FTC Proposes New Rule to Broadly Ban Non-Compete Agreements

On January 5, 2023, the Federal Trade Commission (FTC) announced a proposed rule that, if
enacted, would amount to a near-total ban on non-compete agreements nationwide. The rule would preempt
the standing state laws which govern non-compete clauses and give employers 180 days to rescind all
existing non-compete agreements. Forty-seven states currently enforce non-compete provisions to varying
degrees.

Although state laws may vary in their particulars, to be enforceable, non-competes must be
reasonable in geographic scope, duration, and tailored to protect a legitimate employer business interests.
The FTC seeks to preempt existing state laws by citing Section 5 of the Federal Trade Commission Act,
which broadly prohibits unfair methods of competition in or affecting commerce.

The proposed rule would prohibit employers from 1) entering into or attempting to enter into a
non-compete agreement with a worker, 2) maintaining non-compete agreements with workers, or 3)
representing to a worker that they are subject to a non-compete without a good faith basis to believe that
the worker is subject to an enforceable non-compete. The rule would apply retroactively to non-compete
agreements entered into before the final rule’s effective date and would require that employers rescind
any non-compete agreements within 180 days of the publication of the final rule.

There are some narrow exceptions to the proposed rule. The rule would not apply between the
buyer and seller of a business where the restricted party was an owner, member, or partner owning less
than 25% ownership interest in the business. Also, the rule would only apply to the employer/worker
relationships and would prohibit post-employment non-competes only. Additionally, the proposed rule
would not extend to banks, federal credit unions, air carriers, common carriers, meatpackers, or poultry
dealers.

The FTC is accepting public comments on the proposed rule through March 6, 2023. In the
meantime, employers currently using non-compete agreements could consider alternative restrictive
covenants, like non-solicitation and non-disclosure agreements, as a means to protect business interests.
Non-solicitation and non-disclosure restrictions, if properly drafted, would likely not be affected by the
rule.

Employers who rely on non-competes should not panic. Many observers agree that the proposed
rule is unlikely to go into effect in its current form. Additionally, if the proposed rule is enacted, it will
likely be challenged. Certain trade groups, businesses, and members of Congress have already voiced
opposition to the rule and its broad scope and have given notice of their intent to challenge it if the rule is
enacted in its current form.