On January 5, 2023, the Federal Trade Commission (FTC) proposed a new rule that, if enacted, will ban U.S. non-competition clauses in employment agreements almost entirely, both at the state and Federal level.
A non-competition clause is a contractual term between an employer and a “worker” (with an expansive definition of who is a worker) that blocks the worker from working for a competing employer, or starting a competing business, typically within a certain geographic area and a certain defined period of time after the worker’s employment ends.
The FTC’s rationale for the proposed ban is that they regard non-competition clauses as an unfair competitive practice and harmful to American workers. The FTC states that about one in five American workers, approximately 30 million people, are bound by a non-competition clause and are thus restricted from pursuing competing and potentially better employment opportunities. The FTC estimates that the proposed rule would increase American workers’ earnings between $250 billion and $296 billion per year.
The proposed rule would not only ban entering into and enforcing future non-competition clauses, but it would also require employers to rescind millions of existing non-competition clauses as well. If enacted, compliance with the rule would be required within 180 days.
The proposed rule would apply to both explicit and de facto non-competition clauses, meaning it would also ban any non-disclosure agreements between employers and workers that are written so broadly as to effectively preclude the worker from working in the same field post-employment.
The one exception to the ban is in the context of non-competition clauses for persons with substantial ownership interests in a business that they are selling. For purposes of the proposed rule, the FTC defines a substantial ownership interest as 25% or greater ownership.
Critics of the proposed rule question whether (1) the FTC’s rulemaking process rather than the legislative process is the appropriate way to address issues with non-competition agreements; and (2) whether the FTC even has the authority under Section 5 of the Federal Trade Commission Act to change the law as contemplated by the proposed rule. Employers are likely to oppose the proposed rule, particularly in the context of higher-earning, higher-skilled workers who have access to confidential intellectual property of the employer. And if enacted, the rule would likely result in an increase in trade secrets and intellectual property litigation brought by employers against former workers who depart to work for or start competing businesses.
As of right now, the FTC proposal is still just a proposed rule and is open to a 60 day public comment period, so it may end up being revised or possibly not enacted at all. The comment period ends on March 10, 2023. Regardless, it indicates that the FTC is pursuing a significant regulatory agenda.
Greenspoon Marder’s employment, corporate, intellectual property, and litigation practices will be monitoring developments on this proposal, and we welcome your questions and comments.
For more information on how this potential rule may affect your business or employment, please contact us at info@gmlaw.com .
Robert Wessely robert.wessely@gmlaw.com
Sharon Urias sharon.urias@gmlaw.com
Brian Koegle brian.koegle@gmlaw.com
Kevin Ryan kevin.ryan@gmlaw.com
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