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FTC Proposes Regulations Barring Non-Compete Agreements

January 6, 2023

Overview

On July 9, 2021, President Biden signed an Executive Order requesting that agencies, including the Federal Trade Commission (FTC), issue rules banning employers from entering non-compete agreements with employees. Following that request, on January 5, 2023, the FTC announced it is proposing sweeping new regulations that would bar employers from entering into or enforcing non-compete agreements with employees that prevent an employee from working with a competitor. The FTC is seeking to bar non-compete agreements as an exercise of its authority under Section 5 of the Federal Trade Commission Act, which declares “unfair methods of competition” to be unlawful and directs the FTC “to prevent persons, partnerships, or corporations . . . from using unfair methods of competition in or affecting commerce.”

The proposed regulations would cover all employees, volunteers, and independent contractors and (1) bar non-compete agreements; (2) require employers to rescind existing non-compete agreements; and (3) require employers to provide notice to existing employees and independent contractors that their non-compete agreement has been rescinded.

The proposed regulations specifically include in its definition of prohibited non-compete agreements:

  • Contractual terms that prevent 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;
  • Non-disclosure agreements, non-solicitation agreements, or other similar agreements that are written so broadly that they effectively preclude the worker from working in the same field after the conclusion of the worker’s employment with the employer; and
  • Contractual terms that require the worker to pay the employer or a third-party entity for training costs if the worker’s employment terminates within a specified time period, where the required payment is not reasonably related to the costs the employer incurred for training the worker.

Notably, the FTC is proposing to bar non-compete agreements that apply post-employment; it would not bar non-compete agreements or policies that apply during employment. Nor would the prohibition apply to non-compete agreements entered into with individuals who are selling substantially all of their ownership interests in a business (or substantially all of the assets of a business), provided that the person subject to the non-compete owned at least 25% of the business being sold.

While the FTC does state that its proposed regulations would generally not apply to non-disclosure and non-solicitation agreements, provided that the agreements “do not prevent a worker from seeking or accepting employment with a person or operating a business after the conclusion of the worker’s employment with the employer,” the proposed regulations could bar non-disclosure and non-solicitation agreements if they are so broad as to functionally bar an ex-employee from working for a competitor. Accordingly, whether a post-employment term or condition would be prohibited by these new regulations will require a fact-specific analysis.

The proposed regulations would apply to all employers in the United States, regardless of size, except for those employers not subject to the Federal Trade Commission Act, such as certain banks, savings and loan institutions, federal credit unions, common carriers, air carriers and foreign air carriers, and persons subject to the Packers and Stockyards Act of 1921,362 as well as an entity that is not “organized to carry on business for its own profit or that of its members.” State and local government entities may also be exempt from the proposed regulation if the state action doctrine applies. Under the state action doctrine, federal statutes do not limit the sovereign states’ autonomous authority over their own officers, agents, and policies in the absence of clear congressional intent to do so.

The proposed regulations would supersede any state or local rule that is inconsistent with the FTC’s rule, and employers would have to come into compliance with the regulations 180 days after publication of the final regulations.

The proposed regulations have not been published in the Federal Register at this time. Comments will be due 60 days after the regulations’ publication there.

The FTC’s broad rationale for the proposed regulations is as follows:

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. A non-compete clause is a contractual term between an employer and a worker that blocks the worker from working for a competing employer, or starting a competing business, typically within a certain geographic area and period of time after the worker’s employment ends. Because non-compete clauses prevent workers from leaving jobs and decrease competition for workers, they lower wages for both workers who are subject to them as well as workers who are not. Non-compete clauses also prevent new businesses from forming, stifling entrepreneurship, and prevent novel innovation which would otherwise occur when workers are able to broadly share their ideas. The Federal Trade Commission proposes preventing employers from entering into non-compete clauses with workers and requiring employers to rescind existing non-compete clauses. The Commission estimates that the proposed rule would increase American workers’ earnings between $250 billion and $296 billion per year. The Commission is asking for the public’s opinion on its proposal to declare that non-compete clauses are an unfair method of competition, and on the possible alternatives to this rule that the Commission has proposed.

The FTC has also published a fact sheet regarding the proposed regulations. The fact sheet notes that the FTC is specifically seeking comments on the following:

  • Whether franchisees should be covered by the rule;
  • Whether senior executives should be exempted from the rule, or subject to a rebuttable presumption rather than a ban; and
  • Whether low- and high-wage workers should be treated differently under the rule.

This article summarizes aspects of the law and does not constitute legal advice. For legal advice for ‎your situation, you should contact an attorney.

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