Noncompete Agreements: The FTC’s Proposed Rule and What It Means for Employers

Noncompete agreements have long been a controversial topic in the employment landscape, and the Federal Trade Commission (“FTC”) has publicly taken the position that they limit workers’ career mobility and impede entrepreneurship. In step with their public position, the FTC proposed a new rule in January 2023 that would declare non-compete clauses an unfair method of competition. This blog post provides an overview of the proposed rule and a status update incorporating recent press releases from the FTC.

The Proposed Rule

Understanding Noncompete Agreements

For those unaware, a noncompete agreement is a contract (or contractual term if embedded within a larger agreement, and such term would also be subject to the FTC’s proposed rule) that restricts an employee from working for a competing employer or starting a competing business, (i) for a specified period and (ii) within a defined geographic area, after leaving his current employment. According to the FTC, these clauses limit career opportunities for approximately 30 million American workers and hamstring wages by nearly $300 billion per year.

The Proposed Rule

The FTC’s proposed rule, which would be added as a new subchapter J of part 910 in title 16 of the Code of Federal Regulations, aims to address the negative impact of noncompete agreements. There are a few key components of the proposed rule:

1. Who is covered.

The rule provides definitions (§ 910.1) to establish the scope of its application. Important terms include “employer” and “worker.” “Employer” means “any person (with the broad definition of “person” linked to 15 U.S.C. 57b-1(a)(6)—a definition of “person” that covers nearly every feasible type of individual or entity) that hires or contracts with a worker to work for the person.” § 910.1(c). Additionally, “worker” means “a natural person who works, whether paid or unpaid, for an employer,” expressly including independent contractors and excluding franchisees. § 910.1(f). Ultimately, the intended application of the proposed rule is extremely broad and meant to infiltrate almost all employment relationships.

2. What the rule requires.

The proposed rule deems it an “unfair method of competition” for an employer to enter into, or even attempt to enter into, a noncompete agreement with a worker. § 910.2(a). It also requires employers to rescind existing noncompete agreements if entered into prior to the compliance date, and convey a notification within 45 days of recission that informs the worker that the noncompete agreement is no longer in effect. § 910.2(b)(1). However, the proposed rule exempts non-compete clauses entered into during the sale or transfer of a business entity or its operating assets when the person restricted by the clause is a substantial owner, member, or partner in the entity. § 910.3. To allow sufficient time for employers to adjust, compliance with the proposed rule will be required 180 days after the final rule’s publication. § 910.5.

The Current Status of the Proposed Rule (May 2023)

After the FTC publishes a proposed rule, the FTC seeks public input via a comment period. Stakeholders, including workers, employers, and legal experts, are encouraged to provide feedback on the proposal’s various aspects and suggest alternative approaches. As of the date of this article, over 20,000 comments had been posted in relation to the proposed rule.

Given the substantial public input, the FTC organized a public forum and an extended comment period. The virtual public forum was hosted on Thursday, February 16, purportedly allowing individuals to directly express their thoughts on noncompete clauses. The FTC indicated that the forum would feature speakers who have been subjected to noncompete restrictions and business owners who have dealt with noncompete agreements, and the public would have an opportunity to comment via livestream.

The public comment period was originally scheduled to end on March 20. However, again, the FTC extended the public comment period to a new deadline of April 19. This extension offers individuals and organizations more time to provide feedback and insights on the potential implications of the proposed rule. No further press releases have been issued, so it is unclear at this time whether the proposed rule has been adopted.

Conclusion

The FTC’s proposed rule will have a substantial impact on commercial operations if adopted. Fortunately, the FTC has undergone substantial efforts to solicit public opinion through the public forum and extended comment period, hopefully indicating that any proposed rule adopted will be in the best interests of the public and all parties involved. It is critically important that employers monitor the status of the proposed rule to know if it is adopted, and just what is regulated. If adopted as drafted, the proposed rule would require immediate measures be taken to adjust corporate contracts, rescind active noncompete agreements, and otherwise adjust operations in the absence of such protections. Employers must be prepared for immediate and comprehensive contract overhaul, at least until the FTC gives an indication of what will happen next with the proposed rule.