Will the FTC Ban the Use of Employee Non-Compete Provisions? Maybe.

March 28, 2023

Topics: Independent Contractors

Employers across a number of industries rely on their ability to have employees sign non-competition agreements. These agreements prohibit employees from competing with their prior employer following the termination of the employees’ employment. Although a small handful of states prohibit non-competes outright, and a number of others limit the use of these provisions in various ways, properly crafted non-compete provisions can be an important tool for protecting an employer’s assets and goodwill.

It is therefore not surprising that a rule recently proposed by the Federal Trade Commission (“FTC”) that would ban non-competes across the United States has set off alarm bells for many employers. Press coverage of the proposed rule noting it “could affect every business in the country,” has only amplified these concerns.

There is no doubt the proposed rule represents a bold policy statement from the FTC and a sharp break from current law. But context matters. Coverage of the proposed rule must be balanced by considering the substantial obstacles in the way of its enactment. The proposed rule may be newsworthy, but the context makes clear that employers do not yet need to panic about their non-competition agreements.

What Is the Proposed Rule?

The rule would prohibit all post-employment non-compete agreements for any employee, regardless of seniority or compensation level, in every industry covered by the FTC (which is almost all industries, with some exceptions including banks, insurance companies, and non-profits). The proposed rule would also require employers in the covered industries to rescind existing non-compete agreements and send individual notices of the rescission to current and former employees.

The rule as proposed even goes so far as to prohibit de facto non-competes, which are agreements that may not look like non-competes on their face, but which function in a similar way. Broad confidentiality provisions or other requirements such as those requiring that departing employees repay training expenses in amounts greater than the actual cost, are examples of clauses that would fall under this definition. While the proposed new rule would expressly permit non-solicitation provisions that do not limit the employee’s ability to work, it is unclear the extent to which broad non-solicitation provisions would be considered “de facto” non-competes.

The only exception to the general non-competition prohibition is narrow: purchasers of a company would still be allowed to require selling former owners to abide by non-compete agreements. For all others, however, non-compete agreements would become a thing of the past if this rule went into effect.

What Are The Next Steps?

Remember: this is a proposed rule. Before it can be finalized, the general public has the opportunity to submit comments, and the FTC is required to take these comments into consideration when drafting a final version. Federal agencies take this obligation seriously, and often make significant changes to a proposed rule based on public comments before the rule is implemented.

A significant volume of public comments is expected regarding the proposed ban. Perhaps in recognition of this, the FTC has already extended the deadline for submission of comments from March 20 to April 19, 2023.

While it remains to be seen whether the FTC will change course in response to public comments, it is possible that the agency will narrow the final rule (perhaps adding exceptions for highly compensated employees, for example, or limiting the rule to certain industries).

What Happens After A Final Rule Is Published?

If a final rule is published following the comment period, it will take effect 180 days later. However, if the final version resembles the proposed rule, it is widely anticipated that it will be challenged in federal court before it becomes effective. Such a challenge will likely make its way to the Supreme Court, which has recently limited the ability of federal agencies to enact rules with sweeping economic effect unless Congress has expressly authorized them to do so. This new “major questions doctrine” may well be fatal to the FTC’s proposed ban.

Aside from court challenges, the rule will also be vulnerable to political shifts. Generally, a federal agency can rescind a rule that it enacted. If the political party holding the White House changes in 2024, it is a distinct possibility that the new administration would swiftly rescind any non-compete ban, especially if the rule hasn’t taken effect yet.

What Can My Company Do?

Companies who consider non-competes to be an important part of their business have a concrete opportunity to register their objections to the proposed rule during the public notice and comment period. Information about how to submit comments can be found on the FTC’s notice.

It’s also important to keep in mind that the FTC’s proposed rule reflects a broader trend in state laws toward limiting or even eliminating employee non-compete provisions, especially for low-income workers. If your company uses non-compete provisions, it is important to consult employment counsel to make sure the agreements comply with all applicable rules and laws of the states in which you have employees.

For more information about these or other employment law topics, please contact the authors George D. Vallas and Devora L. Lindeman, or your personal Greenwald Doherty attorney contact.