In the summer of 2021, President Biden signed an executive order that, among other things, asked the Federal Trade Commission (FTC) to consider curtailing the use of employment noncompetes. This week, the FTC answered the call by announcing a notice of proposed rulemaking to “regulate” employment noncompetes. We use air quotes around “regulate” as what the FTC actually proposes to do is ban employment noncompetes. As explained by the FTC, its proposed rule would provide that it would be an unfair method of competition (under the Federal Trade Commission Act for an employer to enter into or attempt to enter into a noncompete clause with a worker, to maintain any noncompete clause with a worker, or (under certain circumstances) to represent to any worker that he or she is subject to a noncompete clause. The FTC proposes to define a “noncompete clause” as any contractual term between an employer and a “worker” that prevents the worker from seeking or accepting employment with another person or business after the conclusion of the worker’s employment by the employer. Such “workers” would include not just obvious employees, but also independent contractors, volunteers, or even sole proprietors that provide services. The FTC’s proposed rule would generally exempt nondisclosure agreements and nonsolicitation agreements so long as they do not function as a noncompete clause. The proposed rule would also exempt noncompetes entered into a part of the sale of a business where the party restricted owns at least a 25% ownership interest in the business being sold. The proposed rule would not only prohibit noncompetes going forward, but also require employers to rescind any existing noncompetes.
In proposing a nationwide ban on noncompetes, the FTC is not just catching up with, but in most cases going beyond, the policies adopted by a slew of individual states. California and Oklahoma have long banned employment noncompetes. However, many other states (Washington and Oregon among them) have placed restrictions on the use of employee noncompetes without banning them altogether. For instance, in 2020, Washington enacted a statute that generally bans the use or enforcement of noncompetes for workers making less than about $100,000 a year, but allows noncompetes with higher paid workers. Similarly, Oregon law restricts the use of noncompetes without banning them altogether.
There is, of course, a long way to go between proposing a rule and adopting it. The FTC is accepting comments on its proposed rule for the next 60 days. We will periodically update on how this rulemaking progresses.
This article is provided for informational purposes only—it does not constitute legal advice and does not create an attorney-client relationship between the firm and the reader. Readers should consult legal counsel before taking action relating to the subject matter of this article.