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FTC Proposes Nationwide Ban on Noncompetition Agreements

    Client Alerts
  • January 13, 2023

On January 5, the Federal Trade Commission (FTC) published a notice of proposed rulemaking seeking comment on a rule that would declare most U.S. noncompetition agreements unlawful, subject to very limited exceptions. Using its power to regulate “unfair methods of competition” under Section 5 of the Federal Trade Commission Act, the FTC would proactively prohibit employers from entering into noncompete clauses and require employers to rescind all existing noncompete clauses. The rule would preempt all inconsistent state and local laws or regulations.

The FTC takes a functional approach to determine whether an agreement is a noncompete clause. As such, the rule would also prohibit nondisclosure agreements worded so broadly as to effectively prohibit certain types of employment. Even training repayment agreements, under which a worker must reimburse the employer for their training costs if they leave before the end of an agreed term, have drawn scrutiny. Such agreements would be prohibited unless the payment is reasonably related to the costs incurred by the employer for training the worker.

While the proposed rule would invalidate a multitude of agreements, it also includes important exceptions. The definition of a noncompete clause would not include ordinary nondisclosure agreements or client or customer non-solicitation agreements. Additionally, the rule would permit noncompete agreements between the buyer and seller of a business in order to protect the value of a business acquired by the buyer.

The public now has 60 days following the publication of the proposed rule to submit comments. Following the comment period, the FTC will publish a final rule and may begin enforcement within 180 days after the publication of the final rule.

The bigger question, however, is whether the rule will withstand inevitable and significant legal challenges in the meantime. The U.S. Chamber of Commerce has already declared that the proposed rule is “blatantly unlawful” and will not withstand legal challenge. The FTC enabling legislation appears to lack the clear authorization of the type required under recent U.S. Supreme Court decisions.

Recent enforcement activities regarding restrictive agreements signal that the FTC is likely to assert a vigorous defense of the proposed rule. On January 4, 2023, the agency announced that it had entered into consent orders with three companies and two individuals, forcing them to rescind unlawful noncompete restrictions. In October 2022, the Department of Justice (DOJ) secured its first corporate guilty plea arising from allegations of an anti-competitive no-poaching arrangement. In February 2022, the FTC issued a policy statement declaring its intention to combat the use of restrictive covenants for gig workers.

Employers that currently use noncompete agreements should watch this space for updates on the proposed rule. Even if the rule never takes effect, employers may also consider reviewing the strategies regarding noncompete agreements to ensure compliance with recent state laws and enforcement guidance.