On January 5, 2023, the Federal Trade Commission (FTC) issued a proposed rule that would prohibit employers from using noncompete agreements with their employees or independent contractors. This proposal arises from a preliminary finding by the FTC that noncompetes constitute an unfair method of competition in violation of Section 5 of the Federal Trade Commission Act (FTC Act). It comes on the heels of the FTC’s November policy statement asserting its intention to rigorously enforce and expand the scope of Section 5 of the FTC Act’s ban on unfair methods of competition.
If adopted, this rule would make it illegal for an employer to enter into a noncompete agreement with a worker, maintain a noncompete with a worker or represent to a worker that the worker is subject to a noncompete. Employers would also be required to rescind existing noncompetes and inform workers that they are no longer enforceable.
The proposed rule would apply to noncompetes with either employees or independent contractors. Other restrictive covenants such as non-disclosure agreements would not be affected by the FTC’s proposed rule unless they are so broad in scope that they essentially function as a noncompete agreement.
The FTC is inviting public comment on its proposed rule. The full text of the proposed rule and information on the public comment period is available here. In particular, the FTC seeks comment on whether senior executives or franchisees should be covered by the rule, as well as whether low- and high-wage workers should be treated differently under the rule. Comments are due 60 days after the Federal Register publishes this proposed rule, after which the FTC is likely to issue a final rule. Should the rule become final, companies should be prepared for it to go into effect 180 days after the date of publication.
The proposed rule arrives with the FTC’s concurrent announcement of settlements in complaints it issued against three employers’ use of noncompetes. These settlements ban those employers from enforcing, threatening to enforce or imposing noncompetes against specified groups of employees and require that the companies notify all affected employees.
Historically, noncompetes were a matter of state law. With this new involvement from the FTC attempting to set a national ban on noncompetes, employers need to be aware of this latest attempt to regulate the use of noncompete agreements and restrictive covenants.
Whether the FTC will succeed remains an open question. Republican Commissioner Christine S. Wilson, in a dissenting statement, cautioned that the proposed rule is open to meritorious challenges that (1) the Commission lacks authority to engage in “unfair methods of competition” rulemaking and (2) the Supreme Court of the United States’ “major questions” doctrine suggests that the federal courts may preclude the FTC from venturing into this novel area of regulation absent legislative amendments to its enabling statute. Plus, interested parties may persuade the FTC to scale back its proposed regulation.