Proposed FTC Rule Would Ban Employers from Using Noncompete Agreements

January 6, 2023 Advisory

As has been widely reported in recent days, the U.S. Federal Trade Commission (FTC) has issued a proposed rule that, in the words of the FTC, would ban employers from using noncompete agreements with workers “without regard to the worker’s earnings or job function.” The FTC issued the proposed rule in response to an Executive Order that President Biden signed in July 2021, calling for the FTC to employ its statutory rulemaking authority “to curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.”

If implemented in its current form, the proposed rule would fundamentally alter unfair competition law in the United States. Indeed, noncompete law (and contract law generally) has traditionally been a matter of state law. Other than California, North Dakota and Oklahoma (and Washington, D.C.), all states’ laws recognize the use of noncompete agreements with workers in some form or fashion.

If the proposed rule becomes final and takes effect in its current form, it would impose sweeping changes, which include the following requirements, among others:

  • Employers would be banned from entering into new noncompete agreements with workers and from taking action to “maintain” or enforce existing noncompete agreements entered with workers prior to the rule’s publication.
  • Employers will be required to rescind all existing noncompete agreements with workers and give notice of such rescission to current and former employees who are subject to existing noncompete agreements.
  • The ban would prohibit use of noncompete clauses with both employees and independent contractors.

Although the rule would not ban nondisclosure and nonsolicitation clauses generally, if such clauses are “unusually broad in scope” and thus “function” as noncompete clauses, the rule would make such clauses unlawful as “de facto” noncompete clauses. In addition, certain types of training repayment agreements, requiring employees to reimburse their employers upon leaving a job before a certain date, would also face scrutiny under the new rule as potentially functioning as de facto noncompete clauses. The rule makes an exception for sale-of-business noncompetes, but sets a high threshold for the exception. Specifically, the exception is limited to individuals who sold a substantial ownership interest (i.e., at least a 25% interest in the business).

Notably, the FTC has acknowledged considering a number of key issues, including whether the ban should be limited based on income thresholds and/or job function, and has specifically solicited comment on these and other issues. While the FTC has explained that a categorical ban on noncompetes is the agency’s preferred approach, the FTC also acknowledged “that several alternatives to a categorical ban may also accomplish the objectives of the proposed rule to some degree, including different standards for senior executives.” 

The comment period is open for 60 days from the date of publication of the proposed rule in the Federal Register. While it is possible that the FTC’s final regulation could look very different from the published regulation, it appears likely that the agency’s efforts to restrict noncompete agreements will face challenges from business and industry groups. Indeed, the U.S. Chamber of Commerce has already issued a statement characterizing the proposed rule as “unlawful.”

The final rule, if implemented, would become effective 180 days after it is published, and violation of the rule would constitute unlawful “unfair competition” under applicable antitrust laws.

Armstrong Teasdale and its Noncompete and Trade Secrets practice will continue to closely monitor developments relating to the FTC’s proposed rule. For more information, contact your regular AT lawyer or one of the authors listed below. 

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