What Employers Need to Know about the FTC’s Proposed Rule Banning Non-Competes

The Federal Trade Commission (FTC) raised questions with employers on Thursday, January 5, when it issued a notice of proposed rulemaking that seeks to ban all non-compete agreements nationwide. While the proposed rule could impose drastic change, at this point, the proposed rule is in the public comment period, and it is uncertain what the final rule will look like or whether it will face legal challenges in the near future. Additionally, employers may be able to affect the scope of any final rule by submitting comments to the FTC during the rulemaking period.

What exactly is this proposal?

It is just that—a proposal—and the first step in the process that the FTC (or any other federal agency) is required to take before implementing a new regulation. For the 60 days following the notice (until March 6), the FTC will receive public comment on the proposed rule from employers and other interested parties. After considering feedback, the FTC could implement the proposed rule in its current form or a modified version.

Who would the rule apply to?

All employers, regardless of size, that use or are planning to use non-competes in their business would be affected. The proposed rule would not apply to certain entities that are exempt from coverage under the FTC Act, such as certain banks, common carriers, and entities not organized to carry on business for their own profit or that of their members.

It would apply to all workers, including those classified as employees and independent contractors. Other than the sale-of-business exception outlined below, the proposed rule does not carve out exceptions for employees in executive, management, or sales positions.

What would the rule require employers to do?

As proposed, the rule would both ban new non-competes and require that employers rescind existing non-competes with current or former employees, with notice to the employee. Importantly, the rule would not apply to non-solicitation or non-disclosure agreements unless they are drafted so broadly as to effectively operate as a non-compete.

What about non-competes in the sale of a business?

Non-competes are a key part of any transaction in which a business owner sells all or substantially all of a business’s assets or equity; if sellers were allowed to compete with buyers after such sale, buyers would not realize the value of acquiring the business. The proposed rule includes a carveout for the sale-of-business context, but only if certain conditions are met—mainly that the person subject to the non-compete is a “substantial owner” of the business being sold, which is defined as holding at least a 25 percent interest.

How long would employers have to comply?

The effective date of any final rule will depend on the length of time after March 6 that the FTC considers feedback and makes changes, if any, to the proposed rule. The FTC will then publish the final rule in the Federal Register, and it will become effective 60 days later. Employers would have another 120 days after that date, however, to comply. When taking the comment period into consideration, this means that employers would not be required to comply until September 2023 at the earliest, but the exact deadline depends on how long it takes the FTC to issue the final rule after March 6 and whether any litigation over the final rule results in any rule being enjoined.

Why is the FTC taking this step?

As justification for the proposed rule, the FTC cites the FTC Act’s delegation of authority to regulate and promulgate rules regarding unfair competition and then explains why it considers non-competes to be an unfair method of competition. Specifically, the agency cites numerous studies and research claiming that non-compete agreements suppress wages (even across state lines), depress competition, decrease the mobility of workers, and increase consumer prices. The agency also claims that in states that prohibit non-competes (California, North Dakota and Oklahoma), businesses have still flourished. As a result, the FTC states that businesses have not realized the threats that proponents of non-competes argue would be seen if non-competes are banned.

The FTC evaluated several alternatives to a full ban, including approaches that some states have taken, such as limiting the application of non-competes to workers of a certain income level. It then explained why it believes those alternatives would not adequately prevent the alleged unfair competition presented by non-competes. The agency is looking for specific input from employers who disagree and believe one or more of these alternatives should be enough to prevent unfair competition without completely banning non-competes.

How do employers submit comments?

Any interested party can submit comments to the FTC online (at Non-Compete Clause Rulemaking, Matter No. P201200 and following the online form’s instructions) or by mailing a hard copy of any comment to either of the following addresses: (1) Federal Trade Commission, Office of the Secretary, 600 Pennsylvania Avenue, NW, Suite CC-5610 (Annex C), Washington, DC 20580; or (2) Federal Trade Commission, Office of the Secretary, Constitution Center, 400 7th Street SW, 5th Floor, Suite 5610, Washington, DC 20024.