Non-Competition Clauses Under Fire: Will They Be Banned By The FTC?

Speculation surrounding the end of non-competition clauses in employment agreements has been circulating for more than a year. On July 9, 2021, President Biden issued an executive order seeking to promote competition in the workplace, effectively banning the use of non-competition agreements by employers. More recently, the Federal Trade Commission (FTC) proposed a new rule earlier this year (the “Proposed Rule”) generally prohibiting non-competition restrictions.

Non-competition clauses are used by employers to prohibit employees from working for a competing employer or starting a competing business. Typically, non-competition provisions are restricted to certain geographic regions for a limited period of time after termination of employment. The FTC estimates that these types of restrictions impact more than 30 million Americans and that, by banning them, the proposed FTC rule could increase wages from $250 to $296 for American employees.[1]

A number of states have already banned or restricted the use of non-competition provisions against for low-income workers.[2] California, Oklahoma, and North Dakota have gone a step further and largely banned all non-competition restrictions.

The FTC’s Proposed Rule would categorically ban non-competition clauses, with limited exceptions, based on the theory that non-competition clauses constitute an unfair method of competition in violation of section 5 of the Federal Trade Commission Act. In particular, the Proposed Rules states: “It is 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 noncompete clause; or represent to a worker that the worker is subject to a noncompete clause where the employer has no good faith basis to believe that the worker is subject to an enforceable noncompete clause.”[3]

The Proposed Rule would prohibit employers from entering into new noncompetition agreements with workers, rescind existing non-compete agreements and require employers to actively inform workers of such rescission. In addition, other restrictive covenants with largely the same effect as a non-competition agreement (i.e., de facto non-compete clauses) would similarly be unenforceable under the FTC’s Proposed Rule. The Proposed Rule provides examples contractual terms that may be considered to be de facto non-compete clauses, including a non-disclosure agreement “that is written so broadly that it effectively precludes the worker from working in the same field after the conclusion of the worker’s employment with the employer” and “[a] contractual term between an employer and a worker that requires the worker to pay the employer or a third party entity for training costs if the worker’s employment terminates within a specified time period, where the required payment is not reasonably related to the costs the employer incurred for training the worker.”[4]

The applicability of the Proposed Rule is not limited to the traditional employer/employee relationship.  Rather, it applies to all “workers,” which term is defined as “a natural person who works, whether paid or unpaid, for an employer. The term includes, without limitation, an employee, individual classified as an independent contractor, extern, intern, volunteer, apprentice, or sole proprietor who provides a service to a client or customer…”[5]

The Proposed Rule provides a limited exception to its ban on non-compete clauses, stating that it does not apply to non-compete clauses that are “entered into by a person who is selling a business entity or otherwise disposing of all of the person’s ownership interest in the business entity, or by a person who is selling all or substantially all of a business entity’s operating assets, when the person restricted by the non-compete clause is a substantial owner of, or substantial member or substantial partner in, the business entity at the time the person enters into the non-compete clause.”[6]

At this time, the Proposed Rule is nothing more than that (a proposed rule), and the time period for the public to submit comments to it has been extended until April 19, 2023.  The FTC will then consider such comments received in drafting and publishing any final rule, which would then go into effect 180 days after it is published. Event if the Proposed Rule is finalized and published, it is likely that it will face legal challenges, which could further delay its effective date or invalidate the rule.[7]

Current non-competition agreements and the enforceability thereof remain subject to applicable state laws and federal antitrust laws. At this time, employers, employees, and other interested parties who regularly use, rely upon, or are subject to non-competition agreements should review the Proposed Rule, monitor its status and consider submitting comments.




[2] Illinois, Maryland, Maine, Massachusetts, Oregon, Nevada, New Hampshire, Rhode Island, Virginia, and Washington.

[3] See proposed 16 CFR 910.2(a).

[4] See proposed 16 CFR 910.1(b)(2).

[5] See proposed 16 CFR 910.1(b)(2)(f).

[6] The scope of this limited exception is even further narrowed by the Proposed Rule’s definitions of “substantial owner,” “substantial member,” and “substantial partner,” which mean an “owner, member, or partner holding at least a 25 percent ownership interest in a business entity.”

[7] The dissenting member of the FTC identified at least three grounds for potential legal challenge to the Proposed Rule: (1) the Act does not provide the FTC authority for competition rulemaking; (2) the “major questions doctrine,” recently explained in West Virginia v. EPA, 142 S. Ct. 2587 (2022), could be applied to challenge whether Congress in fact clearly meant to confer this rulemaking authority upon the FTC; and (3) the Proposed Rule constitutes an impermissible delegation of legislative authority to the FTC under the non-delegation doctrine.

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