FTC Proposes Blanket Ban on Noncompete Agreements
The Federal Trade Commission (“FTC”) created waves by announcing a proposed rule last week that—if adopted and survives legal challenge—would largely prohibit employers from imposing or enforcing non-compete agreements on their workers. In a breathtaking flex of regulatory muscle, the FTC’s unprecedented proposal would create a nationwide standard that would radically modify the current landscape of restrictive covenants and significantly limit the post-termination protections currently available to many employers. The proposed rule boldly follows the Biden Administration’s executive order, which we addressed last year, that encouraged the FTC to exercise whatever legal authority it has to “curtail the unfair use of non-compete clauses” that “may unfairly limit worker mobility”.
The proposed rule would result in a massive change to non-compete agreement drafting, usage and practice in most states. Characterizing non-compete agreements as an “unfair method of competition” that violates the Federal Trade Commission Act, the FTC’s proposed rule is remarkably broad in application and scope:
- It defines “non-compete clause” as a “contractual term between an employer and a worker that prevents the workers from seeking or accepting employment with a person or operating a business after the conclusion of the worker’s employment with the employer.”
- Labeling doesn’t matter and workarounds will not be effective – the FTC’s non-compete definition is functional in nature and prohibits agreement terms that have the “effect” of restricting work for a competitor following the termination of employment (e.g., broadly drafted non-disclosure or non-solicit provisions).
- The proposed rule not only prohibits employers from entering into or attempting to enter into new non-compete agreements but also a) requires employers to rescind currently existing non-compete agreements and provide notice of the rescission to current and former employees; and b) prohibits employers from representing that workers are subject to enforceable non-compete provisions.
- The proposed rule would cover virtually all workers, including employees, contractors, and interns.
- The single current exception to the proposed rule would be limited to non-compete provisions in the context of the sale of a business for sellers who have a “substantial” ownership in the sold business.
- The FTC’s proposal would create a national, relatively unified standard by superseding and preempting any inconsistent state statute, regulation, or interpretation.
The FTC’s proposed rule is an unprecedented expansion of the Biden Administration’s stated goal to target unfair methods of competition. It will face significant hurdles before it can be promulgated or enforced. First, the proposed rule will go through the typical regulatory rulemaking process and is now subject to a 60 day comment period before it is finalized. Not only could the proposed rule be modified before it is finalized, but employers are expected to have up to 180 days to comply with the final rule.
Second, the final rule will undoubtedly be subject to immediate legal challenges. The United States Chamber of Commerce has already mobilized resources against what it termed a “blatantly unlawful rule”, explaining that “Congress has never delegated the FTC anything close to the authority it would need to promulgate such a competition rule.” Like other recent far reaching agency proposals and orders that have been legally challenged, we may have to wait for quite some time before the courts bring clarity to what is otherwise going to be a period of significant uncertainty for employers who have relied on and/or used non-competition agreements in the past.
At this time, employers are best advised to be mindful to these potential changes and be prepared for the possibility that restrictive covenants will need to be significantly modified in the future. In the meantime, a cautious employer should engage with intentionality before offering additional consideration or bonuses for signing new restrictive covenants because the contemplated ban under the proposed FTC rule may not warrant a significant investment in getting new non-compete agreements signed. In any case, attorneys on Nexsen Pruet’s employment and labor law team are available to advise on non-competes and other contractual provisions that can help protect against unfair competition and assist in navigating the uncertainty going forward. Of course, we will continue to monitor these developments closely and report out on material changes.
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