The FTC’s proposed rule would effectively ban worker non-compete provisions by deeming them an unfair method of competition under the FTC Act. The proposed rule would make it unlawful for employers to enter or keep any non-compete provisions with current or former workers in place. Non-compete provisions are contract terms that prevent workers from seeking or accepting employment or operating a business after their employment with the employer ends.
The proposed rule does not apply to customer or employee non-solicitation provisions, confidentiality, or non-disclosure agreements. The proposed rule applies a functional test for determining whether the rule covers a clause. A provision is considered a de facto non-compete provision if it prohibits the worker from seeking or accepting employment with a person or operating a business after the worker’s employment with the employer. The proposed rule includes, as an example, a non-disclosure agreement between an employer and a worker that is written so broadly that it effectively precludes the worker from working in the same field after the conclusion of the worker’s employment with the employer.
The proposed rule broadly defines worker to include any natural person who works, whether paid or unpaid, for an employer, including independent contractors, externs, interns, volunteers, apprentices, or sole proprietors who provide a service to a client or customer.
The rule would require employers with existing non-compete provisions that violate the rule to affirmatively rescind existing non-compete clauses with current workers and give individualized notice to workers that they are no longer subject to the non-compete clause. Employers would also be required to rescind non-compete clauses in effect with former workers and give them notice of the rescission as long as the employer has the former worker’s contact information readily available. Employers would be prohibited from representing to a worker that the worker is covered by a non-compete clause when the employer has no good-faith basis to believe the worker is subject to an enforceable non-compete clause.
Sale of Business
The rule would provide a single, limited exception for the sale of a business. The exception says the rule shall not apply to a non-compete clause entered into by a person selling a business entity or otherwise disposing of all of the person’s ownership interest in the business entity. The exception applies only to a person who owns at least a 25% ownership interest in a business entity at the time the person enters into the non-compete clause.
The proposed rule says it supersedes any state statute, regulation, order, or judicial interpretation inconsistent with it. However, a state statute, regulation, order, or interpretation is not inconsistent with the rule if it provides greater protections to workers than the rule. As a result, the proposed rule sets a floor for worker protection against non-compete agreements but keeps state and federal law in effect that provides workers greater protection.
The proposed rule would establish separate effective and compliance dates. The effective date would be sixty days after the final rule is published in the Federal Register. The compliance date would be 180 days after the final rule is published in the Federal Register.
The time between the effective date and the compliance date is when employers must be prepared to comply with the proposed rule’s provisions by the compliance date.
Employers should carefully monitor the status of the proposed rule. It will likely face significant legal challenges, and its fate is uncertain. Employers should audit their non-compete agreements and practices to determine whether and to what extent they may be impacted should the proposed rule become law.
Employers relying primarily on non-compete restrictions to prevent unfair competition or theft of trade secrets may consider strengthening or modifying their non-solicitation and non-disclosure restrictions. Employers should also evaluate their confidentiality agreements to evaluate the risk that they may be considered de facto non-competes invalidated by the proposed rule and ensure they comply with the antitrust laws. Employers may also consider identifying vulnerabilities within their organization if key current and former employees suddenly have unenforceable non-compete restrictions. A contingency plan could save resources and prevent significant impacts.
If the proposed rule is adopted in its current state, it will place much greater importance on policing corporate confidential and trade secret information since companies would lose the ability to prevent former employees from immediately going to work for a direct competitor. This provides an additional incentive for companies to proactively take stock of their confidentiality practices and agreements to ensure they are fully prepared if the FTC implements the proposed rule in its current form.