Clifford Chance

The FTC proposed a rule that departs from decades of legal precedent and ignores procompetitive justifications by looking to ban noncompetes in almost every situation.

On January 5, 2023, the Federal Trade Commission published a Notice of Proposed Rulemaking that would prohibit employers from having their employees sign any form of noncompete agreements. The proposed rule would apply to all independent contractors and any paid or unpaid employees. Additionally, current noncompetes would need to be rescinded and employers would need to actively inform workers that noncompetes no longer have any effect. One narrow exception applies to owners with at least 25% ownership of a business who are looking to sell their business.

Noncompete clauses have generally been enforceable and are evaluated on a case-by-case basis. Courts review noncompete clauses under a reasonableness standard—looking at the clause's duration, geographic scope, and the business justifications to support the clause. The proposed rule follows President Biden's Executive Order on Promoting Competition in the American Economy from July 2021, where his Administration expressed concerns about unfair labor restrictions on American workers and encouraged the FTC to limit or eliminate noncompetes through the rulemaking process.

The FTC believes noncompetes are unfair methods of competition under Section 5 of the FTC Act, which was recently unilaterally expanded in November 2021 without Congressional approval, because noncompetes restrict competition and individual and economic liberties. The FTC claims that noncompete clauses affect one in five American workers and that eliminating noncompetes would increase wages $300 billion annually. Further, according to FTC Chair Lina Khan in an op-ed in the New York Times, noncompetes depress wages for workers subject to a noncompete and cost everyone money, even if they are not bound by a noncompete.

In her dissent, Commissioner Wilson worries that the current proposed rule would run afoul of 47 states that allow some form of noncompetes and court rulings that have found noncompetes enforceable. She also questions whether the FTC can propose this rule as: (1) the FTC does not have the authority to promulgate competition rulemaking; (2) the FTC's authority will likely be challenged under the major-questions doctrine, where a court looks at whether Congress conferred power that an agency is attempting to assert; and (3) the FTC's authority could be called into question under the non-delegation doctrine, which is the principle that Congress cannot delegate its legislative power to another branch of government. The U.S. Chamber of Commerce expressed that the proposed rule is "blatantly unlawful" and Congress never delegated such authority to the FTC.

The public is invited to comment during the 60-day period before the Commissioners vote on a final rule. The final rule would go into effect after 180 days once published in the Federal Register. Lengthy litigation over the rule is expected.