FTC Aims to End All Noncompete Agreements

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January 13, 2023 | By: Lisa I. Fried-Grodin, Esq.

In June 2021, President Biden issued an executive order encouraging the Federal Trade Commission (“FTC”) to use its statutory authority to curtail the use of noncompetes.  A year and a half later on January 5, 2023, the FTC wielded that authority with a hammer by proposing a rule that would ban all noncompetes for all workers regardless of their duration, geographic scope or restricted activity. 

The rule, which is out for public comment for 60 days, would do the following if it becomes final:

  • Ban employers from entering into new non-compete agreements with workers. “Workers” includes employees, independent contractors, interns, volunteers, externs, and sole proprietors  who provide a service to the employers’ client or customer.
  • Requires employers to rescind existing non-compete agreements.
  • Prevent employers from threating to enforce a noncompete or telling an employee that they cannot pursue a particular opportunity where the employer does not have a good faith basis that the noncompete is enforceable. This could arise, for example if the FTC issues a final rule banning noncompetes and/or when state law bars enforceability of non-competes and the employee is unaware of it.
  • Ban customer and employee nonsolicitation agreements, confidentiality agreements or nondisclosure agreements if the effect of them is so broad that such an agreement is a defacto noncompete (ie, if the effect of the agreement essentially prevents the individual from working or starting a business in a given field). If such an agreements doesn’t extend that far, then employers can continue to use such agreements.

In issuing this rule, The FTC states that it considers all noncompetes to be unfair methods of competition, and asserts that it has the statutory authority to ban them under section 5 of the Federal Trade Commission Act.  The agency relays that approximately 30 million workers are covered by such agreements.

Despite the breadth of this proposed rule, the FTC is also seeking comments on alternative rules on noncompetes, including whether to have different standards if such agreements cover senior executives or other highly skilled or highly paid workers versus other categories of workers or if such agreements should be deemed presumptively unlawful but employers can present evidence that the competitive benefit of such an agreement outweighs the harm to consumers and workers.

Expect legal challenges from businesses and cheers from employees.  After the comment period ends in March, it will be several months until the FTC issues a final rule.  Stay tuned. In the interim state law governs the enforceability of noncompetes and enforceability decisions are very fact-based.  Call your employment attorney if you have questions about existing agreements.