FTC Proposes Ban on Noncompete Clauses with Workers

On January 5, 2023, the Federal Trade Commission (FTC) proposed adopting a new rule that would forbid an employer to enter into, attempt to enter into, or maintain, a noncompete clause with any worker. The proposed rule would expressly supersede any state law to the extent it is inconsistent with the rule, unless it provides even greater protection to workers.

What is a noncompete clause?

• Under the FTC's proposed rule, the term "non-compete clause" means "a contractual term between an employer and a worker 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."
• While the FTC's definition would generally not include nondisclosure agreements and client or customer non-solicitation agreements, the term "non-compete clause" would include a contractual term that has the effect of prohibiting 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, such as a nondisclosure agreement that is written so broadly that it effectively precludes the worker from working in the same field. 

Who is directly affected by this rule?

• The FTC estimates that about one in five American workers – approximately 30 million people – are bound by a noncompete clause.
• The proposed rule would apply to any person or entity that "hires or contracts with a worker to work for" the person or entity and would protect any person who “works, whether paid or unpaid, for an employer.” The proposed rule makes clear that the rule protects not only employees, but also individuals who are independent contractors, externs, interns, volunteers, apprentices, and sole proprietors who provide services to a client or customer, among others. 

What would employers be required to do under this rule?

• The proposed rule primarily would require employers to refrain from entering into, attempting to enter into, or maintaining a noncompete clause with any worker.
• The proposed rule would also require each employer that has already entered into a noncompete clause with a worker to rescind the noncompete clause within 180 days after official publication of the rule and contains detailed provisions addressing how the employer must notify such workers.

Are there exceptions to the proposed rule?

• The proposed rule would not apply to, and thus would not prohibit, a noncompete clause that is entered into by a person who is selling a business entity or otherwise disposing of all of the person's ownership interest in the business entity, or "by a person who is selling all or substantially all of a business entity's operating assets," where the person is an owner, member, or partner holding at least a 25% ownership interest in the business entity.

Why is the FTC proposing this rule?

• While the FTC Act declares unfair methods of competition to be unlawful and directs the FTC to prevent persons and entities from using unfair methods of competition, it does not define what constitutes unfair methods of competition, which has been left to the FTC and the courts.
• In proposing the rule, the FTC explained that research in recent decades has shown that the use of noncompete clauses by employers has negatively affected competition in labor markets, resulting in reduced wages for workers across the labor force—including workers not bound by noncompete clauses, and that, by suppressing labor mobility, noncompete clauses have negatively affected competition in products and service markets as well.
• The FTC estimated that the proposed rule would increase worker earnings by between $250 billion and $296 billion per year. 

What’s next?

• The FTC has invited the public to submit comments until March 10 on its proposed rule, after which it may make changes in a final rule.
• On the same day the proposed rule was announced, the U.S. Chamber of Commerce issued a statement calling the FTC's action "blatantly unlawful" and stating "Congress has never delegated the FTC anything close to the authority it would need to promulgate such a competition rule."
• Given the significance of the proposed rule, it seems likely there will be many comments on it and, once the FTC adopts a final rule, extensive litigation, with ultimate resolution by the U.S. Supreme Court.

Employers who currently benefit from noncompete clauses may do well to begin considering what measures they may take to protect their interests, such as seeking appropriate nondisclosure and/or non-solicitation of customer or other clauses with their workers that would not be prohibited; introducing greater internal security measures with respect to critical confidential information; and/or exploring other contractual or operational approaches that would be lawful under the proposed rule.