The End Of The Noncompete Agreement? A Look At The FTC’s Proposed Rule
On January 5, 2023, the Federal Trade Commission (“FTC”) announced that it proposed a new rule pursuant to Section 5 of the Federal Trade Commission Act that would ban employers from imposing noncompete agreements on employees.1 The FTC estimated that “the new proposed rule could increase wages by nearly $300 billion per year and expand career opportunities for about 30 million Americans.”2 According to FTC Chair Lina M. Khan, “Noncompetes block workers from freely switching jobs, depriving them of higher wages and better working conditions, and depriving businesses of a talent pool that they need to build and expand. By ending this practice, the FTC’s proposed rule would promote greater dynamism, innovation, and healthy competition.”3
The proposed rule would supersede all contrary state laws.4 The rule would prohibit employers from entering into or attempting to enter into a noncompete agreement with a worker, maintaining a noncompete with a worker, or, in certain circumstances, representing to a worker that he or she is subject to a noncompete agreement.5 The proposed rule would apply to independent contractors and anyone who works for an employer, whether paid or not.6 It would further require employers to rescind existing noncompete agreements and would mandate that employers inform workers that the agreements have been rescinded.7 The proposed rule includes an exception for an individual “who is selling a business entity or otherwise disposing of all of the person’s ownership interest in the business entity, or by a person who is selling all or substantially all of a business entity’s operating assets” if the individual “is a substantial owner of, or substantial member or substantial partner in, the business entity at the time the person enters into the non-compete clause.” 8
The FTC is seeking public comment on the proposed rule, and the comment period is open until March 20, 2023. Following that period, the FTC will conduct a further analysis of the proposed rule and may make revisions. The FTC may issue a new proposed rule, terminate the rulemaking authority on the issue, or move to adopt a final rule. Congress has an opportunity to review all final rules and may also hold hearings regarding the proposed rule or take other legislative action, and litigation is likely if a final rule is adopted. It is important to note that this is early in the process and that it is unclear what form, if any, the final rule will take and if a final rule would survive congressional action or litigation.
We will continue to monitor this important story and provide updates as they become available. If you have any questions or concerns regarding this topic, or any topic related to labor and employment law, please contact us.
1 Press Release, Fed. Trade Comm’n, FTC Proposes Rule to Ban Noncompete Clause, Which Hurt Workers and Harm Competition (Jan. 5, 2023), available at https://www.ftc.gov/news-events/news/press-releases/2023/01/ftc-proposes-rule-ban-noncompete-clauses-which-hurt-workers-harm-competition (last visited Feb. 13, 2023).
4 Non-Compete Clause Rulemaking, § 910.4, Proposed Rule, Fed. Trade Comm’n, available at https://www.ftc.gov/legal-library/browse/federal-register-notices/non-compete-clause-rulemaking (last visited Feb. 15, 2023).
5 Id. at § 910.2(a).
6 Id. at § 910.1(f).
7 Id. at § 910.2(b).
8 Id. at § 910.3.