More than 7,000 public comments have been submitted to the Federal Trade Commission since it announced its proposed rule to ban most non-compete agreements in January. As one might expect, the proposal has garnered significant attention from both workers’ groups and the business community. The FTC will continue accepting public comments on this proposal until April 19, 2023. What can businesses expect next? Here’s what you need to know.
The Proposed Rule
Currently, state law governs non-compete agreements and other restrictive covenants like non-solicitation agreements, no-hire agreements and confidentiality agreements. Determining which state’s law applies will often determine whether and to what extent those agreements are enforceable. The FTC’s proposed rule would supersede inconsistent state laws and would ban employers from requiring employees, workers (whether paid or unpaid) and independent contractors from signing non-compete agreements as a condition of their employment or engagement. However, the proposed rule would not supersede state laws that impose restrictions providing greater protection for workers. The proposed rule is also retroactive, so it would invalidate existing non-compete agreements and would require employers to provide notice to current and former employees, workers (whether paid or unpaid), and independent contractors that their covenants are no longer legally binding.
While the proposed rule is sweeping, there are a few limited exceptions to its applicability. First, it would not apply to non-compete clauses negotiated as part of the sale of a business, including agreements to sell a business entity, all of a person’s interest in a business entity, or all or substantially all of the business’s operating assets. This sale-of-business exception would only apply if the person to be bound was considered a “substantial owner,” “substantial member,” or “substantial partner,” meaning an owner, member or partner holding at least a 25% ownership interest in the business entity. The proposed rule is also inapplicable to entities exempted from the FTC’s jurisdiction under 15 U.S.C. § 45(a)(2), including certain banks and savings and loan institutions, federal credit unions, certain common carriers, certain domestic and foreign air carriers, and businesses subject to the Packers and Stockyards Act of 1921, except as provided by 7 U.S.C. § 227(b).
Further, by its terms, the FTC’s proposed rule does not apply to other types of restrictive covenants like non-solicitation agreements, no hire agreements and confidentiality agreements. That said, the proposed rule adopts a “functional test” to determine whether a contractual provision qualifies as a non-compete clause for purposes of the rule, regardless of how employers label the restriction. Under this “functional test” a contractual provision would be considered a “non-compete clause” if it “has the effect of prohibiting the worker from seeking or accepting employment with a person or operating a business after the conclusion of the worker’s employment with the employer.” Examples include non-disclosure agreements that effectively preclude a worker from seeking employment in the same field at the conclusion of their employment or engagement with the employer.
How can businesses weigh in on the proposed rule?
The FTC published its proposed rule for public comment on Jan. 5, 2023, and the comment period runs through April 19, 2023. The FTC will not consider any comments received after April 19, 2023. The FTC has already received over 7,300 public comments of varying length. For those interested, you may submit comments online via the federal government’s website at www.regulations.gov. You can also mail your comment to the FTC at the following address: Federal Trade Commission, Office of the Secretary, 600 Pennsylvania Avenue NW, Suite CC-5610 (Annex C), Washington, DC 20580. Comments and the envelopes mailing those comments should be marked with “Non-Compete Clause Rulemaking, Matter No. P201200.”
The FTC also held a three-hour virtual public forum on its proposed rule on Feb. 16, 2023, at which a number of business owners, workers and legal professionals provided their personal experiences and feedback on the proposed rule. The comments from that forum will also be included in the FTC’s rulemaking record.
After considering all of the comments it receives, the FTC will likely issue a final rule later this year. It is difficult to say how, if at all, the FTC may revise the final rule to address the comments it receives, but given that the proposed rule was issued against the backdrop of President Joe Biden’s July 2021 Executive Order on Promoting Competition in the American Economy and that it comes on the heels of the FTC’s January 2020 workshop on non-compete clauses, it seems virtually certain that the final rule will ban the use of non-compete clauses in some way.
What happens after the FTC issues a final rule?
Even after the FTC issues its final rule, that is not the end of the story. Litigation is virtually inevitable. Serious questions exist about whether the commission has the authority to issue the sort of rule it proposes to issue. In fact, in her dissenting statement, Commissioner Christine Wilson stated as follows:
The NPRM is vulnerable to meritorious challenges that (1) the Commission lacks authority to engage in “unfair methods of competition” rulemaking, (2) the major questions doctrine addressed in West Virginia v. EPA applies, and the Commission lacks clear Congressional authorization to undertake this initiative; and (3) assuming the agency does possess the authority to engage in this rulemaking, it is an impermissible delegation of legislative authority under the non-delegation doctrine, particularly because the Commission has replaced the consumer welfare standard with one of multiple goals. In short, today’s proposed rule will lead to protracted litigation in which the Commission is unlikely to prevail.
Ultimately, it is difficult to say when or if the FTC’s proposed non-compete ban will take effect, but given the current Administration’s focus on anti-competitive activity, it seems unlikely that this issue will go away anytime soon.
Adam Israel focuses on complex business litigation, primarily in the areas of business torts and unfair competition and banking and financial services for Balch & Bingham LLP. A substantial portion of Israel’s practice is devoted to representing businesses and individuals in non-compete, non-solicitation and theft-of-trade secrets cases in trial and appellate courts. Israel is also regularly involved in complex litigation on behalf of highly regulated businesses.