FTC Issues Proposed Rule to Ban Non-Compete Agreements

Last week the Federal Trade Commission ("FTC") issued a Notice of Proposed Rulemaking ("Proposed Rule") on January 3, 2023 that—if made final—would prohibit employers from using non-compete clauses.  This Proposed Rule comes 18 months after President Biden signed an Executive Order on July 9, 2021 directing the FTC to consider using its rulemaking authority to study and "curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.”

In the event the Proposed Rule becomes final it would:

• Categorize non-compete clauses as an unfair method of competition;
• Ban employers from entering into non-compete clauses and "de facto" non-compete clauses with all "workers;"
• Require employers to rescind existing non-compete clauses with written notification to the worker; and
• Preempt all state laws providing lesser protections.

A de facto non-compete clause is one that is the functional equivalent of a non-compete clause.  Examples of de facto non-compete clauses referenced in the Proposed Rule include non-disclosure agreements that are broad enough to effectively preclude a worker from working in the same field and training reimbursement agreements that are not reasonably related to the costs incurred by the employer for training.  By banning de facto non-compete clauses, the Proposed Rule seeks to prevent employers from using alternative agreements for purposes of evading the non-compete ban.

Workers is defined broadly in the Proposed Rule to include not only employees but also "independent contractors, externs, interns, volunteers, apprentices, and sole proprietors who provide a service to a client or customer," regardless of whether paid or unpaid.

The Proposed Rule would not apply to franchisee-franchisor agreements or agreements between buyers and sellers of a business.  Both of these types of agreements would continue to remain subject to antitrust law. 

Next Steps

The Proposed Rule is now published in the Federal Register for public comment.  The comment period is open through March 10, 2023.  The Proposed Rule, fact sheets, and public comment submission form can be found on the FTC's website here:  Non-Compete Clause Rulemaking.

The FTC is soliciting opinions on certain key issues.  For instance, the FTC is considering whether senior executives should be exempted from the rule, or subject to a rebuttable presumption rather than a ban; and whether low- and high-wage workers should be treated differently.  Specifically: (1) whether the rule should impose a categorical ban on non-compete clauses or a rebuttable presumption of unlawfulness; and (2) whether the rule should apply uniformly to all workers or whether there should be exemptions or different standards for different categories of workers?  See the full text of the Non-Compete Clause Rule at 16 CFR Part 910 (2023), p. 136–52.

The FTC must review and respond to all “relevant matter presented” during the public comment period before publishing a final rule.  The FTC may make changes to the Proposed Rule based on the comments, but is not required to do so.  The publication of the final rule will include an analyses of any relevant data or other materials submitted during the public comment period.  If opposition to the proposed rule is exceptionally large, the FTC may decide to make substantial modifications to the Proposed Rule and start the process over by publishing a new notice and opening a new comment period.

What Does this Mean for Employers?

If the Proposed Rule survives the Public Comment period as-is, employers would be required to come into compliance within 180 days of publication of the final rule.  The Proposed Rule could be finalized by the end of the year; but court challenges to the final rule are likely to follow.  FTC Commissioner Christine S. Wilson published a Dissenting Statement explaining some of the legal challenges the Proposed Rule may face.  That being said, it is possible that the Proposed Rule will not survive the implementation process due to either public comments or potential legal challenges, but that is far from certain at this early stage.  Employers can be pro-active by identifying and reviewing existing agreements that may be impacted if the Proposed Rule ever were to become final.  Employers may also want to explore the development of tailored agreements that protect confidential and proprietary information, trade secrets, and other legitimate business interests without acting as a de facto non-compete agreement.

If you have any questions or concerns regarding the Proposed Rule to ban non-compete agreements, please contact the MacDonald, Illig, Jones & Britton LLP Labor & Employment team.

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