Federal Trade Commission Proposes Rule to Ban Noncompete Clauses

On January 5, 2023, the Federal Trade Commission (“FTC”) released a Notice of Proposed Rulemaking (the “proposed rule”) to prohibit employers from imposing noncompete clauses on workers.  Under the proposed rule, noncompete clauses would be treated as an unfair method of competition.  Importantly, the proposed rule applies to “workers” and not merely employees.  The term “worker” is defined to also include independent contractors, externs, interns, volunteers, apprentices, and sole proprietors who provide services to a client or customer.

The effect of the proposed rule is twofold. The proposed rule would 1) prevent employers from entering noncompete clauses with their “workers” and 2) require employers to “rescind” existing noncompete clauses.  The FTC states that the proposed rule would not affect any other terms of an employment contract.  Only noncompete “clauses” must be rescinded.  The proposed rule defines noncompete clauses broadly.  Therefore, the impact of the proposed rule on non-solicitation and non-disclosure clauses is unknown.  Broadly drafted non-solicitation and non-disclosure clauses may be implicated.  In addition to the rescission, employers must provide notice to their workers that the clauses have been rescinded.

At present, the proposed rule only has one narrow exception.  Noncompete clauses would be permitted in the sale of business whereby the parties to the agreement seek to restrict a substantial owner departing from the business entity from competing after the sale.  Further, the proposed rule only applies to clauses that restrict the workers’ ability to seek new employment after the conclusion of their current employment.  Otherwise put, employers may still prohibit workers from competing during the period services are rendered.

The proposed rule is not final.  Legal challenges contesting the proposed rule are expected.  Barring legal challenges, the FTC’s new rule would become effective 180 days after the publishing of the final rule. A copy of the proposed rule can be found here: https://www.ftc.gov/legal-library/browse/federal-register-notices/non-compete-clause-rulemaking

We will continue to monitor developments regarding the proposed rule.  If employers have specific questions about noncompete clauses, employers should contact Nikole Canute, Scott Dwyer, Nate Wolf, Kimberly Large Dominic Clolinger, or Kathryn Zoller as soon as practicable.