The Federal Trade Commission Moves on Non-Competes
On January 5, 2023, the Federal Trade Commission (“FTC”) issued its proposed rulemaking on unfair methods of competition aimed at limiting the use of non-compete clauses between employers and employees. The FTC’s action follows President Biden’s July 9, 2021 Executive Order on “Promoting Competition in the American Economy,” directing the FTC use its rulemaking authority “to curtail the unfair use of noncompete clauses and other clauses or agreements that may unfairly limit worker mobility.”
The FTC states that approximately 30 million American workers, or one in five American workers, have a non-compete that prevent them from pursuing better opportunities that offer higher pay or better working conditions, and prevent employers from hiring qualified workers. In short, the FTC’s position is that non-competes hurt workers and harm competition.
The Proposed Rule
- Finds that it is an “unfair method of competition” for an employer to enter into or attempt to enter into a non-compete clause with a worker; maintain with a worker a non-compete clause; or represent to a worker that the worker is subject to a non-compete clause where the employer has no good faith basis to believe that the worker is subject to an enforceable non-compete clause.
- Defines a “non-compete clause” as a contractual term between an employer and a worker that prevents the workers from seeking or accepting employment with a person, or operating a business, after the conclusion of the worker’s employment.
- Expands the definition of “non-compete clause” to include “de facto” contractual clauses that have the effect of a non-compete clause. Examples provided by the FTC include, a non-disclosure agreement that is written so broadly that it effectively precludes a worker from working in the same field after conclusion of employment or a term between an employer and a worker that requires the worker to pay the employer or a third party for training costs if the worker’s employment terminates within a specified time period, where the required payment is not reasonably related to the costs the employer incurred for training the worker.
- Requires recission of existing non-compete clauses entered prior to compliance date. The rule provides a procedure for recission as well as sample language. Those that comply with the recission requirement are entitled to a safe harbor from liability.
- Contains an exception for non-compete clauses entered into by a person who is selling a business or otherwise disposing of a person’s ownership interest, or by a person who is selling substantially all of a business entity’s operating assets.
- Supersedes any “State statute, regulation, order, or interpretation to the extent that such statute, regulation, order, or interpretation is inconsistent with” the proposed rule.
Comments to the proposed rule are due 60 days after publication in the Federal Register. The FTC is specifically asking for input on whether the rule should treat low- and high-wage differently or whether senior executives should be exempted from the rule. The proposed rule can be found in its entirety here. In addition to the Notice of Proposed Rulemaking, the FTC prepared a fact sheet addressing noncompetes, which may be found here: https://www.ftc.gov/system/files/ftc_gov/pdf/noncompete_nprm_fact_sheet.pdf.
The proposed rule is likely to experience significant legal challenges. The U.S. Chamber of Commerce has already issued a statement declaring the proposed rule “blatantly unlawful”.
Whether or not lawful, the proposed rule is yet another in a series of legal pushbacks against employer-employee non-competes. In recent years, multiple states have passed laws either outright banning enforceability of non-competes (California, North Dakota and Oklahoma), while others, such as Georgia, have passed laws which limit enforceability to “key employees” or other defined criteria. Because of these trends, employers have been looking to alternatives such as non-solicitation provisions to protect their legitimate business interests, trade secrets and other key investments. Employers interested in evaluating what steps they can take in response to this action are encouraged to reach out to counsel to discuss further.