January 6, 2023
On January 5, 2023, the Federal Trade Commission (FTC) issued a Notice of Proposed Rulemaking (NPRM) proposing the “Non-Compete Clause Rule.” This NPRM occurred one day after the FTC announced that it secured consent decrees pursuant to the Federal Trade Commission Act (FTC Act) forcing three companies to abandon use of non-competition clauses.
The rule as proposed would in effect ban the use of non-compete clauses involving workers (NCCs) in almost all circumstances and would nullify and rescind all non-compete agreements with workers currently in effect. The NPRM will be open for comments for 60 days from the date it is filed in the Federal Register (which should be relatively soon). The FTC invites comments on the specifics of the Proposed Rule, potential alternatives, as well as the FTC’s reasoning.
The FTC grounds its authority in Section 5 of the FTC Act which declares “unfair methods of competition” unlawful. The Proposed Rule would deem the attempt to use, the entrance into, the maintenance of, or, in certain circumstances, the representation that a worker is subject to an NCC, a method of unfair competition and a violation of Section 5. Of particular note (and concern for employers) is that other traditional employment contractual commitments, such as non-disclosure agreements, could be subject to the proposed Rule, and hence the Rule’s prohibition, if the FTC finds that those commitments “functionally operate as an NCC.” The proposed Rule would preempt state law.
The ban would be retroactive and nullify all existing NCCs. The Rule would require affirmative recission of all NCCs in effect with notice to the worker within 180 days of the effective date of the final rule. Employers may institute other restrictive covenants (such as non-solicitation or non-disclosure agreements) in place of NCCs, so long as these new agreements do not effectively act as an NCC and are reasonably tailored.
The Proposed Rule provides for a limited exception. In an agreement between a buyer and a seller, the seller of a business (or of all the seller’s ownership interest in a business) or the seller of substantially all of a business’s assets could be subject to an NCC provided that the restricted seller holds at least 25% equity interest at time of the sale. These non-compete agreements remain subject to antitrust law and other applicable law. This is the only exception. There is no exception for workers in a position to receive highly confidential trade secrets or other highly proprietary technical, financial, or other information.
Expect this rulemaking to see a lot of comment and discussion. The FTC acknowledges it is proposing a sweeping categorical ban of a commonly used and widely accepted employment term. Commissioner Wilson, the sole Republican FTC Commissioner at present, wrote a scathing dissent to the vote to approve the NPRM. She notes, among other things, that it “represents a radical departure from hundreds of years of legal precedent that employs a fact-specific inquiry into whether a non-compete clause is unreasonable in duration and scope, given the business justification for the restriction.” Her dissent will be a roadmap for those seeking to oppose or challenge the proposed Rule, and she encourages comments as the best way to impact the process.
The FTC will likely pursue other sweeping changes in the labor market. While the FTC and DOJ have focused on the labor market over the last few years, prior efforts focused more on allegedly “naked” competitive restraints between employers such as no-poach or wage agreements.
If you have any questions about the FTC’s NPRM, please contact Erin Glavich, at [email protected] or (202) 663-7830.