On January 5, 2023, the Federal Trade Commission proposed a new rule that, if enacted, would ban employers from entering into noncompetition agreements with new employees and would require employers to rescind existing noncompete clauses binding current employees. The FTC’s basis for this rule is that noncompete clauses are an unfair method of competition.
Noncompete clauses prevent an employee from seeking or accepting work with a different employer, usually one in competition with the employee’s former employer, following the end of employment. This FTC notice of proposed rulemaking follows a broad trend of government and regulatory bodies voiding or otherwise restricting noncompete clauses. The FTC will be seeking public comment on the rule, with all proposed comments being due 60 days after publication in the Federal Register. If the rule passes, compliance with the rule will be required within 180 days after final publication. No effective date has been proposed. However, the earliest it might become effective under existing rule-making procedures is September 2023. Other highlights of the proposed rule include that:
- The rule would apply to expressly named noncompete clauses as well as to “de facto” noncompete agreements which have the effect of prohibiting employment, including broad nondisclosure and confidentiality clauses and clauses that would require an employee who resigns within a certain time period to pay a former employer for training costs not reasonably related to costs incurred by the employer in training the worker. Based on the language of the proposed rule, this does not appear to forbid nonsolicitation agreements provided they are narrowly tailored and do not prohibit competing employment.
- For existing noncompete agreements, in addition to requiring the employer to rescind the clause, the proposed rule would also require the employer to provide individualized notice to all current and former employees whose clauses are rescinded.
- The only stated exception to the rule is for noncompete clauses related to the sale of a business or ownership interest, provided that the person being restricted is at least a 25% owner of the business.
- The rule would preempt and supersede all inconsistent state laws.
If you have any questions about this proposed rule, its status or its possible effects on your existing employment and noncompete agreements, please reach out to Scott Carvo, Dean Pacific, Andrea Bernard, Jonathan Kok or Jarrod Trombley.