The Federal Trade Commission’s Proposed Evisceration of Non-Compete Agreements – What the Proposed Rule Means for Employers

In January 2023, the Federal Trade Commission (FTC) proposed a Rule that would prohibit employers from utilizing most non-compete agreements with its employees. In the FTC’s view, this Rule reflects the FTC’s current enforcement policies and belief that “by suppressing labor mobility, non-compete clauses have negatively affected competition,” and “allow[ed] serious anticompetitive harm to labor, product, and service markets to go unchecked.”

In support of these findings, the FTC estimated that approximately one in five American workers (or approximately 30 million workers) are currently bound by non-compete clauses. In proposing its Rule, the FTC reviewed the current legal landscape of non-compete agreements at the state level, confirming that three states have barred non-compete agreements altogether, 11 states (and the District of Columbia) have barred non-compete agreements based on the salary level of the employee involved, and a number of other states have barred or limited the enforcement of non-complete agreements in certain specified occupations. In the FTC’s view, non-compete agreements negatively impact the wages of employees and harm the economy as a whole.

Ultimately, the proposed Rule states that “it is an unfair method of competition—and therefore a violation of [the Federal Trade Commission Act]—for an employer to enter into or attempt to enter into a non-compete clause with a worker; maintain with a worker a non-compete clause; or, under certain circumstances, represent to a worker that the worker is subject to a non-compete clause.” The FTC also noted in its notice of proposed rulemaking that certain other restrictive covenant agreements with employees, namely, confidentiality agreements and non-solicitation agreements, may be “de facto” non-compete agreements. In addition to barring non-compete agreements moving forward, the Rule would require employees to affirmatively rescind existing non-compete agreements with its employees. Failure to comply with these provisions would subject employers to penalties and investigatory action by the FTC.

The notice of proposed rulemaking requests comments on a variety of topics, including whether there is (or should be) a difference in non-compete agreements with senior executives versus other lower level employees. Either way, the FTC indicated that these type of agreements should be prohibited for virtually all employees.

While the proposed Rule is currently awaiting public comment and the enforcement period will not be applicable until late 2023 (at the earliest), proponents for and those against the rule are already gearing up for the legal challenges that would inevitably be filed to the Rule. Of course, even with those anticipated legal challenges, employers should be prepared to review their existing agreements to determine whether they would (a) be subject to this Rule and (b) be subject to other types of enforcement by the FTC. Indeed, even without this Rule in place, the FTC has been clear in its policy statements that non-compete agreements and other types of restrictive covenants constitute an unfair method of competition and violate the Federal Trade Commission Act, and they have routinely taken action to bar the enforcement of these restrictive covenants against employees. This Rule would have no impact on the FTC’s continued investigation of employers who utilize non-compete agreements.

As it stands now, employers should continue to monitor the rulemaking process and be prepared to rescind non-compete agreements if this Rule takes effect. In addition, considering the current makeup of the FTC and its policy initiatives, employers should consult with legal counsel to determine whether there is a risk of potential exposure with respect to their current employment agreements. Employers will need to justify the scope and business necessity of these agreements, including standard non-solicitation, non-poaching, and confidentiality agreements, to avoid the perception that these agreements will impair a former employee’s ability to obtain a new position. Failure to do so now may lead to an enforcement action by the FTC, with attendant penalties and attorney’s fees.

*Lee is a shareholder in our Philadelphia, Pennsylvania, office. He can be reached directly at 215.575.2584 or at lcdurivage@mdwcg.com.

_{Defense Digest, Vol. 29, No. 1, March 2023, is prepared by Marshall Dennehey to provide information on recent legal developments of interest to our readers. This publication is not intended to provide legal advice for a specific situation or to create an attorney-client relationship. ATTORNEY ADVERTISING pursuant to New York RPC 7.1. © 2023 Marshall Dennehey. All Rights Reserved. This article may not be reprinted without the express written permission of our firm. For reprints, contact tamontemuro@mdwcg.com.}