In response to a 2021 Executive Order from President Biden, on January 5, 2023, the Federal Trade Commission (FTC) issued notice of a proposed rule that will prohibit most forms of noncompete agreements between employers and employees. Under the proposed rule, it is an unfair method of competition for an employer to enter into a noncompete agreement with an employee. Employers and members of the public will have 60 days after the proposed rule is published in the Federal Register to make comments. The FTC will then issue a final rule that will amend the Code of Federal Regulations consistent with the final rule.
The proposed rule broadly defines noncompete agreements as any contractual provision between an employer and an employee that prevents the employee from being employed with another competing person or company or that prevents the employee from operating their own competing business once the employee no longer works for the employer. Employers and employees are also broadly defined. An employer is any person or company that hires or contracts with a worker. An employee is any natural person who works for an employer, and includes independent contractors, volunteers, interns, unpaid workers and others.
The proposed rule does not prohibit noncompete agreements with independent contractors who operate as businesses nor noncompete agreements for sales of businesses. The proposed rule also does not prohibit non-solicitation agreements pertaining to customers and employees and does not prohibit confidentiality agreements that bar employee disclosure of confidential employer information. Employers can still protect their trade secrets under federal and state trade secret laws. However, the proposed rule expressly states that contractual terms are prohibited noncompete agreements if they have the effect of prohibiting the employee from accepting work after their employment ends.
Notably, the proposed rule not only prohibits future noncompete agreements but also all noncompete agreements currently in existence. Employers are obligated to notify both current and former employees that a prohibited noncompete agreement is void by sending an individualized communication such as a letter or email to each affected employee, past and current. There are no specific enforcement provisions in the proposed rule, such as statutory fines for violations or private causes of action, but it will be enforced pursuant to section 5 of the FTC Act.
The purported authority for the rule is the FTC’s power to regulate unfair methods of competition, and the rule supersedes all state laws and regulations that conflict with the rule.
The rule is sure to receive extensive legal challenges, including whether the rule exceeds the FTC’s rulemaking authority, and whether the rule’s retroactive application violates employers’ property and due process rights.
We will continue to closely monitor the proposed rule and any legal challenges, and provide updates as appropriate.