On January 5, 2023, the Federal Trade Commission announced a proposed rule eliminating most non-compete provisions in employment agreements.
The move by the FTC comes one day after the agency announced enforcement actions against three companies and two individuals for the respondents’ use of non-compete provisions in their employment agreements. Although the enforcement actions indicate the agency’s belief of an independent, pre-existing basis for restricting non-compete provisions in employment contracts, the proposed rulemaking seeks to codify new rules that, with few exceptions, would both (1) eliminate existing non-compete provisions in employment agreements and (2) prohibit future employment agreements from including non-compete provisions.
The proposed rulemaking, which purports to enforce the Federal Trade Commission Act’s prohibition on “unfair methods of competition,” captures illegal contractual provisions through a functional test: not only would provisions labeled as non-compete provisions become illegal, but the new rules would prohibit any contractual provisions that would effectively prevent an employee from seeking or accepting employment, or from operating a business, after concluding their current employment. Such a functional test could therefore capture broadly-written non-disclosure agreements, and some provisions requiring an employee to re-pay training costs at the conclusion of employment. Indeed, the proposed rule appears intended to capture those types of provisions when they effectively function as non-compete provisions. The rule would apply to paid and unpaid workers, and to both employees and contractors.
The proposed rule would become effective 180 days after the final rule is published. Currently, the FTC seeks comments from the public on the proposed rule or possible alternatives to the proposed rule. FTC will accept comments until March 6, 2023, after which date FTC intends to review the comments and publish a final rule based on the comments and FTC’s further analysis of the issues.
Cranfill Sumner attorneys are monitoring this proposed rulemaking and the legal challenges that may follow any final rule broadly prohibiting non-compete agreements, and are prepared to assist interested persons and companies with navigating the proposed rule and, potentially, the litigation that may follow its final publication. Further information on the proposed rulemaking can be found in the FTC’s notice, located here.