FTC Proposes Ban On Non Competes: Public Comments Due
(March 10, 2023)
Non-compete agreements in the workplace are not exactly new. The first recorded judicial enforcement of a non-compete in the US was in 1621, when a noncompete was enforced in the case of Broad v. Jollyffe. See Alger v. Thacher, 36 Mass. 51, 53 (1837). Since that time, the validity of non-compete agreements has largely been a matter of state law.
Some 400 years later, on January 5, 2023, the Federal Trade Commission (FTC) has issued a proposed Rule which would prohibit employers from entering into non-compete agreements. The proposed Rule would also require employers to rescind all existing non-compete clauses and to provide notice to the employee that the non-compete clause is no longer in effect.
The FTC argues that non-compete clauses prevent employees from leaving jobs and decrease competition in the workplace. In essence, the FTC takes the position that employers’ use of such restrictive covenants constitutes a form of unfair competition.
The proposed Rule utilizes very broad definitions. For example, the term “employer” is “a person, that hires or contracts with a worker” and by reference to the US Code, the Rule defines “person” as “any natural person, partnership, corporation, association, or other legal entity.”
Under the proposed Rule, a “worker” is defined to include employees, independent contractors, interns, volunteers, or sole proprietors. The term does not include the franchisee-franchisor relationship as that is already subject to Federal antitrust law.
The proposed Rule would also potentially impact the use of non-disclosure agreements, as well as any other agreements that might be construed as limiting the employee’s ability to seek alternative employment. For example, the Rule specifically uses the example of training repayment agreements, where an employee is required to repay the employer for training costs if the worker leave employment within a specified period of time. The proposed Rule includes noncompete clauses in contracts that are considered “de facto noncompete clauses” because although not entitled as a non-compete clauses, such provisions have the effect of prohibiting the worker from seeking or accepting alternative employment.
The proposed Rule, if finalized, would become part of 16 CFR Part 910 and become effective 180 days after the date of publication. For now, the Rule is only a proposed Rule and the public has the ability to comment on the proposed Rule until March 10, 2023.
Significant comment from business to the FTC is anticipated, as well as prompt litigation if the proposed Rule is adopted. It is certainly unclear, at best, whether the FTC has the statutory authority to issue such a Rule. Stay tuned.