To Compete or Non-Compete: The FTC’s Proposed Rule to the Latter

On Thursday, January 5, 2023, the Federal Trade Commission (FTC) proposed a new rule affecting the use of non-compete agreements by employers nationwide. In a 3-1 vote to publish the Notice of Proposed Rulemaking, FTC Commissioners voted in favor of publishing a Proposed Rule banning employers nationwide from using non-compete agreements with workers.

In addition to prohibiting employers from entering into new non-compete agreements, the Proposed Rule seeks to require employers to nullify existing non-compete agreements within a prescribed time frame.

As the basis for this Proposed Rule, the FTC cited a preliminary finding that non-compete agreements violate Section 5 of the Federal Trade Commission Act as they constitute an unfair method of competition. The FTC previously used Section 5 authority to ban companies from imposing onerous noncompetes on their workers.

“The freedom to change jobs is core to economic liberty and to a competitive, thriving economy,” said FTC Chair Lina M. Khan. “Noncompetes block workers from freely switching jobs, depriving them of higher wages and better working conditions, and depriving businesses of a talent pool that they need to build and expand. By ending this practice, the FTC’s proposed rule would promote greater dynamism, innovation, and healthy competition.”

If adopted, the Proposed Rule stands to create a significant shift in contemporary business practices, placing immediate, unforeseen burdens on companies nationwide which will be forced to scramble to comply. The Proposed Rule applies to independent contractors and anyone who works for an employer, whether paid or unpaid. Organizations will need to rapidly review and update any employee on-boarding documents, as well as any and all existing agreements banned by the Proposed Rule in favor of new employment agreements in cases where the Proposed Rule compels the organization to do so.

Exemptions to the Proposed Rule include individuals who hold at least a 25 percent ownership interest in a business entity and enter into a non-compete agreement as part of the sale of their ownership interest in the business. As drafted, the Proposed Rule generally does not apply to other types of employment restrictions, like non-disclosure agreements, but may apply to other types of employment restrictions if the restrictions are so broad in scope that they effectively function as non-compete agreements.

The Proposed Rule will be available for sixty days for public comment, after which a final rule could be published and then enforced some months after that. Expect significant pushback. The FTC’s Proposed Rule will most likely face legal challenges, such as whether the FTC has the authority to regulate noncompete agreements and whether its provisions as to existing noncompetes violate the constitution’s provision against impairing the obligation of contracts.

Previous articles from our attorneys including “Your Non-Compete Agreement is Probably Not Enforceable. Here’s Why.” and “An Overview of Louisiana’s Law on Non-Compete” look at the intricacies of non-competes, especially those falling under the jurisdiction of Louisiana law. If you have any questions about this latest Proposed Rule or non-compete agreements, please contact Phil Antis or Marianna Downer.

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