On January 5, 2023, the Federal Trade Commission proposed a new rule that bans noncompetition agreements between private employers and their employees nationwide. In its press release, the FTC sharply criticized noncompetes, saying that they suppress wages, limit innovation, and deter new businesses. Accordingly, the FTC believes noncompetes “constitute an unfair method of competition and therefore violate Section 5 of the Federal Trade Commission Act.”
Section 5 of the FTC Act generally prohibits “[u]nfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce.” Estimating that around 1 in 5 workers in the U.S. are bound by noncompetes, the FTC believes that wages would increase by $250 billion to $296 billion per year if such provisions were banned outright. And that appears precisely what the proposed rule is designed to do.
The FTC broadly defines a noncompete as a “contractual term between an employer and a worker that prevents the worker from seeking or accepting employment with a person, or operating a business, after the conclusion of the worker’s employment with the employer.” Under the proposed rule, all such provisions are prohibited. The FTC states that a prohibited noncompetition provision may also include an overly broad nondisclosure provision—i.e., one that is so broadly written that it effectively precludes the worker from working in the same industry. This view is shared by some courts in states where noncompetes are already outlawed. See, e.g., Brown v. TGS Mgmt. Co., LLC, 57 Cal. App. 5th 303, 314-19 (Cal. Ct. App. 2020) (finding that nondisclosure provision was void because the definition of “confidential information” was “strikingly broad” in that it included all information that was useable in or related to the relevant industry). The FTC intends for the rule to apply to both employees and independent contractors. The only exception to the prohibition is in the context of a sale of a business, ownership, and/or assets.
The FTC also proposes that any prohibited noncompetition provisions that are already signed and in place are subject to rescission. If the rule goes into effect, employers will need to notify employees that existing noncompetition provisions are rescinded. Further, employers may not “represent” to a worker that he or she is subject to a prohibited noncompetition provision.
At this point, the rule is simply proposed. That means the FTC is collecting comments to the proposal for 60 days from the date of publication of the proposed rule. But, given the broad scope of the proposed rule, employers need to start thinking about how they will comply. At a minimum, this will entail some due diligence with an employment law attorney to determine which employees and independent contractors have restrictive covenants and then assessing whether those restrictive covenants would constitute a prohibited noncompetition provision under the proposed rule. Employers will also need to analyze whether and how to enforce nondisclosure and nonsolicitation provisions that are not, themselves, traditional noncompetition provisions, as this proposed rule would seemingly give defendants in such cases an additional defense against such claims.
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