In July 2021, President Biden issued an Executive Order encouraging the Federal Trade Commission (“FTC”) to consider exercising its rulemaking authority to “curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.”[1] On January 5, 2023, the FTC issued a press release stating that non-competes in employment agreements have negatively affected commerce by promoting anticompetitive behavior.[2] The FTC also announced a proposed new rule, known as the Non-Compete Clause Rule, proposing a nationwide ban on non-compete clauses.[3]
The FTC defines non-competes as contractual terms that prevent a worker from seeking or accepting employment with a person or operating a business after the conclusion of employment.[4] The FTC’s proposed rule is a categorical ban on non-compete clauses.[5] The ban applies whether a person is a W-2 employee, independent contractor, intern, or volunteer.[6] There is a limited exception for non-competes between buyers and sellers of businesses. The exception will allow non-compete agreements only in the sale of an entity when restricting an owner with at least 25% ownership.[7]
The FTC proposes compliance with the new ban within 180 days of the publishing of the final rule. By the compliance date, employers must:
- affirmatively rescind existing employee non-competes;[8]
- not enter into or attempt to enter into an agreement with a non-compete clause with a worker; and
- not represent to a worker that the worker is subject to a non-compete clause.
Although the ban excludes non-disclosure and non-solicitation clauses, the FTC warns that these provisions can become overly broad and violate the ban.[9] The FTC calls these broad contractual provisions de facto non-compete clauses and will treat them the same as a standard non-compete clause. If the proposed rule takes effect, employers must carefully review existing employment agreements to ensure they do not preclude workers from working in the same industry after the termination of their employment. Employment agreements also may not contain terms that would require a worker to repay the employer for any training costs if the worker’s employment is terminated within a specific period of time, where the required payment is not reasonably related to the costs the employer incurred for training the worker. Once effective, the ban would supersede all state laws on non-competes.[10]
Historically, the enforceability of non-compete clauses has been determined by state law. Arizona enforces non-competes when the restrictions are no broader than the employer’s legitimately protectable interests, are not unreasonably restrictive on the rights of the employee, and do not contravene public policy.[11] Once a court determines the enforceability of a non-compete clause, employers may obtain an injunction against former employees to enforce the restrictions. Due to the FTC’s intention to retroactively apply the proposed rule, it is anticipated such injunctions may no longer be enforceable. Employers who have obtained such injunctions should contact legal counsel to discuss potential impacts of the proposed rule.
The FTC will be accepting public comments on its proposed rule through April 19, 2023. The FTC has asked for feedback on the following questions:
- Should the ban apply to all types of workers or should there be an exception for senior executives?
- Should the FTC propose a rebuttable presumption of non-compete invalidity instead of a categorical ban?
- Should there be a wage threshold above which non-competes are allowed?
If you would like to submit comments to the FTC regarding its proposed rule, you can do so electronically at https://www.regulations.gov/docket/FTC-2023-0007/document, or you can submit comments by mail to the Federal Trade Commission, Office of the Secretary, 600 Pennsylvania Avenue NW, Suite CC-5610 (Annex C), Washington, DC 20580.
The proposed rule has drawn criticism from the business community. Legal challenges to the rule are anticipated. Milligan Lawless will continue to update our clients on new developments.
[1] Executive Order on Promoting Competition in the American Economy (July 9, 2021), at Sec. 5(g). Available here.
[2] Federal Trade Commission, FTC Proposes Rule to Ban Noncompete Clauses, Which Hurt Workers and Harm Competition (Jan. 5, 2023). Available here.
[3] Federal Trade Commission, Notice of Proposed Rulemaking, RIN 3084-AB74 (to be codified at 16 C.F.R. §§ 910 et seq.) (Jan. 5, 2023) (“NPRM”); supra note 2; see also Lina M. Khan, Noncompetes Depress Wages and Kill Innovation, The New York Times, Jan. 9, 2023.
[4] NPRM at 4.
[5] Some entities may not be subject to the rule to the extent they are not covered by the Federal Trade Commission Act. For example, common carriers, air carriers, and certain financial institutions may be excluded from the final rule.
[6] NPRM at 4-5.
[7] Id. at 5.
[8] The proposed rule contains model language rescinding a non-compete. If the model language is used, the employer will be provided a safe harbor for compliance with the ban.
[9] NPRM at 4.
[10] Id. at 5.
[11] See, e.g., Bed Mart, Inc. v. Kelley, 202 Ariz. 370 (App. 2002); Am. Credit Bureau, Inc. v. Carter, 11 Ariz. App. 145 (1969).
