By Kirsten M. Grossman, Esq. and Rachel H. Khedouri, Esq.
Update: The Federal Trade Commission’s proposed Non-Compete Clause Rule was published in the Federal Register on January 19, 2023. The public comment period was extended to April 19, 2023.
In July 2021, President Biden issued his Executive Order on Promoting Competition in the American Economy directing all federal agencies to address anti-competitive conduct in the American workplace and, specifically, encouraging the Federal Trade Commission (“FTC”) to exercise its rulemaking authority to ban the use of non-compete clauses or other agreements “that may unfairly limit worker mobility.” Although it recently had cracked down against various employers it alleged were abusing non-compete agreements with workers, the FTC had not taken significant rulemaking action . . . until now.
On January 5, 2023, the FTC issued a notice of proposed rulemaking that would invalidate all noncompetition clauses between companies and their workers – including paid and unpaid employees, as well as independent contractors – with limited exceptions relating to the sale of a business entity or its assets. Importantly, the proposed rule would require that employers not just stop entering such agreements but also rescind existing noncompetition agreements and notify all current and former workers with such agreements in place that they are no longer in effect.
Although the proposed rule would apply only to “non-compete clauses”, the FTC intends to include agreements that operate as “de facto” noncompetition agreements by prohibiting workers from seeking or accepting employment or operating a business after leaving an employer. This potentially could include broadly drafted nonsolicitation or nondisclosure agreements or other contractual terms, such as those requiring the repayment of training costs that are not reasonably related to the actual training costs incurred. Notably, only the FTC would have the right to pursue violations; workers would not have a right to sue under the new rule.
There is significant question as to the FTC’s authority to enact and enforce such a broad non-compete ban, and any rule enacted almost certainly will be met with a legal challenge, as many have already criticized the proposed rule as encroaching upon the state and federal legislative role. Several bills banning or restricting non-competes already have been introduced in Congress, but none have gained significant traction to date. The most recent example is the Workforce Mobility Act of 2021, with versions “pending in committee” in both the House and the Senate since February 2021.
We will continue to monitor the proposed rule and legislative developments and provide updates. Once published in the Federal Register, the rule will be subject to a 60-day public comment period and will not take effect until 180 days after the publication of the final rule. In the interim, employers should consider taking inventory of existing noncompetition agreements (including those still in effect with former employees) in order to be in a position to provide notice to all impacted individuals when and if the new rule goes into effect.
If you have any questions relating to this e-Alert or need help reviewing your noncompetition agreements, please reach out to the NFC Attorney with whom you typically work or call us at 973.665.9100.