What is the Status of Noncompetes After the FTC Proposed Ban?

You may have seen news coverage over the past few months about a new FTC (Federal Trade Commission) proposed rule that bans non-compete agreements.  What does this mean for non-compete agreements in the future?  Below are some questions and answers regarding the proposed rule.

What is a proposed rule?  First, it is important to remember that the new FTC rule is a proposed rule.  Like most federal agency rulemaking, members of the public have an opportunity to comment on the proposed rule. The comment period for this rule expires on April 19, 2023.  After the comment period ends, the FTC is supposed to review and consider the comments received from the public and then issue a final rule.  The final rule could be similar to the proposed rule – or it could be very different.  It is also possible that no final rule will ever be issued.

Unless and until a final rule is issued by the FTC, noncompete agreements are still effective as before and employers can still enter into noncompete agreements with employees.

When could the rule become effective?  The proposed rule appears to provide for a compliance period of 180 days after the rule becomes final.  This gives employers some time to adjust.  It is also likely that any final rule that bans noncompete agreements will be challenged in court.  We won’t go into the specific arguments that a challenger will bring.  However, given the Supreme Court’s recent rulings regarding environmental regulations, there is a good chance that a broad rule banning noncompetes will be held up in court challenges for a lengthy period of time.

What does the proposed rule say?  If the proposed rule were to go into effect as written, below are some key takeaways:

• The rule would provide that non-compete clauses are an unfair method of competition. As a result, the rule would ban employers from entering noncompete clauses with their workers, including independent contractors.
• The rule would ban noncompete clauses for all workers – even high wage executives.
• The rule would require employers to rescind existing noncompete clauses with workers and actively inform their employees that the contracts are no longer in effect.
• The definition of a non-compete clause would generally not include other types of

restrictive employment covenants – such as non-disclosure agreements (NDAs) and client or customer non-solicitation agreements as long as such other clauses don’t function as a non-compete.

• The proposed rule would include a limited exception for non-compete clauses between the seller and buyer of a business. This exception would only be available where the party restricted by the non-compete clause is an owner, member, or partner holding at least a 25% ownership interest in the selling business entity.

What should employers do now?  Employers should closely follow the progress of this rule.  Although it appears that the rule will provide for a compliance period of 180 days, employers should be prepared to act quickly within that time frame if the rule is finalized.  Employers should also consider a detailed review of their current employee agreements to ensure that the non-solicitation and non-disclosure provisions are up to date and provide sufficient protection to the employer.