Client Alert: FTC Proposal to Ban All Non-Compete Clauses – Legal Update
Date: August 3, 2023
Non-compete clauses impact approximately one in five American employees or 30 million people. The Federal Trade Commission (“FTC”) recently proposed a ban on non-compete clauses in employment agreements. On January 11, 2023, Whiteford published an Alert on this proposal, but here’s an update about what you need to know regarding the ban and reports of recent FTC action to enforce these restrictions.
What is a Non-Compete Clause?
A non-compete clause is a contractual term between an employer and an employee that forbids an employee from working for a competing employer or starting a rival company/business. Typically, this applies within a particular geographic area and for a specific period of time after the worker’s employment ends. The FTC, premised on the assumption that the clauses are “an unfair method of competition,” argues that because non-competes prevent workers from leaving jobs, they decrease competition for workers and allegedly lower wages for all workers, even those not subject to them. Additionally, the FTC asserts that they prevent new businesses from forming and stifle entrepreneurship, as well as any innovation that would otherwise occur when workers can broadly share their ideas in the market. Alternatively, employers maintain that these contracts provide necessary protection for investment in employee development, manager training, and their business’s trade secrets. Thus, there is a robust debate over theories on the economic value of non-compete clauses in today’s workplace.
The FTC Proposal
On January 5, 2023 the FTC announced, and then on January 19, 2023 released , a notice of proposed rulemaking that would generally prohibit employers from using non-compete clauses. Specifically, the FTC’s proposed new rule would make it illegal and unenforceable for an employer to:
- Enter into or attempt to enter into a non-compete with a worker;
- Maintain a non-compete with a worker;
- Represent to a worker, under certain circumstances, that the worker is subject to a non-compete.
The rule would apply to, whether paid or not, any individual who works for an employer and all independent contractors. It is also retroactive; thus, employers must rescind existing non-competes and inform workers that they are no longer in effect. The FTC argues its proposed prohibition could increase workers’ collective earnings by about $300 billion annually.
Exceptions to the Non-Compete Ban
The proposed ban is limited to traditional “pure” non-compete covenants. It is not per se a prohibition on restrictive covenants, like customer or employee non-solicitation agreements, unless they are overly broad. It would not prohibit confidentiality agreements, fixed-term employment contracts, concurrent employment restraints, sale of business non-competes, and employers not covered by the FTC Act. These exempt employers include certain banks, savings and loan associations, common carriers, air carriers, and non-profit organizations.
What Should Employers Do Now?
The real fight is just beginning. The proposed rule opened for a public comment period that ended March 20, 2023, receiving over 27,000 comments. By late February, the agency had already spent $500,000 on its rulemaking effort. Thus, the agency has a lot to consider before the proposal is finalized and put to a vote in April 2024. If the proposed rule becomes effective, it will likely require employers to: retract any existing non-compete agreements or provisions within 180 days of publication of the final rule in the Federal Register and provide individualized notice to both current and former workers covered by a non-compete that it is now no longer in effect.
Just this year, four large companies’ employer-employee non-compete agreements have already been subject to administrative enforcement actions by the FTC. More recently, the FTC ordered that a company’s use of non-compete restrictions constituted an unfair method of competition under Section 5 of the FTC Act. In a complaint filed against Anchor Glass Container Corp. and its owners, the FTC stated that Anchor “illegally imposed non-compete restrictions on more than 300 workers” and banned them “from entering into, maintaining, enforcing or attempting to enforce, or threatening to enforce non-compete restrictions on relevant workers,” as well as required them to give notice to any relevant employees about the removal of the policy and any restrictions. The three other claims were against a security company, Prudential Security, Inc., and two glass container manufacturers, O-I Glass, Inc., and Ardagh Group S.A. These decisions provide evidence that as the FTC continues to investigate restrictive terms, they might come after larger employers’ non-competes, even before the proposed rule is published.
Therefore, employers should use this opportunity to stay ahead of the legal and regulatory trends by determining how best to protect their trade secrets, employee training practices, and other interests — possibly requiring new agreements with employees before the proposed law goes into effect.
If you think the FTC proposal may impact your business or need any assistance with your employment practices, Whiteford attorneys stand ready to help.
*Summer Intern, 2023
The information contained here is not intended to provide legal advice or opinion and should not be acted upon without consulting an attorney. Counsel should not be selected based on advertising materials, and we recommend that you conduct further investigation when seeking legal representation.