News & Insights

Federal Trade Commission Proposes Rule To Ban Noncompete Agreements

On January 5, 2023, the Federal Trade Commission (“FTC”) proposed a rule to ban non-compete agreements between employers and workers. The proposed rule would prevent employers from requiring workers to agree to contract clauses that prevent the worker from seeking or accepting employment with another employer or operating a business after the conclusion of the worker’s employment. The only exception to the proposed rule is non-compete agreements stemming from the sale of a business or ownership interest in a business.  The FTC has proposed the rule on the basis that non-compete agreements are unfair methods of competition, and it estimates that the rule would increase American workers’ earnings between $250 billion and $296 billion per year. 

The proposed rule provides a “functional test for whether a contractual term is a non-compete clause,” which encompasses all contractual terms that have the effect of prohibiting a worker from seeking or accepting employment with a person or from operating a business after the conclusion of the worker’s employment with the employer.  The rule includes that broad non-disclosure agreements that keep workers from staying in the same field, and contract terms that require workers to pay for training costs if terminated will be treated as de facto non-compete agreements that are prohibited.  If enacted, the proposed rule would supersede all contradictory state laws. 

Advocates of the proposed rule argue that non-compete agreements contribute to wage stagnation.  President Joe Biden called the FTC action “a huge step forward in banning non-compete agreements that are designed simply to lower people’s wages.”  Opponents of the proposed rule argue that non-compete agreements help protect start-ups and small businesses by safe-guarding trade secrets.

The FTC claims to have authority under Section 5 of the FTC Act, which allows the FTC to prohibit unfair methods of competition. See 15 U.S.C. § 45. The rule making process begins with the FTC publishing the rule to the Federal Register, after which the public has 60 days to submit commentary on the rule.  Once the commentary period ends, the FTC will review the comments and make changes to the rule as it deems necessary.  Should the FTC finalize the rule, employers will have 180 days to comply, which includes rescinding all non-compete agreements and providing each worker individualized notice within 45 days of the recission.  However, this process will almost certainly be delayed, and even derailed, by legal challenges, with groups such as the U.S. Chamber of Commerce already deeming the proposed rule as “blatantly awful.”