We have addressed non-compete agreements several times here and it is with good reason – there has been a lot of debate and case law about the scope and enforceability of non-compete agreements. Amy and I have both handled issues relating to non-compete agreements, including drafting and reviewing non-compete agreements, as well as representing clients in litigation involving non-compete agreements. Restrictions on non-competes across the board have become greater over the past few years and it is no surprise that the Federal Trade Commission (“FTC”) has now proposed to ban them.
On January 5, 2023 the FTC proposed a rule that would not only prohibit employers from entering into non-compete agreements with employees, but it would require that employers rescind all existing non-compete agreements. See Non-Compete Clause Rulemaking | Federal Trade Commission (ftc.gov). The rule would also preempt state and local laws. The FTC’s proposed rule would generally prohibit employers from using noncompete clauses and would make it illegal for an employer to:
- Enter into or attempt to enter into a noncompete with a worker;
- Maintain a noncompete with a worker; or
- Represent to a worker, under certain circumstances, that the worker is subject to a noncompete.
The new rule would apply not only to employees, but to independent contractors, and anyone who works for an employer, whether paid or unpaid. In addition to requiring that employers rescind existing non-compete agreements, employers would have to advise employees that any current non-compete agreements are no longer in effect. The proposed rule is broad and currently does not have any carve-outs, such as for executives. Public comment on the rule is open until March 20, 2023.
According to the FTC, about one in five American workers—approximately 30 million people—are bound by a non-compete clause and are thus restricted from pursuing better employment opportunities. See Non-Compete Clause Rulemaking | Federal Trade Commission (ftc.gov) The FTC further states that because non-compete clauses prevent workers from leaving jobs and decrease competition for employment, they lower wages for both workers who are subject to them as well as workers who are not. Id. The Commission estimates that the proposed rule would increase American workers’ earnings between $250 billion and $296 billion per year. Id. Therefore, the FTC is asking for public comment on the proposed ban, as well as proposed alternatives. It will be interesting to learn what the feedback on the proposed rule is and what alternatives are proposed, if any.
The proposed rule does not ban other restrictive covenants, such as non-solicitation agreements or non-disclosure agreements. In comparison to a non-compete agreement, a non-solicitation agreement does not prohibit an individual from seeking employment in any capacity, it simply prohibits an employee from soliciting an employer’s customers and/or employees. Similarly, a non-disclosure agreement only prevents an individual from disclosing an employer’s proprietary information, whether it be customer lists, marketing information, business strategies, etc. Both can be tailored to meet the employer’s needs and are not included in the FTC’s proposed ban.
As set forth herein, the public comment period closes on March 20, 2023. We will continue to monitor any updates and will provide updates here as they develop. We anticipate that some version of the rule will be passed, but whether the rule will be narrowed in any way remains to be seen.
Disclaimer: The information contained in this post is not, nor is it intended to be, legal advice. You should consult an attorney for advice regarding your individual situation. We invite you to contact us and welcome your calls and communications. Contacting us, however, does not create an attorney-client relationship.
