Scope of Proposed Rule
On January 5, 2023, the Federal Trade Commission (“FTC”) voted 3-1 to publish a proposed new rule which would impose a near-complete ban on the use of non-compete clauses by employers (the “Proposed Rule”).
The proposed rule would make it unlawful for employers to enter into, or keep in place, any non-compete clause with current or former workers. Non-compete clauses are defined as contract terms that “prevent workers from seeking or accepting employment” or “operating a business” after their employment with the employer ends. The proposed rule defines the term “worker” very broadly to include any “natural person who works, whether paid or unpaid, for the employer,” including “independent contractors, externs, interns, volunteers, apprentices, or sole proprietors who provide a service to a client or customer.”
The proposed rule does not apply to customer or employee non-solicitation clauses or nondisclosure clauses, unless they are “de facto” non-competes. A clause is considered a “de facto” non-compete clause if it “has the effect of prohibiting 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.” For example, the proposed rule describes the following as a de facto non-compete: a “nondisclosure agreement between an employer and a worker that is written so broadly that it effectively precludes the worker from working in the same field after the conclusion of the worker’s employment with the employer.”
If the proposed rule becomes effective, employers that have existing non-compete clauses must rescind them by the compliance date. As proposed, employers with existing non-compete clauses are required to provide individualized notice, in writing, to the worker that the non-compete clause is “no longer in effect and may not be enforced against the worker.” Employers would also be required to rescind non-compete clauses in effect with former workers and give former workers notice of such rescission, so long as the employer has the former worker’s contact information readily available.
Sale-of-Business Exception
The proposed rule provides a single, limited exception related to the sale of a business. The exception provides that the rule “shall not apply to a non-compete clause that is entered into by a person who is selling a business entity or otherwise disposing of all of the person’s ownership interest in the business entity.” However, the exception only applies to a person who owns at least 25% of the business entity at the time that they enter into the non-compete clause. It is unclear as to whether the proposed rule’s exception applies to existing non-compete terms applied to future sales of a business, or only to non-compete terms entered into at the time of the sale.
Relation to State & Local Laws
The proposed rule provides that it supersedes any state statute, regulation, order, or judicial interpretation that is inconsistent with the proposed rule. A state statute, regulation, order, or interpretation is not inconsistent with the proposed rule, however, if it provides greater protections to workers than the proposed rule.
Next Steps for Employers
If published as currently drafted, the final rule would take effect 60 days after it is published in the Federal Register, and employers will have until 180 days after its publication to comply with its requirements. Employers should continue to monitor the status of the proposed rule, although it will likely face significant legal challenges and is far from being final.
In the meantime, employers should (1) continue monitoring developments during the rulemaking process, (2) review the proposed rule’s effect on existing non-compete, non-solicitation, and non-disclosure clauses, (3) consider submitting a public comment to the FTC opposing or requesting changes to the proposed rule, and (4) consider implementing or reinforcing non-compete alternatives like trade secret protections. If this rule is implemented, it will place much greater significance on policing corporate confidential and trade secret information, as companies would lose the ability to prevent former employees from immediately working for a direct competitor. As such, employers should be prepared to use other tools beyond non-compete clauses to protect their legitimate business interests and trade secrets.
Request for Public Comment
The FTC is seeking public comment on the proposed rule for 60 days after its forthcoming publication in the Federal Register. Specifically, the FTC seeks comments on several different alternatives to this non-compete ban, such as whether non-compete clauses between employers and senior executives or non-compete clauses with workers earning more than $100,000 per year should be subjected to a different rule than non-compete clauses between employers and other workers. The FTC also seeks comments on the possible benefits and costs of the proposed rule, the impact of the proposed rule on businesses, and possible compliance costs should the proposed rule be implemented.
If you have any further questions regarding the FTC’s proposed rule or proactive steps employers should take regarding their non-compete policies, please contact Daniel Crowell and Stephen Stovall.
