Aug. 20, 2024 Update: On Aug. 20, 2024, the U.S. District Court for the Northern District of Texas set aside the FTC’s Final Rule on a nationwide basis. See our latest alert on the topic.
RELATED UPDATE: FTC Issues Final Rule Banning Most Non-Compete Agreements
(April 24, 2024)
On Jan. 5, 2023, the Federal Trade Commission proposed a new rule that would ban non-compete agreements between employers and workers in most circumstances and require employers to rescind any existing non-compete agreements with current and former workers. The announcement came just one day after the FTC brought suits alleging that three employers’ non-compete agreements violate the FTC Act. Non-compete agreements are commonplace in many employment and transaction-related agreements and are enforceable in most jurisdictions if they protect legitimate business interests and are otherwise reasonable. The FTC’s actions would turn that status quo on its head and invalidate non-compete agreements that many employers have long used. The proposed rule is striking in both scope and substance.
What Does the Proposed Rule Say?
The proposed rule has two primary components. First, it would prevent employers from entering into non-compete clauses with workers. Second, it would require employers to rescind existing non-compete clauses.
Under the proposed rule, the FTC would deem non-competes between employers and workers “an unfair method of competition” and, therefore, unlawful under Section 5 of the FTC Act. The FTC recently detailed its intention to more vigorously enforce Section 5 in a November 2022 policy statement, which was described in a prior McGuireWoods alert. The proposed rule also prohibits “maintaining” non-compete agreements, so “an employer that entered into a non-compete clause with a worker prior to the compliance date must rescind the non-compete clause no later than” 180 days from the date the rule is published in the Federal Register or have the existing non-compete clause be deemed an unfair method of competition. The upshot of the rule is thus that entering into, maintaining or enforcing non-compete agreements would be unlawful under Section 5 and would constitute a violation of a federal antitrust law.
Notably, the proposed rule would apply not just to restrictions on employees, but to all “workers,” which is defined to also include independent contractors, interns, volunteers, apprentices and sole proprietors. It should be noted that the proposed rule says that it is not intended to prohibit or regulate reasonably tailored customer nonsolicitation or employee raiding agreements.
There is a limited exception in the proposed rule for non-compete agreements entered into in a sale-of-business context. This exception indicates that non-compete agreements may still be used to prevent owners who are selling their businesses from competing with the purchasers of their businesses, but the exception would be available only where the restricted party is an owner, member or partner holding at least a 25% ownership interest in a business entity. Importantly, the exception would apply only to the proposed rule itself, and all such restrictions still would be subject to all other antitrust laws.
If the proposed rule does take effect, the FTC could seek to enforce the rule, but private parties could not seek damages or penalties for violations of the rule under Section 5 of the FTC Act. Additionally, because many companies are subject to compliance obligations (e.g., under deferred prosecution agreements, consent decrees or other contracts) with consequences for antitrust violations, it will be especially important for these companies to carefully consider how to avoid running afoul of Section 5 if the proposed rule becomes final.
Could the Proposed Rule Be Narrowed?
While the proposed rule is broad in scope, the notice of proposed rulemaking also offers several potential alternatives to the proposed rule. The FTC invites comment on the potential alternatives, as well as to the proposed rule itself, though the FTC is proposing moving forward with the rule outlined above, banning almost all non-compete clauses.
These potential alternatives include:
- a categorical ban on non-compete agreements for employees earning below a wage threshold (e.g., $100,000) with no changes to the law of non-compete agreements for employees earning above that threshold;
- a categorical ban on non-compete agreements for employees earning below a wage threshold (e.g., $100,000) with a rebuttable presumption that non-compete agreements are illegal for employees earning above that threshold;
- no ban on non-compete agreements, but a rebuttable presumption that non-compete agreements are illegal for all employees; or
- no ban on non-compete agreements, but a rebuttable presumption that non-compete agreements are illegal for employees earning below a wage threshold (e.g., $100,000) with no changes to the law of non-compete agreements for employees earning above that threshold.
Additionally, the notice also considers “whether the rule should apply uniformly to all workers or differentiate between categories of workers.” The notice particularly questions “whether [the FTC] should adopt different standards for non-compete clauses with senior executives.”
When Would the Proposed Rule Go Into Effect?
The FTC’s notice of proposed rulemaking is just the first step in the FTC’s efforts to establish this new rule. Comments on the proposed rule are due 60 days after the FTC publishes the proposed rule in the Federal Register. Afterward, the FTC can finalize the rule based on input received from the public. It is not clear how long the FTC would take to finalize the rule (if it does finalize the rule). As the proposed rule is currently drafted, the FTC has indicated that, if it proceeds to finalize the rule, it would then set a compliance date of 180 days after it publishes the final rule in the Federal Register. Thus, the earliest the proposed rule could go into effect is 240 days after the FTC publishes the proposed rule in the Federal Register.
Note also that the rule could be further delayed or derailed entirely by legal challenges. There exists substantial uncertainty about the FTC’s rulemaking related to antitrust issues, and the U.S. Chamber of Commerce, for example, has already said the proposed rule is “blatantly unlawful.”
What Does This Mean for Employers and Businesses?
Employers and other businesses, including those acquiring or merging with other entities, should take a couple of concrete steps in response to this news. First, in the short term, employers should consider whether to submit comments on the proposed rule (and alternatives). As noted above, these comments must be made within 60 days of the publication of the proposed rule in the Federal Register. McGuireWoods is ready to assist employers and others in preparing and submitting these comments.
Second, employers should assess their current and projected use and enforcement of non-compete agreements and consider how the implementation of the proposed rule would impact their business and compliance obligations. McGuireWoods is preparing additional materials to address frequently asked questions concerning the proposed rule and is ready to consult concerning the effect the proposed rule may have on your business.
In sum, the FTC’s proposed rule underscores the important and growing focus of antitrust enforcement related to employment issues. For questions about the FTC’s proposed rulemaking, non-compete agreements, or any aspect of antitrust or labor and employment law, please contact the authors of this article or any member of the firm’s antitrust and trade regulation, labor and employment, or government investigations and white collar litigation teams.