The laws of most states allow employers and employees to make noncompete agreements. These agreements can range in scope and generally prevent former employees from working (or competing) for a competitor in a similar field for a reasonable amount of time after employment ends.
On January 5, 2023, the Federal Trade Commission (“FTC”) proposed a new rule that would prohibit employers from using noncompete clauses. Specifically, the proposed rule would make it illegal for an employer to:
- Enter into or attempt to enter into a noncompete with a worker;
- Maintain a noncompete with a worker; or
- Represent to a worker, under certain circumstances, that the worker is subject to a noncompete.
This proposed rule would apply to employees, independent contractors, and anyone who works for an employer, whether paid or unpaid. Notably, the rule would also require employers to rescind existing noncompetes and inform workers that they are no longer in effect.
The FTC believes that noncompetes constitute an unfair method of competition and violate Section 5 of the Federal Trade Commission Act. The FTC’s reasoning for this proposed rule is that noncompetes suppress wages, hamper innovation, and block entrepreneurs from starting new businesses.
The FTC estimates that this proposed rule change could increase wages by nearly $300 billion per year and expand opportunities for about 30 million Americans.
There are some notable exceptions to this rule. Non-disclosure agreements and non-solicitation agreements are generally not covered by this rule (although if the agreement is broad enough to be construed as a noncompete, it would be subject to the rule). In fact, the official statement from FTC Chair Lina M. Khan notes that trade secrets laws and confidentiality agreements are reasonable alternatives to achieve the same goal as noncompetes. That statement can be found here.
Another exception is a noncompete agreement entered into upon the sale of the business. A noncompete entered into upon the sale of a business or the person’s ownership interest in the business entity is valid (provided it is not excluded by another applicable law).
The full language of the proposed rule can be found at:
https://www.ftc.gov/legal-library/browse/federal-register-notices/non-compete-clause-rulemaking
The rule has been submitted for public comment until March 10, 2023. If you would like to make a comment, you can do so here. After the public comment period has ended, the FTC will review the comments and may make changes to the final rule.
If you have any questions on how this rule may impact you or your business, the attorneys at Demorest Law Firm would be happy to help you.
