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What Employers And Employees Need To Know About The Federal Trade Commission’s Proposed Ban On Non-Compete Agreements

by | Mar 10, 2023 | By Steve Harvey, Executive Employment, Frontpage Article

Non-compete agreements (also known as covenants not to compete) are a type of contract provision that provides that a person or business will not compete against another person or business under certain circumstances. For many years they have been widely used in the employment context in the United States, except in California, where they have long been considered unenforceable on the grounds that they restrict competition too greatly. In virtually all other states, they have been subject to legal limitations but nonetheless have been considered quite legal and have been widely used.

This is about to change greatly, however, because on January 5, 2023, the Federal Trade Commission (“FTC”) proposed a new rule that, if it becomes final, would ban non-compete agreements between any employer and any employee or independent contractor. Once the proposed new rule—the “FTC Non-Compete Ban”—becomes final, employers will have 180 days to rescind any existing non-compete agreements that violate the Ban.

There is an exception to the Ban when the non-compete agreement is agreed to in the context of the sale of a business and the employee to whom it applies owns at least 25 percent of the business.

If the Ban becomes final, it will also apply to (1) non-disclosure agreements that are written so broadly that they effectively preclude work in the same field and (2) agreements that require the repayment of training costs if an employee leaves within a specified time.

Non-compete agreements are traditionally governed by state law, not federal law. The Ban would change this and preempt any state laws to the contrary.

The FTC will accept public comments on the proposed Ban for 60 days from January 9, 2023. After that, it will consider the comments and almost certainly publish the Ban as a final rule, possibly with some changes but mainly as is.

Employers will surely challenge the Ban in court and it will end up being decided by one or more of the federal courts of appeals and possibly the Supreme Court.

Many employers will complain that the FTC Non-Compete Ban unfairly prohibits them from using non-compete agreements to protect their confidential information and business relationships. Organizations that represent employees will respond that employers have no one but themselves to blame, as non-compete agreements have been used far more extensively and broadly than is necessary for any legitimate business purposes and have been applied to a wide range of low-level employees, which has unfairly prevented many employees from leaving undesirable jobs.

The FTC’s rationale for the Ban is based on economics. The FTC “estimates that the new proposed rule could increase wages by nearly $300 billion per year and expand career opportunities for about 30 million Americans.” The FTC also maintains that “noncompete clauses also hinder innovation and business dynamism in multiple ways—from preventing would-be entrepreneurs from forming competing businesses, to inhibiting workers from bringing innovative ideas to new companies.”

Just the existence of the proposed Ban will be enough to discourage litigation over non-compete agreements. Once it becomes final, such litigation (apart from cases challenging the validity of the Ban itself) will become rare indeed and only in cases involving the sale of businesses, or involving narrowly-drawn non-disclosure agreements. Does this mean that employees will not have to worry about threats of litigation when they leave their employment? The correct answer, as always, is “it depends.” As explained in our pages on Trade Secrets and Employee Fiduciary Duties, employers may still bring claims against employees who violate their fiduciary duties by engaging in competition with their employer before they leave or who misappropriate trade secrets. The law in these areas is robust and will continue to be the subject of litigation between employers and former employees, but the days of non-compete litigation are mainly over.