FTD Proposes Non-Compete Agreement Ban

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Brownstein                                                                        January 9, 2023

NEWS
The Federal Trade Commission Proposes Ban on Employer-Worker Non-Compete Agreements

On Jan. 5, 2023, the Federal Trade Commission (FTC) issued a Notice of Proposed Rulemaking (Proposed Rule) seeking to categorically ban nearly all employer non-competition agreements nationwide. If passed in its draft form, the Proposed Rule would: (1) prohibit employers from entering into virtually all non-compete agreements with all workers, (2) require employers to rescind existing non-compete agreements, and (3) require employers to notify past and current employees that their non-compete obligations are no longer in effect. The Proposed Rule would supersede all less-restrictive state non-compete laws, which in many jurisdictions are common and enforceable if the restriction reasonably protects the employer’s legitimate business interests. The Proposed Rule marks a major shift to the legality and enforceability of non-compete agreements. Employers who have historically included non-competition provisions in employee handbooks, employment agreements and equity grants will need to make significant changes before the Proposed Rule is implemented.

The Proposed Rule is in response to July 2021 Executive Order 14036, which directed the FTC to issue rules to limit the use of non-compete clauses “that may unfairly limit worker mobility.” In response, the FTC took a sweeping approach to banning non-competes, deeming such clauses as categorically unfair. The Proposed Rule broadly defines a non-compete agreement to include any “contractual term between an employer and a worker that prevents the worker from seeking or accepting employment with a person, or operating a business, after the conclusion of the worker’s employment with the employer.” The Proposed Rule also forbids any contractual provision that achieves a similar effect, such as an overly broad nondisclosure or non-solicitation agreement that would effectively preclude a worker from working in the same field. The rule applies to all employers nationwide and all “workers,” including an employee, independent contractor, extern, intern, volunteer, apprentice or sole proprietor who provides a service to a client or customer.

Further, the Proposed Rule would require employers to rescind existing non-compete clauses no later than the rule’s compliance date. The Proposed Rule places the onus on employers rescinding a non-compete clause to provide notice to current and former employees before the date the rule becomes effective. The Proposed Rule provides model language for such notice and would also establish a safe harbor provision whereby an employer would satisfy the rescission requirement when it provides satisfactory notice to the affected workers. Finally, the Proposed Rule would also prohibit an employer from representing to a worker that the worker is covered by a non-compete clause where the employer has no good faith basis to believe the worker is subject to an enforceable non-compete clause. Under this provision, employers are prohibited from threatening to enforce a non-compete clause against a worker, advising a worker against pursuing a particular job opportunity due to a non-compete clause, or representing to a worker that the worker is covered by a non-compete clause.

AUTHORS

Sarah Auchterlonie

Kayla Dreyer

Craig Finger

Rosemary Becchi, Strategic Advisor and Counsel

Annmarie Conboy-DePasquale, Policy Advisor

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This document is intended to provide you with general information regarding the FTC's non-compete ban. The contents of this document are not intended to provide specific legal advice. If you have any questions about the contents of this document or if you need legal advice as to an issue, please contact the attorneys listed or your regular Brownstein Hyatt Farber Schreck, LLP attorney. This communication may be considered advertising in some jurisdictions.

The information in this article is accurate as of the publication date. Because the law in this area is changing rapidly, and insights are not automatically updated, continued accuracy cannot be guaranteed.

[ILLMAS]

Imagine if employers pushed to be allowed to give negative references to equal the playing field.