FTC PROPOSES TO OUTLAW NON-COMPETE AGREEMENTS

03/2023

Non-compete agreements may be on the way out.

The Federal Trade Commission (FTC) issued a proposed rule that if finalized, would eliminate many non-compete clauses in agreements. As explained below, this new rule would apply not only to new non-competition agreements but existing agreements.

Effective Date

There is a long way to go before this rule will become effective, if ever. The FTC is seeking comments on this proposed rule by March 10, 2023. At that point, the FTC works on revising the rule and will at some point in the future, publish the final rule. Once the final rule is published, Congress can pass a resolution disapproving the rule and if signed by the President, the rule is not effective. However, if not stopped, the rule would apply to new non-compete clauses and provide the employer 180 days to rescind existing noncompete clauses. The rule even has a proposed notification to send to individuals bound by existing agreements. However, many commentators feel that the constitutionality of this proposed rule will be tested, and the effective date will be much later.

WHAT IS A PROHIBITED NON-COMPETE AGREEMENT?

Prohibited non-compete language includes a contractual term between an employer and a worker that prevents the worker from seeking or accepting employment with a company or person, or operating a business that is similar to that of the employer, after the conclusion of the worker’s employment with the employer. Prohibited non-compete agreements include agreements not only with employees, but independent contractors.

EXCEPTIONS

Some exceptions under the proposed rule include:

• NON-SOLICITATION AND CONFIDENTIALITY PROVISION. A non-solicitation clause or a confidentiality clause would not be prohibited as long as it effectively did not operate like a non-compete.
• SALE OF BUSINESS. The seller of a business could be bound by a noncompetition agreement if they own 25% or more of the business being sold.
• SHAREHOLDERS AGREEMENT/ OPERATING AGREEMENT. It is not clear if the proposed rule would apply to owners of the business in their capacity as owners versus employees.

STATE LAW

The regulations do not prohibit states from having tougher provisions. Consider the FTC rule as a floor on non-compete agreements. States can have tougher rules.

If you have any questions or comments about this article, please contact Michael L. Solomon, Esq., msolomon@ssandplaw.com.