FTC Proposes New Antitrust Regulation on Non-Compete Agreements for Employees
On January 5, 2023, the Federal Trade Commission (“FTC”) proposed a new federal antitrust regulation that would ban almost all non-compete agreements for employees. Citing authority under Section 5 of the FTC Act, the rule asserts that employee non-compete clauses amount to an “unfair method of competition.” If enacted in its current form, the rule would broadly prohibit employers from entering into non-competes with workers across all industries and income levels – including those in the C suite.
The proposed rule broadly defines a non-compete clause as “a contractual term between an employer and worker that prevents 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.”
The term “worker” is also broadly defined, as anyone who works, whether paid or unpaid, for an employer, including employees, independent contractors, externs, interns, volunteers, and apprentices. Although the proposed rule provides a limited exception for non-compete agreements with a person who is selling or otherwise transferring ownership of a business entity, or its operating assets, this exception likely would not be relevant for most employment-based non-competes. The proposed rule would preempt any inconsistent state or local laws, except where the state or local rules provide greater employee protections against non-compete agreements.
While the rule purports to only ban non-compete clauses, other types of employment-related restrictive covenants may be so broad in scope that they are also prohibited under the proposed rule. These could potentially include non-disclosure agreements and confidentiality provisions. Customer non-solicitation agreements and no-recruitment agreements, often provisions in employment contracts to prevent poaching an employer’s business after leaving the company, could also be prohibited under the proposed rule if not carefully drafted to ensure that it does not prohibit the worker from seeking or accepting employment in the same field. Employers should verify that such provisions are drafted to be only as narrow as required to protect actual trade secrets and confidential information.
The proposed rule would apply to all non-compete clauses, both prospectively and retroactively. If the proposed rule is enacted, employers must rescind all existing non-compete agreements and notify all impacted current and former employees that their non-compete clauses are no longer in effect. The proposed rule provides model language that would satisfy the notice requirement, as well as a safe harbor for employers who comply with the rescission and notice requirements in a timely manner. To meet the safe harbor, companies must: (i) identify and rescind all non-compete agreements, including any de facto non-compete provisions, within 180 days of enactment; and (ii) provide proper notice to all impacted individuals within 45 days. The proposed rule requires that “individualized communication” be provided to each current and former employee, so long as the worker’s contact information is “readily available.”
Non-compete clauses and other restrictive covenants are found in many types of executive compensation arrangements, including long-term incentive awards and nonqualified deferred compensation plans. If the proposed rule is finalized, employers would need to broadly review all restrictive covenants found in all of their compensation arrangements to confirm whether the restrictions are prohibited. Significantly, because many employers offer departing executives severance in exchange for agreeing not to compete, such arrangements would be prohibited under the proposed rule, depriving employers of a popular tool for incentivizing certain behaviors following executives’ separation from employmnent. In addition, in some cases, it will be unclear whether an executive currently covered under an arrangement would remain contractually entitled to the severance payments after the non-compete clause has been rescinded. If the proposed rule is finalized, employers will have to consider whether their severance promises are still enforceable when the consideration for them (i.e., the promise not to compete) can no longer be provided.