On January 5, 2023,1 the Federal Trade Commission proposed new rules which would impact nearly thirty million workers and their employers by banning non-compete clauses in all labor contracts.2 Non-compete clauses limit workers from working for competing businesses or starting their own competing business within a certain geographic area or time period. Workers of all levels and industries, including C-Suite executives in the financial industry, electrical engineers in the tech industry, hairstylists, and physicians, are often subjected to non-compete clauses.3 The FTC alleges that the prevalence of non-competes hampers competition between businesses and subsequently reduces wages for workers across the labor market by preventing workers from obtaining higher-paying jobs in the same industry.4 Companies view non-competes as necessary to protect their trade secrets and to ensure that the hours spent training a worker are not wasted.
To the FTC, the prevalence of non-competes and their impact constitutes an unfair method of competition, as prohibited by the Federal Trade Commission Act.5 Accordingly, the FTC has submitted a proposed rule proscribing employers from including non-compete clauses in their labor contracts. The proposed ban is broad both in its definition of non-compete clauses and its effect on past, present, and future non-complete clauses.
The FTC's proposed definition of a non-compete clause is simple: a contractual term that prevents "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."6 Specifically, the test used by the FTC would look at the effect of the clauses in a labor contract, rather than the purpose of the clauses. This proposed definition could be read to include clauses in labor contracts which are neither purported nor intended to be non-compete clauses. And, notably, the noncompete does not need to be a separate contract, it can be a part of an employment agreement or other document. For example, a non-disclosure agreement which is so unusually broad as to effectively prevent a worker from working in the same industry would likely be considered a non-compete clause.7
Not only would these proposed rules ban future non-compete clauses, but they would also force employers to rescind existing non-compete clauses.8 This would require employers sending notices to former workers, informing them that they are no longer bound by their current or past non-compete clause.
The only exceptions to these proposed rules are non-compete clauses from substantial owners, members, or partners in a business who sell substantially all of their ownership interest or substantially all of the business's operating assets.9
These proposed rules follow closely after the FTC took legal action against three companies for unfair methods of competition, and demonstrate that the FTC intends to expand what its self-declared "vigorous[] enforce[ment]" of the FTC Act § 5.10
The proposed rules would be a drastic shift in employment law. However, it is still, at this point, just a proposal. The Commission is currently seeking comments on alternatives to the proposed rules, such as permitting non-compete agreements among senior executives.11 The Commission is also still evaluating the proposed rules' potential impact on small businesses and on the compliance costs associated with the proposed rules' notice requirement.12 Comments on the proposed rules are due on Monday, March 20, 2023.13
Footnotes
1. Research and drafting assistance provided by Kenneth Cooper, law clerk at Eckland & Blando LLP.
2. Federal Trade Commission, Non-Compete Clause Rule, P201200 (proposed Jan. 5, 2023) (to be codified at 16 C.F.R. Part 910, https://www.ftc.gov/system/files/ftc_gov/pdf/p201000noncompetenprm.pdf.
3. Id. at 17.
4. Id. at 3.
5. Id. at 4; 15 U.S.C. 45(a).
6. 16 C.F.R. § 910.1 (proposed Jan. 5, 2023).
7. 16 C.F.R. § 910.1(b)(2)(i) (proposed Jan. 5, 2023).
8. 16 C.F.R. § 910.2 (proposed Jan. 5, 2023).
9. 16 C.F.R. § 910.3 (proposed Jan. 5, 2023).
10. Press Release, FTC Cracks Down on Cos. That Impose Harmful Noncompete Restrictions on Thousands of Workers, FTC (Jan. 4, 2023), https://www.ftc.gov/news-events/news/press-releases/2023/01/ftc-cracks-down-companies-impose-harmful-noncompete-restrictions-thousands-workers.
11. 88 Fed. Reg. 3482, 3484.
12. Id.
13. Id. at 3482.
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