FTC Proposes Rule Prohibiting Non-Compete Clauses for Workers

On January 5, 2023, the Federal Trade Commission (“FTC”) proposed a new rule that would prohibit non-compete provisions for workers and require employers to rescind existing non-competes.  The proposed rule would apply to all employees, independent contractors, and consultants. 

The broad proposed rule would apply even to senior level executives and could potentially implicate agreements among partnerships and LLCs.  The proposed rule would not, however, apply to non-competes entered into in conjunction with a sale of a business for persons owning at least 25% of the company. 
This rule comes just one day after the FTC announced that it took legal action against three separate companies and two individuals, challenging their non-compete agreements as unfair methods of competition under Section 5 of the Federal Trade Commission Act.

The FTC contends that non-compete agreements hamper innovation, suppress wages, and preclude entrepreneurs from otherwise starting new businesses.  Proponents of the rule also contend that existing laws, such as the Federal Protect Trade Secrets Act, already provide adequate protection for employers. 

The proposed FTC rule is the most sweeping proposed legislation to date, following a growing trend disfavoring non-competes, which has largely occurred at the state level.  For example, last January, Illinois revamped its Freedom to Work Act which prohibits non-competes for any person making less than $75,000 per year, and blanket restrictions in certain professions such as construction. Three other states, California, North Dakota, and Oklahoma, have already banned non-compete provisions.  

Whether the proposed rule is enacted or passes legal muster remains to be seen.  Opponents of the proposed rule contend that the proposed rule oversteps the FTC’s role.  FTC Commissioner Christine Wilson, in dissenting from adopting the proposed rule, raised jurisdictional concerns and argued that the proposed rule interferes with “the business justification that prompted its adoption.” It is likely that if the rule is adopted, it would face legal challenge.  The U.S. Chamber of Commerce has already threatened to bring suit against the FTC if the proposed rule is enacted.

The rule is subject to a mandatory 60-day review period, and it could be 2024 before a final rule is enacted. 

Still, employers should review the proposed rule and be prepared to change their existing policies, agreements and compensation structure, if necessary.  Employers may want to consider doing the following:

·  Review existing employment and policies and consider alternatives to protecting trade secrets and goodwill, such as
ensuring that current confidentiality and trade secrets clauses are up to date and cover all relevant workers. 
·  Determine if any existing agreements will need to be rescinded, in which case employers may want to preserve the ability
to rescind the consideration provided for non-compete clauses.  
·  Design new compensation structures to provide for alternatives to non-compete provisions to encourage retention and
loyalty, including retention bonus and longer vesting periods.

In any event, the proposed rule should also serve as a reminder that restrictive covenants, and non-competes in particular, are not viewed favorably by courts or administrative agencies in a non-owner context, and should be carefully drafted.

The proposed rule can be found here: https://www.ftc.gov/legal-library/browse/federal-register-notices/non-compete-clause-rulemaking.

For questions, please contact Steve Shapiro (SShapiro@dugganbertsch.com) or Brian Konkel (BKonkel@dugganbertsch.com). 

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