FTC Proposes Rule That Would Ban Non-Compete Agreements

By Dani Dobosz, John Harris, Isaac Linnartz and Zeb Anderson

On January 5, 2023, the Federal Trade Commission ("FTC") issued a Notice of Proposed Rulemaking proposing a "Non-Compete Clause Rule." If the proposed rule goes into effect as drafted, it would ban employers across the country from using non-compete clauses with their employees and independent contractors. Once the proposed rule is published in the Federal Register, the public will have 60 days to provide comments, which the agency will then consider before issuing any final rule.

Additional key points of this proposed rule include:

• Under the rule, non-compete agreements would be per se unfair methods of competition.

• The rule would ban "de facto" non-compete clauses, including non-disclosure agreements that are so broad as to essentially operate as non-competes and certain training repayment agreements.

• The rule would require employers to rescind existing non-compete clauses and notify present and former workers in a written, individualized communication that their non-compete clauses are no longer in effect.

The FTC also has indicated it will consider certain alternatives to the categorical ban, including salary thresholds for the ban, exceptions for agreements with senior executives, an exception for franchisor-franchisee agreements and other alternatives. As this suggests, the proposed rule represents the FTC’s opening position, and it does not necessarily indicate what a final rule might contain. It also is likely that any final rule will be subject to legal challenge, as the U.S. Chamber of Commerce already has articulated its opposition to the proposed rule.

There is no timeline for the FTC to issue a final rule, but the process will likely take a number of months, at least. Smith Anderson and its Non-Compete and Trade Secrets group will continue to monitor the rulemaking process and provide updates on significant developments.

In the meantime, the FTC appears to be stepping up enforcement against non-compete practices that it contends violate the Federal Trade Commission Act. Smith Anderson will continue to monitor these developments as well, and we are prepared to assist in the event you are contacted by the FTC or any other government agency regarding any non-compete practices.

If you have questions related to this alert, please contact Zeb Anderson, Isaac Linnartz or any other member of the Non-Compete and Trade Secrets group or your regular Smith Anderson lawyer.