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The Labor & Employment Blog provides employers with breaking news, insights, and legal analysis on the wide range of labor and employment issues facing employers and businesses.  While the Blog provides a general summary of regulation updates, it is not intended to be, and should not be relied upon as, legal advice.  The labor & employment attorneys at Chamberlain Hrdlicka stand ready to counsel employers on the issues they face.

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Federal Trade Commission Proposes Rule Banning Non-Compete Clauses with Workers

Late last year, the Federal Trade Commission issued a policy statement that superseded its prior policy statements and guidance concerning the FTC’s interpretation of the scope and meaning of unfair methods of competition as addressed in the Federal Trade Commission Act (“FTC Act”). The FTC indicated it would no longer follow the “rule of reason” inquiry and, instead, focus on trying to stop unfair methods of competition “in their incipiency based on their tendency to harm competitive conditions.” The FTC stated an unfair method of competition need not cause current anticompetitive harm or include anticompetitive intent. Several Commissioners of the FTC issued a statement last year supporting their issuance of the policy statement. In that statement, the Commissioners acknowledged the FTC had allowed its authority under the FTC Act to regulate unfair methods of competition “to lay dormant” but that the FTC wished to “reactivate” that authority.

Last week, the FTC proposed a new Non-Compete Clause Rule that would make it an unfair method of competition for an employer to maintain, enter into, or attempt to enter into a non-compete clause with a worker. Because the FTC has taken the position that a non-compete clause constitutes an unfair method of competition, the FTC has decided to outlaw non-compete clauses in most circumstances. The FTC is accepting public comments on its proposed rule until March 10, 2023.

What will the Non-Compete Clause Rule do, if published?

The proposed rule prohibits employers from entering into non-compete clauses with any worker, regardless of whether the worker is an employee, independent contractor, intern, extern, volunteer, apprentice, or “sole proprietor who provides a service to a client or customer.” The proposed rule similarly proscribes representing to a worker that he or she is subject to a non-compete clause.

While the proposed rule generally does not apply to other types of employment restrictions, such as non-disclosure agreements and client or customer non-solicitation agreements, those restrictions nevertheless may be subject to the rule if they are so broad in scope that they function as a non-compete clause. Said another way, the proposed prohibition against non-compete clauses extends to contractual terms that amount to a de facto non-compete clause. Regardless of what the clause between an employer and worker is called, the FTC may construe the clause as an impermissible non-complete clause if the contractual language prevents the worker from (i) seeking or accepting other employment or (ii) operating a business after the worker’s employment with the employer concludes.

The proposed rule provides two examples of de facto non-compete clauses:

  • Example 1: A broad non-disclosure agreement between an employer and employee that “effectively precludes the worker from working in the same field after the conclusion of the worker’s employment with the employer” may be a de facto non-compete clause.
  • Example 2: A contractual term that requires an employee to reimburse his or her employer for training costs if the worker’s employment terminates within a specified period of time also may be considered a de facto non-compete clause if the required payment is not reasonably related to the costs the employer incurred for training the employee.

Under the proposed rule, employers would not only be barred from entering into (or attempting to enter into) non-compete agreements, but employers also would need to rescind any existing non-compete agreements they have in place. In addition to rescinding all non-compete clauses, employers would have to notify current and former workers that their non-compete clauses are no longer in effect and may not be enforced against them. The proposed rule includes model language that employers may use to provide notice to workers that their non-compete clause is no longer in effect. The model language is as follows:

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]:

  • You may seek or accept a job with any company or any person—even if they compete with [EMPLOYER NAME].
  • You may run your own business—even if it competes with [EMPLOYER NAME].
  • You may compete with [EMPLOYER NAME] at any time following your employment with [EMPLOYER NAME].

The FTC’s new rule does not affect any other terms of your employment contract. For more information about the rule, visit [link to final rule landing page].

The proposed rule would limit use of non-compete clauses in most circumstances, but there is a limited exception for non-compete clauses between the seller and buyer of a business entity (or its assets) where the restricted party is an owner, member, or partner with at least a 25% ownership interest in the business that is subject to the sale. In its current form, the proposed rule does not provide an exception for high-earners or senior executives.

The proposed rule is subject to change after the comment period and before a final version is issued. During the current sixty-day comment period, businesses, employees, and other interested parties will weigh-in on the proposed rule with opinions, criticisms, or support for the proposed rule. The FTC will review and consider comments and, when the comment period ends, likely issue a final rule. A final rule will supersede all inconsistent state laws and statutes. Most states enforce reasonable non-competition provisions, but a final rule would supplant current non-compete laws in each state. The dissenting FTC Commissioner noted that the proposed rule would prohibit conduct that forty-seven state legislatures have allowed, including Georgia, Pennsylvania, and Texas.

Unless it is delayed by legal challenges, the new rule would take effect 180 days after a final version is published. Considering the economic significance of the proposed rule, legal challenges to the rule are extremely likely. As but one example, the United States Chamber of Commerce issued a statement describing the proposed rule as “blatantly unlawful” and expressing its confidence that the competition rule would not stand. We anticipate interested parties will argue the FTC has exceeded the scope of its authority and such a rule is within the province of the United States Congress, not a federal agency. Notably, one FTC Commissioner issued a dissenting statement regarding the proposed rule. She described it as a “radical departure from hundreds of years of legal precedent” concerning the reasonableness of non-compete clauses. The dissenting Commissioner also predicts a raft of unintended consequences and even identified the proposed rule’s vulnerability to specific legal challenges.

Chamberlain Hrdlicka is monitoring the status of the proposed rule and will provide another update when the FTC issues a final rule. If you have additional questions about the proposed rule, a non-compete clause, or other employment issues, we encourage you to reach out to your Chamberlain counsel.

  • AmyJo "AJ"  Foreman
    Associate

    AmyJo "AJ" Foreman is an associate in the litigation section. Her practice focuses primarily on commercial litigation, labor & employment, and appellate matters.

    AJ graduated from the University of Houston Law Center where she was ...

  • C. Larry  Carbo, III
    Shareholder

    Larry Carbo maintains a commercial litigation practice focusing on representation of companies in employment matters including misappropriation of trade secrets, enforcement and defense of non-competition agreements and ...

  • Kellen R. Scott
    Shareholder

    Mr. Scott maintains a general civil litigation practice in state and federal courts, with particular emphasis on employment law, governmental defense, and civil rights.

    His practice includes the defense of employers and ...