FTC proposed rule would ban non-compete clauses

This article is part of a McDonald Hopkins series on developments in restrictive covenant law that will dive deeper into how employers can protect their business interests in light of state - and potentially federal - limitations, strategies for revising employers’ non-compete and non-solicitation agreements, and other topics that will help businesses navigate the changing landscape of employee restrictive covenants.

Readers may recall that on July 9, 2021, President Joe Biden signed an Executive Order encouraging the Federal Trade Commission (FTC) to study “the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.”  

After much anticipation since that Executive Order, on January 5, 2023, the FTC proposed the Non-Compete Clause Rule (the “Proposed Rule”) which, if made final, would categorically ban non-compete clauses in employment contracts. The Proposed Rule would take effect 180 days after (and if) the FTC publishes a final rule and would supersede all state laws that are less restrictive. However, experts anticipate that the Proposed Rule will undergo extensive legal scrutiny from now until the FTC publishes the final version.

What does the FTC's proposed Non-Compete Clause Rule mean for employers?

In the event the Proposed Rule becomes a final rule:

  1. Employers would be prohibited from entering into or attempting to enter into a non-compete clause with a worker; maintaining with a worker a non-compete clause; or representing to a worker that the worker 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.”
  1. Employers would be required to rescind current non-competition agreements in effect at the time the rule becomes final and provide notice to their workers that they are doing so.

Notably, the FTC acknowledges that in some situations, employers still need to be able to protect their confidential information. To this end, the FTC’s Notice that accompanied its Proposed Rule includes several alternatives to a “categorical ban” on non-compete clauses. For example, the FTC indicates it may consider setting different standards for different workers and/or creating a separate, less restrictive standard for executives. Also, the FTC proposes the possibility of establishing a “rebuttable presumption of unlawfulness” for non-competes, which would subject those contractual provisions to greater scrutiny. It is possible that as the Proposed Rule develops, access to an employer’s confidential information could rise to a “good faith basis” for an enforceable non-compete clause.

Although the Proposed Rule does not directly address non-solicitation, non-disclosure, confidentiality, and anti-poaching agreements, the FTC does contemplate situations in which these provisions could be so broadly applied by employers as to functionally serve as non-competition provisions and fall within the purview of the Proposed Rule.

What’s next for employers?

Employers should reevaluate their non-competition agreements and other restrictive covenants to see how this Proposed Rule may impact their workforce. McDonald Hopkins attorneys are available to assist in this process.

Employers should also consider reaching out to their elected officials to discuss any concerns they may have regarding the Proposed Rule. As discussed above, the FTC is considering alternatives to the current language of the Proposed Rule that are less restrictive. The Commission has expressly asked employers to weigh in on this issue. If the FTC issues a final rule, experts anticipate that the final rule will be challenged in court, and the fate of the rule will likely fall into the hands of elected officials in Congress.

McDonald Hopkins will make sure you continue to stay apprised of updates regarding the Proposed Rule, restrictions on non-compete clauses, and development of the “good faith basis” standard.

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