FTC Proposes Rule to Impose Nation-Wide Ban on Non-Compete Agreements

01.11.2023

You read that correctly. On January 5, 2023, the Federal Trade Commission (the “FTC”) issued a Notice of Proposed Rulemaking to “prevent employers from entering into non-compete clauses with workers and requiring employers to rescind existing non-compete clauses” (the “Rule”). This move comes on the heels of a recent tide-change in which a number of states, including Virginia, have implemented statutes restricting or prohibiting employers’ use of non-competes. This Rule, however, is far more expansive than most existing state legislation.

The Rule defines a non-compete clause as any “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.” The Rule then provides that it shall be an “unfair method of competition for an employer to enter into or attempt to enter into a non-compete clause with a worker; maintain with a worker a non-compete clause; or represent to a worker that the worker is subject to a non-compete clause where the employer has no good-faith basis to believe that the worker is subject to an enforceable non-compete clause.”

The breadth of the Rule’s definition of a “non-compete clause” includes non-disclosure or confidentiality provisions that would “have the effect of prohibiting 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.” This includes, for example, non-disclosure agreements that are so broad that they effectively prohibit the worker from working in the same line of business after the conclusion of employment, as well as provisions that require the worker to pay for certain training costs if the payment is not related to the costs the employer incurred for training the worker.

Notably, there is no exemption for non-compete provisions signed prior to the effective date of the Rule. Instead, Employers would need to rescind all existing non-compete provisions within 180 days of the publication of the final Rule and provide employees and former employees who were subject to such provisions with notice that the non-compete provisions have been revoked (a draft of the FTC’s sample language for such notices can be found on Pages 214 and 215 of the Proposed Rule).

The Proposed Rule is currently subject to a 60-day comment period, and may be revised based on feedback provided from interested parties. The Rule may also be subject to legal challenge in court, with opponents arguing that the FTC has overstepped its authority in implementing the Rule. Employers should therefore stay abreast of any new developments regarding the Rule. In the meantime, companies should seek counsel to review their existing restrictive covenant agreements to begin planning for potential revisions. Employers should also consider creating an action plan in the event that the Rule goes into effect, as compliance with the Rule could pose an administrative burden.