Labor & Employment Alert: FTC Proposes Rule to Ban Virtually All Non-Compete Agreements

On January 5, 2023, the Federal Trade Commission (FTC), pursuant to Section 5 of the Federal Trade Commission Act, proposed new subpart J, consisting of Part 910 - Non-Compete Clauses. This proposed rule, if promulgated, would provide that it is an unfair method of competition for an employer to enter into or attempt to enter into a non-compete agreement with a worker; maintain with a worker a non-compete agreement; or represent to a worker that he or she is subject to a non-compete where the employer has no good faith basis for believing so.

You read it right. The proposed rule would actually require employers that have existing non-compete agreements with their employees to rescind those agreements and provide notice of the recission to the affected employees. The notice must:

• be individualized; on paper; or in a digital format, such as text or email.

• provide notice to the worker that the non-compete is no longer in effect and will not be enforced.

• be provided within 45 days of recission of the non-compete.

• be provided to both current and former workers.

The proposed regulation even goes so far as to provide model notice language.

As proposed, the regulation has a single exception – Part 910 will not apply to non-competes entered into by persons who are 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 a substantially all of a business entity’s operating assets, when the person restricted by the non-compete is a substantial owner, member, or partner in the business at the time the person entered into the non-compete. However, substantial owner, substantial member, and substantial partner mean holding at least 25% of the ownership interest in the business entity.

From an employer perspective, the silver lining is Part 910 does not address non-disclosure agreements, which prohibit workers from disclosing confidential information to third parties during or after their employment. Likewise, the proposed regulation is silent with regard to non-solicitation agreements, which are an effective tool in preventing former employees, particularly those having significant client contact, from soliciting client’s post-employment for a defined period of time.

While the trend in recent years, particularly at the state level, has been to whittle away at non-compete agreements, the FTC’s proposed new subpart J would be a sea change as it would effectively do away with non-compete agreements altogether. The expectation is that employers and the public are going to inundate the FTC with comments within the 60-day comment period after the Federal Register publishes the proposed rule. However, what came as a big surprise is FTC Commissioner Christine S. Wilson published her own dissenting statement regarding the proposed rule on the same day it was published by the FTC, which can be found here. Commissioner Wilson was critical of the flawed Notice of Proposed Rulemaking for the Non-Compete Clause Rule and predicted there would be a number of successful legal challenges regarding the FTC’s authority to issue the rule.

Even without court challenges it will be after Labor Day, at the earliest, before the proposal could be “official” law - so there is nothing you need to do now (unless you want to let the FTC know your views on the proposal).  

In the meantime, we will continue to monitor its evolution.

But, if you should have questions, feel free to contact Steve Bond or Chris Carney.