According to Bloomberg, The Federal Trade Commission (“FTC”) is not expected to vote on the final version of a new rule that would ban noncompete clauses in employment contracts until April 2024. The rule defines a “non-compete clause” as “a contractual term between an employer and a worker that prevents 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.”
As we previously reported, the proposed rule would ban employers from imposing noncompete agreements on their employees. The rule would also require employers to rescind all preexisting noncompete agreements and to notify all employees who had been subject to a noncompete agreement of the recission. Although the proposed rule would not prohibit other kinds of employment restrictions, such as nondisclosure agreements, certain restrictions that are overbroad could be subject to the new rule. For example, a non-disclosure agreement between an employer and an employee that is written so broadly that it effectively precludes the employee from working in the same field would be considered a “de facto” noncompete clause.
The proposed rule is based upon a preliminary finding that noncompete agreements constitute an unfair method of competition and, therefore, violate Section 5 of the Federal Trade Commission Act, which prohibits unfair or deceptive acts or practices affecting commerce. When announcing the proposed rule in January, the Chair of the FTC, Lina M. Khan, noted that “[t]he freedom to change jobs is core to economic liberty and to a competitive, thriving economy.” The FTC estimates that the new rule would increase wages by nearly $300 billion per year and would expand career opportunities for approximately 30 million Americans.
After the proposed rule was announced, the FTC received 26,813 comments. Although the rule garnered support from labor and advocacy groups, other industry groups vehemently oppose the rule. The U.S. Chamber of Commerce called the proposed rule “blatantly unlawful,” arguing that it goes beyond the FTC’s statutory authority. As we previously reported, there are serious questions about the FTC’s authority to regulate noncompete agreements under Section 5 of the Federal Trade Commission Act, especially following the Supreme Court’s 2022 decision in West Virginia v. Environmental Protection Agency, which struck down an environmental regulation enacted by the Environmental Protection Agency (“EPA”) on the basis that the EPA did not have “clear congressional authority” to issue a rule concerning an issue of “great political significance” that would affect “a significant portion of the American economy.”
Assuming the FTC votes to issue the final rule, whether in April or otherwise, the rule will face legal challenges, which likely will result in the rule being enjoined before it takes effect. Therefore, in the interim, employers should stay the course and not make any immediate changes to their noncompete practices. Employers may also consider in appropriate circumstances transitioning away from noncompete agreements and, instead, focusing on strong non-solicitation agreements, confidentiality covenants, and requirements for advance notice of resignation, none of which are affected by the FTC’s new rule prohibiting noncompete agreements. Now is a good time to take a wholistic review of restrictive covenant practices, in particular as state laws are quickly evolving.
Epstein Becker & Green will continue to track developments regarding this rule and will remain ready to advise employers who rely on restrictive covenants to protect their legitimate business interests on how to navigate potentially shifting tides in the coming year.