FTC Proposes New Rule Banning Non-Compete Clauses
January 5, 2023
The Federal Trade Commission proposed a sweeping new rule that would prohibit employers from imposing non-competes on workers, which is broadly defined to include employees, independent contractors, interns, and volunteers.
The proposed rule, which undoubtedly will face legal challenges, calls non-competes "an unfair method of competition" and would prohibit employers from entering into or attempting to enter into a non-compete clause with a worker. It would also require employers with existing non-competes to rescind them no later than the compliance date, 180 days after the final rule is published.
Prohibition Would Extend to Contractual Terms that Function as Non-Competes
It would not matter what a contract provision is called, but how it functions. The FTC explains that non-disclosure agreements and client or customer non-solicitation agreements generally would not fall under this new rule unless such restrictions were drafted in such a way that they prevented a worker from seeking or accepting employment or operating a business after the worker’s employment with the employer ends.
Employers would be required to give notice to workers "in an individualized communication" on paper or through an email or text within 45 days of rescinding the non-compete clause. Model language provided in the proposed rule suggests that employers tell workers subject to a non-compete that "a new rule…makes it unlawful for us to maintain a non-compete clause in your employment contract," and states the clause will no longer be in effect after the 180-day period following publication of the final rule. An employer need not use the model language but must communicate that the worker’s non-compete clause is no longer in effect and will not be enforced.
In addition to providing notice to current workers covered by a non-compete, the proposed rule states that the employer must provide notice to a former worker, "provided that the employer has the worker's contact information readily available."
Implications for State Laws
The new rule would supersede any state law that is inconsistent with it, though if a state has a more stringent requirement for employers, it would remain in effect.
There is one exception to the proposed rule: it would not apply to a non-compete that is entered into by a person who is selling a business or otherwise disposing of all of their ownership interest in the business, or by a person who is selling all or substantially all of a business's operating assets, when the person restricted by the non-compete is a substantial owner, member, or partner in the business entity at the time the person enters into the non-compete. Such agreements will still be subject to scrutiny by the FTC and DOJ Antitrust Division, however.
The FTC based the proposed rule on a preliminary finding that non-competes constitute an unfair method of competition and therefore violate Section 5 of the Federal Trade Commission Act.
What Happens Next
The public has 60 days to comment on the proposed rule. At that time, the FTC will review the comments and may make changes before the rule is finalized. One important topic identified by the FTC for comment is whether senior executives should be exempted from the rule, or subject to a rebuttable presumption rather than a ban.
We can reasonably expect this rule to be the subject of legal challenges that will no doubt delay its implementation.
Steps Employers Should Take
- Ensure that you are adequately protecting your trade secrets, intellectual property and confidential information through practical, technical, and contractual measures.
- Ensure your employment contracts include a severability clause.
- Consider whether your interests can be adequately protected by a non-solicitation agreement, and work with legal counsel to ensure that the agreement is drafted narrowly so it is not construed as a non-compete under the proposed rule.
We Can Help
If you have questions about how to protect your company’s legitimate business interests in the midst of this changing regulatory landscape, please contact Maslon's employment and non-compete attorneys.