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FTC Proposes Rule to Ban Non-Compete Agreements

In an area of law formerly left to the states, on January 5th, the Federal Trade Commission issued a notice of proposed rulemaking that seeks to implement a nationwide retroactive ban on non-compete agreements, with limited exceptions. The proposed rule would supersede state laws that are less protective of employees.

Who does the proposed FTC rule apply to?

The rule would cover non-compete clauses with any worker, paid or unpaid, including employees, independent contractors, interns, externs, volunteers, apprentices, or sole proprietors. Under the rule, “employer” is broadly defined as “any natural person, partnership, corporation, association, or other legal entity, including any person acting under color or authority of state law.”

How does the proposed rule define a non-compete clause?

Under the rule, a “non-compete clause” is defined 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.”

The FTC advises that non-disclosure agreements that are too broad could be viewed as unlawful de facto non-compete clauses. It is likely the same holds true for overly broad non-solicitation agreements. Further, the proposed rule warns that if an employer requires employees to repay in-house or third-party training costs if the worker’s employment ends within a specific time-period, this may also qualify as an unlawful non-compete clause, if the required payment is not reasonably related to the costs the employer incurred in training the worker.

How does the rule impact non-compete agreements already in effect?

The proposed rule requires employers to rescind existing non-compete clauses no later than the rule’s compliance deadline of 180 days after the final rule is published.  Employers must provide formal written notice of the rescission to both current and former employees (unless the employee’s contact information is not readily available) that are bound by non-compete clauses. The rescission notice must be provided within 45 days of rescinding the non-compete clause.

When does the rule take effect?

Once the proposed rule is published in the Federal Register, the public has 60 days to submit comments. At that time, the FTC may make changes before submitting a final rule or request further public comment. Once the final rule is published in the Federal Register, employers will have a 180-day grace period to become complaint with the final rule’s requirements.  

The FTC is specifically seeking comments from the public as to whether senior executives should be exempt or subjected to a rebuttable presumption; whether low and high wage earners should be treated differently; and whether franchisees should be covered.

Exemptions?

Very limited. The rule would not apply to a non-compete agreement between a seller and the buyer of a business, where the affected party restricted is an owner, member or partner holding at least 25% ownership interest in the business. 

Pre-emption?

The proposed rule supersedes all state laws, regulations, orders, and the like that are not consistent with the rule’s requirements. State laws, however, may provide greater protections for employees against non-competes.

Key Considerations

This is the perfect time for businesses to take an accounting of and review existing and proposed non-compete agreements. Companies should also review non-disclosure, non-solicitation, and other policies requiring employees to reimburse employers for training expenses to evaluate whether these policies might be construed as de facto non-compete clauses if ultimately challenged. Otherwise, companies should continue to monitor the potential implementation of the FTC’s proposed rule, consider submitting a public comment (either individually or through industry associations), and be on the lookout for any modifications made by the FTC should a final rule be published, which will then trigger the 180-day compliance deadline.