In early January, the Federal Trade Commission (FTC) announced a proposed rule that would ban the use of non-compete agreements by employers in the United States. The rule is a proposed, not final, rule and could face a number of legal challenges that might prevent it from taking effect. Therefore, while employers should be aware that major changes may lie ahead, there is still time to plan and prepare.
The FTC’s proposed rule is sweeping. With only limited exceptions, it would retroactively invalidate all existing non-compete agreements between employers and employees and bar employers from using such agreements in the future. The FTC’s definition of “non-compete” is very broad. It covers not only conventional non-compete agreements – where an employee cannot work for a competitor for a set period of time after their current employment ends – but any agreement 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.” This means that other widely used post-employment restrictions, such as non-solicitation agreements and non-disclosure agreements, could be prohibited by the rule if they are written too broadly.
The proposed rule is also broad in the kinds of workers and employers who would be covered. Non-compete agreements with employees, independent contractors, volunteers, and even interns would be prohibited. On the employer side, the rule would reach “any natural person, partnership, corporation, association, or other legal entity, including any person acting under color or authority of State law”—regardless of size.
Perhaps the most concerning feature of the proposed rule is that it would bar not only future non-compete agreements but would also retroactively invalidate any covered agreements that have already been entered into by employers and employees. Under the retroactive section of the proposed rule, employers would have to rescind existing non-compete agreements and notify the affected worker in writing within 45 days that the agreement has been rescinded and that they are free to have competitive employment in the future. This notification requirement would apply both to current employees and former employees, provided the employer had the worker’s contact information.
The FTC’s proposed rule would also invalidate any state laws that offer workers less protection than the FTC’s rule. In recent years, some states have made efforts to scale back the use of non-compete agreements by employers—such as by limiting them to only exempt employees or employees who earn over a certain amount in wages. Under the FTC’s rule, these types of limitations would be overridden by the federal rule because they do not go far enough in prohibiting the use of non-compete agreements altogether.
The only exception that the FTC’s proposed rule expressly identifies is a non-compete agreement entered into in connection with the sale of a business. The FTC has indicated that a person who is selling all of their ownership interest in a business or substantially all of the operating assets of the business is permitted to enter into a non-compete agreement with the buyer of the business.
Given the broad reach of the FTC’s proposed rule, it is certainly understandable that employers will be concerned. The rule is not yet final, however, and may face challenges. Members of the public may comment on the rule, with comments due in early March, and the FTC may make changes to the rule based on those comments. There is then another 60-day period before the rule is published in final form, followed by a 180-day period for employers to comply with the rule. At a minimum, therefore, employers likely have until at least the end of 2023 before the rule goes into effect. Moreover, any final rule will almost certainly be challenged in court by litigants who will argue, among other things, that the FTC has exceeded its authority under existing Supreme Court precedent. The current composition of the Supreme Court also suggests that a majority of the Justices would be receptive to arguments that the FTC overreached its authority.
Given what is at stake if the proposed rule goes into effect, employers who utilize non-compete, non-solicitation, and non-disclosure agreements should take advantage of the time they have over the next few months to audit their agreements and look for provisions that might be invalidated by the FTC. Businesses with questions about how the proposed rule might affect their employment practices are advised to seek legal counsel.