Federal Trade Commission Seeks To Ban All Noncompete Contracts

On January 5, 2023, the Federal Trade Commission (FTC) proposed a rule to ban all employers from using noncompete contracts and clauses and to require rescission of existing noncompete restrictions. The FTC labels the use of noncompete restrictions as an “exploitative practice that suppresses wages, hampers innovation, and blocks entrepreneurs from starting new businesses.” Employers should expect the rule making process to take several months and should also expect legal challenges to the final rule.

Noncompete clauses have always been closely scrutinized by the courts and must be narrowly tailored to be lawful. In recent years, the states have begun to further restrict the use of noncompete clauses; for example, in 2021, Nevada banned noncompete restrictions for hourly employees.

But the federal government has decided to go much further. President Biden believes noncompete agreements are harmful to the economy and has directed the FTC to exercise its “statutory rulemaking authority under the Federal Trade Commission Act to curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.”

In response, the FTC has now proposed an extremely broad rule to completely ban noncompete clauses and contracts in all states and for all workers. The proposed rule and rationale demonstrate a complete disregard for employers’ legitimate interests by:

• Banning all noncompete clauses and contracts;
• Banning any contractual term that has the effect of a noncompete (which may apply to confidentiality provisions and non-solicitation provisions);
• Requiring an employer to rescind all existing noncompete clauses and provide notice to the worker or former worker that the provision is no longer in effect and cannot be enforced;
• Providing only one narrow exception for a person who is selling a business, disposing of all ownership interest in a business, or selling all or substantially all of a business entity’s operating assets; and
• Superseding state laws that are inconsistent with the federal law.

It is very likely that this aggressive rule will be subject to a flurry of legal challenges, including arguments that the FTC has overstepped its authority. But first, it must proceed through the rule-making process which will take several months. As always, we will notify you of developments here. 

KZA Employer Report articles are for general information only; they are not intended and should not be construed to be legal advice. Reading or replying to such articles does not establish an attorney-client relationship. In addition, because the subject matters and applicable laws discussed in Employer Report articles are often in a state of change and not always applicable to every type of business entity or organization, readers should consult with counsel before making decisions based on the same.