FTC Seeks to Ban Noncompete Agreements in Employment Contracts

On January 5, 2023, the Federal Commerce Fee (“FTC”) introduced a broad proposed rule that might ban employers from imposing noncompete clauses on their employees. The FTC press launch saying the proposed rule states that noncompete clauses—which apply to about one in 5 American employees—suppress wages, hamper innovation, block entrepreneurs from beginning new companies and cut back American employees’ earnings between $250 billion and $296 billion per yr.[1] The proposed rule would prohibit employers from: (1) coming into into or trying to enter right into a noncompete with a employee; (2) sustaining a noncompete with a employee; or (3) representing to a employee, beneath sure circumstances, that the employee is topic to a noncompete. The time period “employee” covers paid workers along with unbiased contractors and unpaid workers. The proposed rule doesn’t apply to noncompete provisions imposed upon 25% house owners of a enterprise in transaction paperwork associated to the sale of the enterprise. The proposal is topic to a 60-day public remark interval commencing when the Federal Register publishes the proposed rule.

Notably, the rule would require employers to rescind all present noncompete clauses and inform each former and present employees that their noncompete clauses are now not in impact. Beneath the rule, present noncompete clauses have to be rescinded no later than 180 days after the ultimate rule is printed. Though the proposed rule doesn’t ban non‑disclosure or buyer non-solicitation agreements, the rule does search to ban “de facto” noncompete clauses which are “written so broadly that it successfully precludes the employee from working in the identical area.” The rule would supersede any state statute, regulation, or order that’s inconsistent with the rule. The one exception to the ban permits noncompete clauses entered into by an individual who’s promoting a enterprise or disposing of possession curiosity in an enterprise entity by which the person holds not less than a 25% curiosity.

The FTC voted 3-1 to publish the Discover of Proposed Rulemaking, which is step one within the FTC’s rulemaking course of. FTC Chairperson, Lina M. Khan said, “[n]oncompetes block employees from freely switching jobs, depriving them of upper wages and higher working circumstances, and depriving companies of a expertise pool that they should construct and increase. By ending this observe, the FTC’s proposed rule would promote larger dynamism, innovation, and wholesome competitors.”[2] FTC Commissioner, Christine S. Wilson wrote a dissent arguing that the FTC lacks rulemaking authority to remove unfair strategies of competitors and that noncompete agreements have to be analyzed beneath a fact-specific inquiry as a result of they may have professional enterprise justifications.[3] The FTC’s announcement of its proposed rule comes solely sooner or later after issuing a press launch that it was taking authorized motion in opposition to three firms and two people who “illegally” imposed non-compete restrictions on 1000’s of employees.

The FTC’s proposed blanket ban on noncompete agreements furthers the company’s dedication to advancing the Biden Administration’s coverage to advertise competitors in U.S. labor markets. On July 9, 2021, President Biden signed an Govt Order encouraging the FTC to make use of its rulemaking authority “to curtail the unfair use of noncompete clauses and different clauses or agreements that will unfairly restrict employee mobility.” President Biden known as this proposed rule “an enormous step ahead in banning noncompete agreements which are designed merely to decrease folks’s wages.” It additionally arrives on the heels of the FTC’s latest coverage assertion increasing its powers beneath Part 5 of the Federal Commerce Fee Act “to establish unfair types of competitors.”[4]

The enterprise group is voicing important criticism of the proposed rule. Banning noncompete agreements with out exception (except within the context of the sale of a enterprise) would permit staff who may disclose extremely invaluable enterprise data to go to a competitor with none actual barrier. Employers could be compelled to depend on commerce secret statutes and customary legislation cures to hunt redress to guard their pursuits. If carried out, we might count on litigation difficult the scope of the proposed rule in addition to the scope of the FTC’s administrative and constitutional authority to promulgate and implement the rule. As soon as the rule is finalized, firms and people might want to rigorously think about each their current and potential employment agreements with respect to noncompete clauses and NDAs to find out the right means to adjust to the proposed rule’s broad set of prohibitions.


[1] Federal Commerce Fee, Non-Compete Clause Rulemaking (January 5, 2023).

[2] Federal Commerce Fee, FTC Proposes Rule to Ban Noncompete Clauses, Which Harm Staff and Hurt Competitors (January 5, 2023).

[3] Federal Commerce Fee, Dissenting Assertion of Commissioner Christine S. Wilson Relating to the Discover of Proposed Rulemaking for the Non-Compete Clause Rule (January 5, 2023).

[4] Federal Commerce Fee, Assertion of the Fee on the Withdrawal of the Assertion of Enforcement Ideas Relating to “Unfair Strategies of Competitors” Beneath Part 5 of the FTC Act (July 9, 2021).

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