Did the FTC Just Ban Non-Compete Agreements?

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The short answer is no, but it might in the future. There is still a long road ahead, likely with legal challenges. And it is unclear if the rule the Federal Trade Commission proposed will be its final version.

What Happened?

On January 4, 2023, the FTC proposed a new rule which would rescind current non-compete clauses and ban employers from using them in the future. A non-compete clause is a portion of an employment agreement that bans an employee from working for a competitor within some geographical area for a particular period of time.

The FTC proposed the rule under Section 5 of the FTC Act. Simultaneous with this proposed rule, the FTC announced it filed lawsuits against “three companies and two individuals” to force “them to drop non-compete restrictions that they had imposed on thousands of workers.”

The FTC’s proposed rule broadly defines a non-complete clause as a “a contractual term between an employer and a worker that prevents 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.”

The proposed rule also broadly defines “workers.” And it would “supersede any State statute, regulation, order, or interpretation to the extent that such statute, regulation, order, or interpretation is consistent” with the proposed rule, unless the State version “affords” workers with “greater” protection than the proposed rule.

In a nutshell, if the proposed rule becomes law, it will ban current and future contract clauses that deter employees from leaving one job and starting another. The only exception appears to be clauses for certain business owners when a business is sold (or clauses related to a buy/sell agreement).

What Is the Context?

Both the Biden and the Obama Administrations have increased scrutiny of non-compete clauses and their impact on the economy.

In the summer of 2021, President Biden signed an Executive Order to encourage the FTC “to exercise the FTC’s statutory rulemaking authority under the Federal Trade Commission Act to curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.”

Prior to President Biden’s Executive Order, the Obama Administration had also analyzed the use of non-competes across the country. Since 2016, several states and jurisdictions have changed their non-compete laws, including Illinois, Colorado, Washington, Massachusetts, and Washington D.C.

What Happens Next?

The FTC’s actions last week are just a proposal. The FTC has provided notice of the proposed rule, and now the public has 60 days to submit comments. With its notice, the FTC also provided lengthy supplementary information related to non-compete clauses. The FTC could narrow the proposed rule (as many of new state laws ban non-compete clauses for most workers, but allow them for highly compensated employees), could leave the rule as-is, could include other provisions (for example, a stronger enforcement mechanism), or could decide not to implement any rule.

Once the FTC makes a decision, there is additional time before the rule becomes effective. And there will be legal challenges related to whether the FTC has authority to implement a nationwide rule regarding non-competes. Regardless, it is evident that the Biden Administration will continue to evaluate anti-competitive market behavior.

And while the FTC’s authority is unclear, national uniformity regarding non-compete clauses may be necessary to allow predictability for both employers and employees. As more workers are now remote, and more states continue to pass non-compete legislation, it becomes increasingly difficult to determine the enforceability of an employee’s non-compete clause.

We will continue to monitor the FTC’s actions, along with the actions of other States. In the meantime, companies, especially those operating in multiple jurisdictions, should continue their internal discussions regarding the desirability of using non-compete clauses and how to navigate an evolving landscape.