In July of 2021, as part of “a whole-of-government effort to promote competition in the American economy,” President Biden issued an Executive Order on Promoting Competition in the American Economy, encouraging the Federal Trade Commission (FTC) to ban or limit non-compete agreements.
On January 5, 2023, the FTC delivered and proposed a rule that would essentially ban all employee non-competes, such as restrictive covenants that contractually prohibit an employee from competing against a former employer. In its press release accompanying the proposed rule, the FTC explained its “preliminary finding that non-competes constitute an unfair method of competition and therefore violate Section 5 of the Federal Trade Commission Act” and estimated “that the new proposed rule could increase wages by nearly $300 billion per year” for 30 million Americans.
The FTC is currently seeking public comment on its proposed rule (subchapter J, Part 910), which provides:
“it is an unfair method of competition for an employer to enter into or attempt to enter into a non-compete clause with a worker; maintain with a worker a non-compete clause; or represent to a worker that the worker is subject to a non-compete clause where the employer has no good faith basis to believe that the worker is subject to an enforceable non-compete clause.”
The proposed rule defines a non-compete clause as “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.” It also includes a functional test to determine whether a contractual term is considered a de facto non-compete clause regardless of the terminology used; specifically, the proposed rule would prohibit any “contractual term that is a de facto non-compete clause because it 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.”
Notably, the proposed rule carves out non-competes connected to the sale of a business, as well as non-disclosure, non-solicitation, and other agreements that prohibit an employee from using confidential information against a former employer, so long as they are not written so broadly as to effectively preclude working in the same field after the conclusion of the worker’s employment with the employer. By way of example, the proposed rule notes that certain training repayment agreements that are not reasonably related to the costs the employer incurred for training the worker may be de facto non compete agreements. Entities excluded from the coverage of the FTC Act and, therefore, which are excluded from the proposed rule include certain banks, savings and loan institutions, federal credit unions, common carriers, air carriers, and foreign air carriers.
The proposed rule would also require employers to affirmatively rescind any non-compete clauses with present and former employees no later than 180 days after publication of the final rule. And under the proposed rule, employers that rescind non-compete clauses would also need to “provide [individualized] [paper or digital] notice to the worker [within 45 days of rescission] that the worker’s non-compete clause is no longer in effect and may not be enforced against the worker.” The FTC provided the following model language for notice:
A new rule enforced by the Federal Trade Commission makes it unlawful for us to maintain a non-compete clause in your employment contract. As of [DATE 180 DAYS AFTER DATE OF PUBLICATION OF THE FINAL RULE], the non-compete clause in your contract is no longer in effect. This means that once you stop working for [EMPLOYER NAME]:
You may seek or accept a job with any company or any person—even if they compete with [EMPLOYER NAME].
You may run your own business—even if it competes with [EMPLOYER NAME].
You may compete with [EMPLOYER NAME] at any time following your employment with [EMPLOYER NAME].
The FTC’s new rule does not affect any other terms of your employment contract. For more information about the rule, click here.
The proposed rule explicitly states it supersedes any state statute, regulation, order, or interpretation that is inconsistent with the proposed rule. The rule-making process requires that the FTC invite public comments, and such public comments will be due 60 days after the Federal Register publishes the proposed rule.