees leaving to start their own competing business or going to work for a competitor. One of the main concerns in these situations is that the departing employee will use the specialized knowledge, trade secrets, and proprietary information they learned during their employment with the business they are leaving and use that information to the detriment of their former employer. 

What Does the Proposed Rule Say?

If finalized, the FTC’s rule would ban ALL non-compete agreements, regardless of reasonableness, in a complete departure from “hundreds of years of legal precedent that employs a fact-specific inquiry into whether a non-compete clause is unreasonable in duration and scope, given the business justification for the restriction,” as noted by dissenting Commissioner Wilson. The proposed rule also flatly rejects common business justifications for non-competition provisions, such as the protection of intellectual property, trade secrets, and other proprietary and competitively sensitive information, claiming that other, less restrictive alternatives exist to protect those interests. Furthermore, the rule would not only apply to new agreements and prevent enforcement of current ones but would also require the rescission of existing non-compete agreements and compel notice to be provided to employees that all such agreements were no longer enforceable. The proposed rule also explicitly states that it preempts state laws, regulations, orders, or interpretations to the extent they are inconsistent with the FTC’s rule, unless such other laws provide “greater protection” to workers. 

The only proposed exception to the rule’s broad prohibition on non-compete agreements is for those agreements entered into in connection with the sale of a business. However, even under those circumstances, the exception only applies to individuals with a 25% or greater ownership interest in the business being sold. Clearly, the FTC’s proposed rule presents new considerations and risks for companies that currently use or intend to use non-compete clauses in the future. 

So, What Should You Do Now?

We recommend that you exercise your right to submit comments on the Proposed Rule, which are being accepted by the FTC through March 10, 2023. In fact, the agency is specifically seeking comments as to whether the proposed regulation should apply uniformly to all workers, including executives, highly paid franchisees, and hourly, lower wage-earning workers. The FTC is also seeking comments on whether there should be a categorical ban on all non-compete clauses or a rebuttable presumption of unlawfulness. In an unusual move, the FTC also announced that it will host a public forum on February 16, 2023, with a series of speakers and business owners who will share their experiences with non-compete agreements, followed by an opportunity for the public to comment via live stream.

Until we know the fate of this proposed rule, companies that currently have non-competition agreements in place should review those documents and their policies regarding their use and enforcement. The reasons for requiring these restrictive covenants should be documented in case some non-compete provisions are still permitted under the final rule. We recommend ensuring that your agreements are narrowly tailored with regard to duration (one-to-two-year limitations are more defensible than longer ones), geography (must be reasonable and have business justifications), and the types of activities prohibited (should be limited to direct competitors). Your review of existing non-compete agreements should also evaluate which employees are covered, as those that apply to “lower-level” employees are scrutinized more heavily than those that only apply to more senior executives and business owners. 

Since the proposed rule does not specifically address non-solicitation agreements, it is also highly recommended that businesses implement or strengthen existing agreements to protect against the solicitation of their customers and other employees. While you are at it, ensure that your non-disclosure and confidentiality agreements are also bolstered to prevent departing employees from using any of your trade secrets or confidential information if they work for a competitor or start their own competing business. 

Although the FTC’s rule is not final, employers should be aware of continued efforts by the Federal Trade Commission to abolish non-competition agreements entirely. In fact, this view of non-competes as an “exploitative practice” is nothing new and has strong support from the current Administration. In July 2021, President Biden issued an Executive Order making it clear that his Administration would encourage the FTC to ban or substantially limit non-compete agreements. To that end, the FTC and the Department of Justice have been investigating and bringing more enforcement actions against businesses where they believe agreements are restraining competition in labor markets. Moreover, in his February 7, 2023, State of the Union address, President Biden claimed that his Administration had exposed the problems with non-competes which previously would have prevented “…a cashier at a burger place… [from] walk[ing] across town and tak[ing] the same job at another burger place [to] make a few bucks more.” We cannot help but note, as have those who fact-checked this claim, that non-compete agreements for fast food workers like cashiers have never been a thing. However, the intent of the Administration in “exposing” what they deem to be “exploitative practices” is abundantly clear. 

The full text of the FTC Rule can be found here. If the currently proposed rule or another version is ultimately finalized, it will take effect 180 days after such Final rule is published in the Federal Register. 

On February 16, 2023, the FTC hosted a public forum that included comments from the FTC Commissioners, a panel discussion, and comments from the public. As expected, those present from the business community strongly opposed the proposed ban and argued, among other things, that the ban is overly broad. Unfortunately, the overall tenor of the FTC in the forum leads us to believe that it is unlikely that the FTC will back away from pushing its proposed rule forward.

The extent of the scope of the FTC’s proposed rule is indeed surprising, as it covers all types of workers (even interns, independent contractors, apprentices, and sole proprietors) and, as stated earlier, requires companies to rescind all existing agreements of this nature (and to provide notice to current and former employees that such agreements are rescinded). 

Our consultants are available to assist you in reviewing your current agreements and provide guidance on protecting your proprietary and confidential information going forward.