On January 5, 2023, the Federal Trade Commission (“FTC”) unveiled a proposed ruling that would essentially ban noncompete agreements across the country. This proposed ruling is based on a finding that noncompete agreements constitute an unfair method of competition and violate Section 5 of the Federal Trade Commission Act.
Specifically, the FTC’s new 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.
The proposed rule (if made final) is likely to be challenged in court, but employers should be conscious of this proposal and consider different methods to shield themselves from the acts of former employees, such as focusing on the protection of their confidential information.
‘Worker’ Has a Broad Definition – The proposed rule defines a ‘worker’ as an “employee, individual classified as an independent contractor, extern, intern, volunteer, apprentice, or sole proprietor who provides a service to a client or customer”. Note that the term ‘worker’ does not include a franchisee in the context of a franchisee-franchisor relationship.
Rule Would be Applied Retroactively – Employers would be required to withdraw existing noncompete agreements and inform current and former employees within 45 days that their noncompete clauses are no longer operative. The proposed rule also provides a form of notice, which creates a “safe-harbor” for compliance.
Impact on NDAs That May Function as Noncompetes – While the proposed rule would likely not apply to ordinary non-disclosure agreements, such agreements may be interpreted as noncompete clauses if they prevent workers from finding employment in the same area of work.
The public will be allowed to submit comments on the proposal until March 10, 2023, at which point the agency will move to make it final. Given the sweeping scope of this proposed rule, we anticipate there will be a large amount of comments that may have a significant impact on its material provisions.
As a reminder, about half of states already significantly constrain the use of noncompete agreements, and a small number have deemed them largely unenforceable (including California). However, if this rule becomes final as currently drafted, its impact would be extensive. Employers should be aware of the implications of the planned prohibition of non-competes and be proactive in creating policies and practices that would lessen the risk of misuse of private information.
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