Yesterday, the Federal Trade Commission (“FTC”) proposed a far-reaching rule that, if adopted, would ban employers from imposing non-compete agreements on their workers. A non-compete clause is a contractual term between an employer and worker that typically blocks the worker from working for a competing company, or starting a competing business, within a certain geographic area and period of time after the worker’s employment ends. Such agreements are widely used in business, especially across the science, technology, and defense industries. The FTC estimates that about one in five American workers – approximately 30 million people – are bound by a non-compete clause.
According to a press release accompanying the proposed rule, the FTC believes the non-compete clauses represent an “unfair method of competition” that violate Section 5 of the Federal Trade Commission Act. The propose ruled would provide that it is unfair method of competition – and therefore a violation of Section 5 – for an employer to (1) enter into or attempt to enter into a non-compete clause with a worker; (2) maintain with a worker a non-compete clause; or (3) under certain circumstances, represent to a worker that the worker is subject to a non-compete clause. The FTC explained that the proposed rule would not preclude certain other post-employment restrictions, such as non-disclosure agreements and non-solicitation provisions related to clients and customers; it would only preclude a term that prevents a worker from seeking or accepting employment or operating a business after conclusion of the worker’s employment.
The FTC’s stated goal is to support workers who leave their employers to seek better jobs. The U.S. Chamber of Commerce issued a statement that the FTC’s action “to outright ban noncompete clauses in all employer contracts is blatantly unlawful. Since the agency’s creation over 100 years ago, Congress has never delegated the FTC anything close to the authority it would need to promulgate such a competition rule.” The Chamber has indicated that it will oppose the proposal.
The enforceability of non-compete agreements has traditionally fallen to state statutes and case law, with many states having rules that seek to balance an employer’s right to protect its valuable proprietary information and customer relationships against the employee’s right to secure employment. Most legal frameworks try to achieve a balance by considering the reasonableness of the restrictions as they relate to time and geographic scope. However, some states (California, Maine, Illinois, New Hampshire, and Maryland, for example), and the District of Columbia, have moved to ban or at least restrict the use of non-compete agreements. Washington D.C.’s new non-compete law went into effect on October 1, 2022.
The FTC’s press release says, “The Commission is asking for the public’s opinion on its proposal to declare that non-compete clauses are an unfair method of competition, and on the possible alternatives to this rule that the Commission has proposed.” It will be interesting to see the response. While the FTC estimates its proposed rule would increase American workers’ earnings between $250 billion and $296 billion per year, if it results in the loss of valuable business information to competitors, it could create more harm than good. A balancing of interests seems a more reasonable approach.
Note that non-compete laws can vary significantly from state to state, and businesses and employees should consult with an attorney familiar with the applicable laws to determine the specific requirements and limitations that would apply in specific instances.