Outline
Will the FTC’s Proposed Rule Spell the Demise of Non-Compete Agreements?
April 25, 2024
FTC’s Notice of Proposed Rulemaking on Non-Compete Clauses:
On January 5, 2023, the FTC issued a far-reaching notice of proposed rulemaking that would prohibit the use of non-compete clauses and preempt all state laws providing lesser protection than the proposed rule.President Biden’s executive order directed the FTC to consider curbing the unfair use of non-compete clauses, with a focus on lower-wage workers. However, the proposed rule bans the use of non-compete provisions with “workers” broadly defined.
Scope and Application of the Proposed Rule:
The proposed rule applies to any contractual term that prevents a worker from seeking or accepting employment or operating a business after leaving the employer. It does not ban non-disclosure or customer non-solicitation agreements, but it could apply if those provisions overly restrict a worker.Employers would be required to rescind previously entered non-compete provisions and inform workers in writing that the agreement is no longer in effect.
Exemptions and Exceptions:
Franchisee-franchisor agreements and agreements between buyers and sellers of a business are exempt from the proposed rule. However, they remain subject to antitrust law.
Public Comments and Future Timeline:
Public comments on the proposed rule are due 60 days after publication in the Federal Register. The rule would go into effect 180 days after the final version is published.
Chair Khan’s Position and Dissenting Statements: FTC Chair Lina Khan believes the rule would improve wages, working conditions, and competition. Commissioner Christine Wilson issued a dissenting statement, arguing against the rule’s departure from legal precedent.
Legal Challenges and Next Steps:
Any final rule will likely face legal challenges. Critics argue that the proposed rule exceeds the FTC’s authority, infringes on state contract law, and may require congressional action.
Company Actions and Compliance:
Companies need not immediately eliminate non-compete agreements but should comply with applicable state laws and ensure agreements are reasonably tailored to protect legitimate business interests.
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