FTC Proposes New Rule to Ban Non-Compete Agreements

In early January 2023, the Federal Trade Commission (FTC) published a notice proposing a new rule that would effectively do away with non-compete clauses against workers and independent contractors.

This proposed rule — also called a Notice of Proposed Rulemaking (NPRM) — has the potential to do away with all non-compete clauses and provisions within contracts or policies that have similar purposes and functions.

A public notice and comment period will go into effect when the FTC officially publishes the NPRM within the Federal Register; this period will last 60 days. As of now, no date is set.

For years, experts predicted this could happen. Several states, including California, Illinois, Washington, Virginia, and Maryland, have already passed legislation to limit non-compete agreements for workers earning low wages or wages below the statutory threshold in their jurisdictions.

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Proposed Restrictions and Requirements

The FTC’s notice seeks to enforce the following three proposed restrictions:

Employers cannot enter into non-compete agreements with employees
Non-compete agreements already in place can no longer be enforced
Employers cannot represent to workers (under certain circumstances) that they’re subject to a non-compete

While the proposal seeks to ban future arrangements where non-compete agreements would be signed, the FTC also aims to provide retroactive relief to workers by ensuring that the new law would also force employers to rescind previously signed provisions and inform their workers through official communications about the latest changes.

Under the current proposal, employers would have 45 days to provide adequate notice to all workers, explaining that any previously established non-compete agreements would no longer be enforceable.

One exception to the proposed rule change applies to individuals engaged in selling a business or their interest in a company. In this case, individuals may still be subject to non-compete terms.

Enforcing the New Rule

The proposed rule, if passed, will be enforced and overseen directly by the Federal Trade Commission. Any violations or complaints must be submitted through the Office of the Secretary or via the Commission’s website.

Proposed penalties have not yet been published, but similar to other FTC violations, these may likely involve hefty fees.

Key Considerations

The FTC’s proposed change defines non-compete clauses as any agreements that prevent workers (and independent contractors) from accepting specific work opportunities or starting their own business upon ending their work relationship with the employer in question.

Although not all work contracts include a clear and defined non-compete agreement, many employees engage in de facto non-compete clauses. These would also be banned under the new law.

The 60-day comment period is likely the public’s sole opportunity to comment on the proposed rule. According to FTC leadership, three potential legal challenges could arise:

The Commission lacks the authority to enforce this rule under the Federal Trade Commission Act of 1914, which bars rulemaking for “unfair methods” of competition
The FTC’s authority may be challenged under the Supreme Court’s Major Questions Doctrine.
Even if the FTC does have authority, this rule may be considered improper use of the nondelegation doctrine

These potential issues may become part of the rule’s future objections on behalf of stakeholders, business leaders, and other entities.

Next Steps

For now, the future of the FTC’s proposed rule is largely up in the air. Once the NPRM has been published, stakeholders will have two months to comment publicly and engage in dialogues regarding the rule change.

As with all proposed changes to federal rules, the proposed ban may not survive the approval process due to legal challenges, public comments, and other prohibitive factors. However, nothing is set in stone.

Employers should start to take necessary preparations if the rule is approved. This means reviewing company policies, contracts, and other documents that may need to be amended to comply with the new changes.

If you have questions about the FTC’s proposed rule change and how this may affect you, consult with the NYC employment law attorneys at Woods Lonergan.

About the Author

James F. Woods is Founder and Managing Partner of Woods Lonergan. He has tried more than 60 jury cases to verdict as first-chair trial counsel, beginning his career as a prosecutor, and resolves complex commercial and real estate disputes valued at $1M to $100M+ for business owners, principals, and middle-market enterprises across the New York metro area. He appears regularly in the New York Commercial Division and in the federal district courts for the Southern and Eastern Districts of New York, and has argued appeals in the Appellate Division and the Second Circuit.

His practice covers complex commercial litigation, real estate and asset litigation, partnership and shareholder disputes, fiduciary breach and corporate fraud, and cooperative and condominium governance. He counsels corporate and cooperative boards throughout New York.

The Legal 500 United States ranks James in its New York Elite rankings for Commercial Disputes, and his peers have recognized him with Martindale-Hubbell's AV Preeminent rating. Woods Lonergan is ranked in Chambers USA: Spotlight New York for Litigation: General Commercial and Real Estate. James serves on the Commercial & Business Litigation Committee and the Business Torts & Unfair Competition Committee of the American Bar Association Section of Litigation, and on the Cooperative & Condominium Law Committee of the New York City Bar Association. His commentary on New York commercial and real estate disputes has been quoted in The New York Times, The Washington Post, Bloomberg Law, Law360, and Forbes.