The new year is off to a roaring start in the field of employment law, with a massive—and unexpected—possible change to the law of restrictive covenants, thanks to a newly proposed federal regulation.
Today, the U.S. Federal Trade Commission announced a sweeping new proposed rule that, if and when promulgated, would ban nearly all post-employment covenants not to compete between employers and employees. The proposed rule would not only prohibit future noncompete agreements, but would also invalidate those already in effect. Although the proposed rule does not purport to prohibit the use of other restrictive covenants such as nondisclosure agreements, nonsolicitation agreements, and no-poaching agreements, those agreements may be “considered non-compete clauses” under the proposed rule if “they are so unusually broad in scope that they function as such.”
The FTC, which enforces federal antitrust statutes, has long been skeptical of non-compete agreements, taking the position that they stifle competition between businesses and depress employee wages by restricting the mobility of labor. In July 2021, President Biden signed an executive order directing the FTC to “curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.”
Recent public statements by FTC Chair Lina M. Khan, a Biden appointee, signaled an aggressive approach. Meanwhile, non-compete agreements have been increasingly regulated at the state level, including the recent enactment of numerous state laws limiting non-competes based on position and compensation, and imposing notice and consideration requirements. Given President Biden’s directive to the FTC and the spate of recent state law restrictions on non-competes, some sort of proposed rule by the FTC placing limitations on the use of non-competes was anticipated. But it is safe to say that the bar and the business community were not prepared for the breadth of what the FTC announced today.
In its 218-page Notice of Proposed Rulemaking, the FTC proposes (1) prohibiting employers from entering into non-compete agreements with workers on or after the effective date of the rule and (2) requiring employers to take affirmative steps to formally rescind non-compete agreements by sending notice to affected employees. The rule proposes only a “limited exception” permitting certain non-compete agreements between a seller and a buyer of a business where the restricted party holds at least a 25 percent ownership interest in the business.
We are continuing to digest the entire NPRM and will provide additional updates. For now, employers should be aware of the following:
The proposed rule will be open for public comment for a 60-day period, after which a final rule will be published. The NPRM provides that the rule would become effective 60 days after final publication and that compliance would be required 180 days after final publication, meaning that employers will have at least eight months to get ready for the change.
As with other controversial agency actions, litigation over the proposed rule is a virtual certainty. Among other issues, the federal courts—and perhaps ultimately the Supreme Court—will need to determine whether and to what extent the rule is within the scope of the FTC’s statutory mandate.
Suffice it to say, this is not over. Stay tuned for updates.