On January 5, 2023, nearly eighteen months after President Biden signed an executive order directing the Federal Trade Commission (FTC) chair to “consider working with the rest of the Commission to exercise the FTC’s statutory rulemaking authority … to curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility,” the FTC has issued a far-reaching notice of proposed rulemaking that would prohibit the use of non-compete clauses and preempt all state laws providing lesser protection than the proposed rule.
While President Biden’s remarks after issuing the executive order seemed to focus on lower wage workers, the proposed rule bans all use of non-compete provisions with “workers,” defined as a natural person who works, whether paid or unpaid, for an employer. The term includes, without limitation, an employee, individual classified as an independent contractor, extern, intern, volunteer, apprentice, or sole proprietor who provides a service to a client or customer.
The proposed rule would apply to any contractual term that functions to prevent a worker from seeking or accepting employment or operating a business, after leaving the employer. The proposed rule does not ban non-disclosure or customer non-solicitation agreements but the ban could apply if those provisions were broad enough to prohibit a worker from working in the same field. Employers would be further prohibited from representing to employees that a non-compete agreement exists.
Under the rule, employers would be required to rescind previously entered non-compete provisions and inform workers in writing via letter, email, or text message that the agreement is no longer in effect and will not be enforced.
The proposed rule would not apply to franchisee-franchisor agreements or agreements between buyers and sellers of a business. Both of these types of agreements would continue to remain subject to antitrust law, but would not be impacted by the rule.
Public comments—of which there will be many—are due 60 days after the Federal Register publishes the proposed rule. The rule would go into effect 180 days after the final version is published.
FTC Chair Lina Khan has maintained for years that the FTC should exercise its rulemaking in this manner. Upon release, Chair Khan stated that the rule would improve wages and working conditions, as well as “promote greater dynamism, innovation, and healthy competition.” Commissioner Christine Wilson issued a dissenting statement in which she stated that the rule “represents a radical departure from hundreds of years of legal precedent that employs a fact-specific inquiry into whether a non-compete clause is unreasonable in duration and scope, given the business justification for the restriction.” She further stated that non-compete clauses are an inappropriate subject for rulemaking, noted negative consequences of suspending non-compete clauses, and criticized the lack of evidence to support the proposed rule. More than fifty restrictive covenant lawyers, in a letter to the White House and the FTC in the wake of President Biden’s order, addressed the misconceptions regarding the claim that non-compete clauses hurt workers and competition.
Any final rule will not go into effect for many months. If the rule goes into effect, it will face numerous legal challenges. First, the proposed rule likely exceeds the FTC’s legal rulemaking authority under the Federal Trade Commission Act and the delegation clause. Second, the rulemaking invades the state provenance of contract law. Third, the rulemaking may trigger the major questions doctrine—and, as such, any action purporting to ban non-compete provisions would need to be undertaken by the U.S. Congress.
Companies need not scramble to eliminate the use of these agreements and may need to explain to employees that such agreements are still in effect. As always, companies are required to comply with applicable state law, including recent changes, and ensure agreements are reasonably tailored to protect legitimate business interests.
Ogletree Deakins’ Unfair Competition and Trade Secrets Practice Group will continue to monitor and report developments with respect to regulations related to noncompete agreements and will post updates to the firm’s Unfair Competition and Trade Secrets blog. Important information for employers is also available via the firm’s webinar and podcast program.