Federal Trade Commission Takes Step to Ban Most Non-Compete Agreements Nationwide
By Patrick S. McCarney – RBE Attorney
The Federal Trade Commission (“FTC”) recently announced that it plans to ban most non-compete agreements nationwide and released a 218-page Notice of Proposed Rulemaking to that effect. Non-compete agreements, also known as covenants not to compete, are contracts that prohibit an individual from working for a competing company or starting a competing business for a certain period of time after leaving their current job. According to the FTC, approximately one in five Americans are bound by some form of non-compete agreement. Non-compete agreements have historically been a matter of state law and are at least somewhat enforceable in 47 states (including Indiana), though they are generally subject to greater judicial scrutiny than other contractual provisions due to their restrictive nature. If the proposed FTC rule becomes a final rule, it would become federal law, at which point it would supersede all state laws related to non-compete agreements.
The proposed rule expressly states that non-compete agreements are an “unfair method of competition” and would generally prohibit all employers from: 1) entering into or attempting to enter into a noncompete with a worker; 2) maintaining a noncompete with a worker; or 3) representing to a worker under certain circumstances that the worker is subject to a non-compete agreement. In addition to traditional employees, the proposed rule also extends to independent contractors and anyone else who works for an employer, whether paid or unpaid, such as interns.
The proposed rule is broad by design, and it does not make exceptions for any particular industry, size of business, type of worker, or level of worker compensation. In other words, the proposed rule would apply with equal force to a minimum-wage worker and a Fortune 500 CEO. However, the proposed rule does include three narrow limitations. First, the proposed rule would not bar other types of contractual employment restrictions, such as non-disclosure agreements and customer or employee non-solicitation agreements (unless such restrictions function as disguised non-compete agreements). Second, the proposed rule does not apply to non-compete agreements binding: 1) a person selling a business entity or otherwise disposing of their entire ownership interest in the business entity; or 2) a person selling substantially all the assets of a business when such person is a substantial owner, member, or partner in the business when entering the non-compete (i.e., holding at least a 25% ownership interest). Third, the proposed rule does not apply to non-compete agreements between franchisees and franchisors, which will remain subject to federal antitrust and other applicable laws.
To comply with the proposed rule if it becomes law, employers would need to rescind their outstanding non-compete agreements. Additionally, employers would be required to provide express notice to workers formerly subject to non-compete agreements stating that they can do any of the following after their employment ends: 1) seek or accept a job with any company or any person—even a competitor; 2) run their own business—even a competing one; and 3) otherwise compete with their employer.
In crafting the proposed rule, the FTC has relied on its statutory authority under Section 5 of the 1914 FTC Act, which provides that “unfair methods of competition in or affecting commerce” are “hereby declared unlawful.” In November 2022, the FTC issued a policy statement recommitting to its use of Section 5 of the FTC Act for enforcement of unfair competition violations after decades of allowing its “authority to lay dormant.” In a joint statement issued in support of the proposed rule banning non-compete agreements, FTC Commissioners Lisa Khan, Rebecca Slaughter, and Alvaro Bedoya stated that non-compete agreements “undermine core economic liberties, burdening Americans’ ability to freely switch jobs.” By contrast, in a dissenting statement, Commissioner Christine Wilson called the proposed rule “a radical departure from hundreds of years of legal precedent” and asserted there was “a lack of clear evidence to support the proposed rule.” This new proposed rule on non-compete agreements also comes on the heels of recent FTC legal action against three companies and two individuals, seeking to force them to drop non-compete restrictions they imposed on thousands of workers.
Among other things, the FTC estimates the proposed rule would:
- Increase workers’ earnings by nearly $300 billion per year;
- Save consumers up to $148 billion annually in health care costs; and
- Double the number of companies founded by a former worker in the same industry.
Nevertheless, before becoming law, the proposed rule will be subject to a public comment period, during which time members of the public can formally weigh in on the proposed rule. The FTC has specifically requested public comment on the following topics:
- Whether franchisees should be covered by the proposed rule;
- Whether senior executives should be exempted from the proposed rule; and
- Whether low and high wage workers should be treated differently under the proposed rule.
Comments must be received within 60 days after the proposed rule is published in the Federal Register, which has not yet occurred. Once the public comment period is open after publication of the notice in the Federal Register, comments can be filed online at https://www.regulations.gov/ and should reference “Non-Compete Clause Rulemaking, Matter No. P201200.”
It remains to be seen how the FTC’s proposed rule will be received by the public, economists, and the business and legal communities. Some companies may argue non-compete agreements are necessary to protect their proprietary information and prevent employee poaching. However, others may welcome the opportunity to freely recruit and hire workers who are no longer bound by non-compete agreements, which could lead to increased competition and innovation in the marketplace. At a minimum, the proposed rule will likely see a very active public comment period and be subject to at least some revisions before becoming law. Given the FTC’s recent recommitment to its enforcement authority under Section 5 of the FTC Act, it appears likely some form of the proposed rule will eventually become law. However, given the significant change in the legal landscape that will result from this proposed rule becoming the law of the land, there will almost certainly be both legislative responses and judicial challenges to the rule if it becomes final.
The team at Riley Bennett Egloff LLP will continue to monitor this situation closely and will provide further updates as new developments arise. If you have questions about the proposed FTC rule, its potential impact on your business, or the current state of law pertaining to non-compete agreements, please contact the author or another member of the Riley Bennett Egloff LLP team.
 15 U.S.C. § 45(a)(1)
Author Patrick S. McCarney
Patrick represents and advises clients in diverse substantive areas, including business entity selection and formation, contract drafting and disputes, municipal law, construction law, insurance defense, and general business litigation.
While attending the Indiana University Robert H. McKinney School of Law, Patrick served as an Articles Editor for the Indiana Law Review and his Note on crowdfunding rules was selected for publication. Patrick also assisted first-year law students with legal writing by serving as a Dean’s Tutorial Society Fellow. Patrick was named to the Order of Barristers in the Moot Court Program and was also a Semi-Finalist in the 2017 Honorable Robert H. Staton Moot Court Competition. In addition, Patrick completed a legal externship with Cummins Inc. where he gained experience in cross-border transactions and intellectual property, including trademarks and trade secrets. Concurrently with his final two years of law school, Patrick completed his M.B.A. from Purdue University’s Krannert School of Management.
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Posted on January 9, 2023, by Patrick S. McCarney