{"id":2131,"date":"2023-01-24T15:21:02","date_gmt":"2023-01-24T20:21:02","guid":{"rendered":"https:\/\/www.bowditch.com\/campuscounselnewengland\/2023\/01\/24\/client-alert-is-the-sky-falling-the-ftcs-proposed-ban-on-non-compete-agreements\/"},"modified":"2023-01-25T15:33:10","modified_gmt":"2023-01-25T20:33:10","slug":"client-alert-is-the-sky-falling-the-ftcs-proposed-ban-on-non-compete-agreements","status":"publish","type":"post","link":"https:\/\/www.bowditch.com\/campuscounselnewengland\/2023\/01\/24\/client-alert-is-the-sky-falling-the-ftcs-proposed-ban-on-non-compete-agreements\/","title":{"rendered":"Is the Sky Falling? The FTC’s Proposed Ban on Non-Compete Agreements"},"content":{"rendered":"
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The Federal Trade Commission (FTC) recently announced a proposed new rule that would have a seismic effect on employment relationships throughout the United States, by barring the future use of non-competition agreements and requiring employers to rescind such existing agreements.<\/p>\n

FTC\u2019s Rulemaking Authority and Existing State Laws<\/h2>\n

As published in the Federal Register on January 19, 2023<\/a>, the proposed rule states that it would be an unfair method of competition for employers to enter into or attempt to enter into non-competition clauses with workers, to maintain such non-competition clauses, or, in certain cases, to represent to workers that they are subject to a non-competition clause.\u00a0 In the proposed rule, the FTC invokes the rulemaking authority of Section 5 and 6(g) of the Federal Trade Commission Act (the FTC Act).\u00a0 Section 5 of the FTC Act deems \u201cunfair methods of competition\u201d to be unlawful and directs the Commission to prevent the use of unfair methods of competition \u201cin or affecting commerce.\u201d\u00a0 Section 6 of the FTC Act authorizes the Commission to implement rules and regulations necessary to carry out the FTC Act\u2019s purposes, including the prohibition against unfair competition.<\/p>\n

The proposed rule notes that a number of states already have laws restricting the use of non-competition agreements.\u00a0 These include California, North Dakota, and Oklahoma, where non-competition agreements are barred almost entirely, but also states like Massachusetts, Rhode Island, Connecticut, New Hampshire, Maine, Colorado, Illinois, Maryland, Nevada, Oregon, and Virginia, as well as the District of Columbia, where their use is restricted.<\/p>\n

Proposed Definitions of Employers, Non-Competition Clauses, and Workers<\/h2>\n

The proposed rule includes sweeping definitions of employers, workers, and non-competition agreements.<\/p>\n

As defined in the proposed rule, an employer includes any natural person, partnership, corporation, association, or other legal entity, including any person acting under color or authority of state law, that hires or contracts with a worker to work for the person.\u00a0 As noted in the proposed rule, inasmuch as certain employers are exempted from coverage under the FTC Act (including certain banks, savings and loan institutions, federal credit unions, common carriers, air carriers and foreign air carriers), such employers will not be subject to the proposed rule.\u00a0 Additionally, the proposed rule states that certain state and local government entities may not be subject to the proposed rule \u201cwhen engaging in action protected by the state action doctrine.\u201d<\/p>\n

The proposed rule defines the term worker broadly.\u00a0 It incorporates by reference the definitions set forth in 15 U.S.C. 57b-1(a)(6).\u00a0 It would include both paid and unpaid employees, independent contractors, externs, interns, volunteers, apprentices, and sole proprietors.\u00a0 The FTC makes no distinction based on a worker\u2019s income or job status, asserting \u201cnon-compete clauses obstruct labor market competition in a similar way for all workers, regardless of a worker\u2019s income or job status.\u201d\u00a0 The proposed rule, if adopted, would impact not just employers who use non-competition clauses with their own workers, but also employers who wish to hire applicants who are subject to such restrictions.\u00a0 Virtually every paid and unpaid worker in the United States, from CEOs of Fortune 500 companies to unpaid volunteers, would fall under the ambit of the proposed rule.<\/p>\n

Finally, the proposed rule\u2019s definition of non-compete clauses includes not just provisions that are denominated as non-competition clauses, but also contractual terms which could be considered de facto non-compete clauses.\u00a0 These would include agreements that prevent employees from working in the same line of business after separation or which require workers to reimburse an employer or third-party for the cost of training if their employment ends within a specific time period.\u00a0 Thus, retention bonus agreements, equity grants, and training reimbursement agreements could all be barred under the proposed rule, as the focus is not on what the clause is named<\/em> but how it functions<\/em>.<\/p>\n

Rescission of Existing Non-Compete Clauses<\/h2>\n

If enacted, the rule will not only bar the use of non-competition clauses as of the rule\u2019s effective date, but it will also retroactively bar the use of such clauses.\u00a0 Employers would be required to rescind all existing non-compete clauses and provide individualized notices to current and former workers within 45 days of rescission.\u00a0 While employers are free to draft their own rescission communication, the proposed rule includes the following model language:<\/p>\n

A new rule enforced by the Federal Trade Commission makes it unlawful for us to maintain a non-compete clause in your employment contract. As of [DATE 180 DAYS AFTER DATE OF PUBLICATION OF THE FINAL RULE], the non-compete clause in your contract is no longer in effect. This means that once you stop working for [EMPLOYER NAME]:<\/em><\/p>\n