On January 5, 2023, the Federal Trade Commission ("FTC") proposed a sweeping new rule that—if implemented—would ban a large percentage of noncompete agreements in the United States. The rule would apply to new as well as existing agreements for workers across all industries in the private and public sector, including both employees and independent contractors, and would allow just two exceptions: (1) noncompetes associated with the sale of a business or ownership interest, and (2) noncompetes between franchisor and franchisee. The proposed rule will go through a public comment period before being implemented in one form or another, after which it is certain to be challenged in court.
Summary of the Proposed Rule
The rule defines noncompetes as agreements between an employer and a worker that prevent 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." Although the proposed rule makes clear that it would not outright prohibit other forms of restrictive employment agreements, such as non-disclosure, non-solicitation, or confidentiality agreements, it provides that any employment agreement might fall within the ambit of the law as a de facto noncompete agreement if its practical effect is to prevent an employee from seeking work elsewhere.
For existing noncompete agreements regardless of when executed, the proposed rule would require employers to issue individualized notices rescinding those agreements to current and former employees within 45 days of the rule going into effect. The FTC has provided sample language for a recission letter within the proposed rule.
In its current version, the proposed rule does not provide for a cause of action for aggrieved employees or allow for penalties for noncompliance.
Anticipated Challenges to the Proposed Rule
The FTC voted 3-1 to publish the Notice of Proposed rulemaking, which is the first step in the FTC's rulemaking process. As noted by the sole dissenting vote among the FTC Commissioners, an FTC rule that bans noncompetes would lead to protracted litigation. There is a serious question about whether the FTC has the authority to issue the proposed rule and several different arguments to attack it based on recent Supreme Court precedent.
The dissenting vote also summarized some of the substantive issues with the FTC's proposed rule. This includes the FTC's inexperience with enforcement in the noncompete space, the wisdom of a one-size-fits-all rule for noncompetes that typically require a fact-based inquiry, the fact that 47 state legislatures permit noncompete agreements, and the disputed claim that noncompetes result in unfair competition.
At this point the FTC is asking for public opinion on its proposed rule and for possible alternatives. The FTC will review the public comments and may make changes in a final rule based on both the comments and the FTC's analysis on this issue. It is important to note that comments are due 60 days after the Federal Register publishes the proposed rule, which has not yet occurred. At this point, the FTC has not shared where the public can comment; based on past legislation, it will likely be here.