FTC’S PROPOSED RULE THAT WOULD BAN NON-COMPETE AGREEMENTS

On January 5, 2023, the Federal Trade Commission (FTC) announced a proposed rule that would invalidate almost all non-compete agreements or clauses used by employers as well as any other restrictive agreements that “function” as non-compete agreements. The proposed rule would prohibit any contractual term between an “employer” and “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. This proposed rule would supersede all state law on the subject. The FTC does not have authority over banks, federal credit unions, air carriers, common carriers, meatpackers, and poultry dealers. Those industries are exempt from the proposed rule, but almost all other hired relationships will be covered.

A “contractual term” as referenced in the proposed rule can be a non-compete or any other restrictive agreement 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, including non-disclosure agreements, non-solicitation agreements, no-business agreements, no-recruit agreements, and liquidated damages provisions to name a few. So while it is clear that non-compete provisions would be banned under the proposed rule, other restrictive agreements like the prior examples would only be  prohibited if they are so unusually broad that they function like a non-compete clause or agreement. Examples in the proposed rule of other types of restrictive agreements that would be prohibited include:

1. A non-disclosure agreement between an employer and a worker that is written so broadly that it effectively precludes the worker from working in the same field after the conclusion of the worker’s employment with the employer.

2. A contractual term between an employer and a worker that requires the worker to pay the employer or a third-party entity for training costs if the worker’s employment terminates within a specified period, where the required payment is not reasonably related to the costs the employer incurred for training the worker.

Thus, some types of restrictive covenants, other than non-compete agreements, might be available to businesses, even if the proposed rule is adopted.

Under the proposed rule, “employers” are considered any person that hires or contracts with a worker to work for the person, and a “worker” is a natural person who works whether paid or unpaid, for an employer. “Worker” includes an employee, individual classified as an independent contractor, extern, intern, volunteer, apprentice, or sole proprietor who provides a service to a client or customer. There are a few limited exceptions dealing with the sale of a business, but the proposed rule is extremely broad and would apply in almost all circumstances that a non-compete or similar restrictive agreement is used.

Along with banning all future use of non-compete or similar agreements, the proposed rule would also invalidate all non-compete agreements previously signed. The proposed rule demands that within 180 days of the final rule going into effect all employers send an individualized communication, either through mail or electronically, to all parties that the employer has entered into a non-compete or similar agreement within the past. The communication must inform the party that their non-compete or similar restrictive agreement is no longer valid.

Despite the broad nature and burdensome obligations of the proposed rule, at the moment, there is no need to panic. As it stands right now, the proposed rule is open for public comment until March 10, 2023, before a final text of the rule is determined by the FTC. Comments can be made to the FTC here. 

The proposed rule is still in its infancy and there are a number of steps before it could become a final rule. After the initial comment period closes, the FTC may reopen the comment period, issue a new proposed rule, terminate its rulemaking, or move on to a final rule.  Prior to publication of a final rule, it will likely be reviewed and a cost analysis performed by the Office of Information and Regulatory Affairs.  Any final rule must be published in the Federal Register, and must be sent to Congress and the Government Accountability Office before it can take effect.   In that administrative process, the rule may face challenges for bureaucratic overreach.  FTC rulemaking may also be challenged through litigation, which usually occurs after a final rule takes effect.

At this point, we expect that as this process moves forward, the proposed rule is likely to face numerous challenges, both administrative and in the court system, before it would be finalized into law. The proposed rule is, however, a message from the FTC that it does not condone the use of non-competes and is willing to take drastic measures to stifle their use in employment contracts. The days of broad non-compete contracts may be limited.

To best prepare for this, employers should:

1. Review all non-compete and restrictive agreements that they use to determine if they will be wiped out by this proposed rule, if adopted;

2. Compile a list of all their current and former employees who have signed non-compete agreements or other restrictive agreements that would be invalidated by the proposed rule so they can be prepared to send notices out if required; and

3. Consider whether to begin drafting new contractual terms for current and/or future employees that are narrowly tailored and would be enforceable under this proposed rule but still protect the trade secrets, confidential information, customer goodwill, or other business interests of the employer.

If you have any questions about the proposed rule, what the proposed rule requires of employers to comply, the validity of your other restrictive agreements, or want help in drafting restrictive agreements that will protect your business’ interests under the proposed rule, reach out to one of the employment law attorneys at Blethen Berens – Julia Corbett, Beth Serrill, or Alyssa Nelson.