FTC Proposes Broad New Rule to Ban Non-Compete Provisions in Employment Contracts

Federal trade commission

On January 5, 2023, the Federal Trade Commission announced a proposed rule to effectively eliminate the use of non-compete agreements between employers and employees. If ultimately passed as drafted, employers will have substantially fewer means to protect what would otherwise be valid business interests, as well as proprietary or confidential information.

Most states, including Missouri, allow the use of non-compete agreements provided the limitations on duration, geographic scope, and other restrictions are reasonable. Some states prohibit the use of non-compete agreements except in rare cases, and a few states have statutory limitations on the use of non-compete agreements.

The proposed rule defines an employer as “any natural person, partnership, corporation, association or other legal entity, including any person acting under color or authority of State law.” Essentially, any employer would be covered by this proposed rule. What is noteworthy is that there is no exception for smaller employers or require a certain number of employees to be covered like other federal statutes and regulations. As currently drafted, a sole proprietorship would be covered by the proposed rule. There is one small exception to the proposed rule regarding a “substantial owner” of the business when the business is for sale.

The proposed rule also not only covers traditional non-compete provisions but “de facto” non-compete clauses as well. For example, the proposed rule specifically states that an agreement drafted so broadly as to prevent the worker from working in the same line of work after termination of his or her employment with the employer is a de facto non-compete. This provision may call into question the validity of confidentiality agreements or non-disclosure agreements prohibiting the employee from disclosing the former employer’s existing customer base.

If passed as drafted, not only would the non-compete clause of any contract be nullified, but the rule specifically requires the employer to notify the employee or any former employee still subject to a non-compete the provision is no longer valid. In fact, that notice must not only be in writing and:

1. Must notify the employee that he or she can accept a job with any other employer, even if the new employer competes with the former employer;

2. Must notify the employee he or she can start and run their own business, even if the new business competes with the former employer; and

3. Must notify the employee he or she can compete with the former employer at any time following termination of employment with the former employer.

The rule was proposed following President Biden issuing Executive Order 14036 in July 2021. That Order was issued as part of a plan intended to promote competition in the economy. Based in part on that Order and 15 U.S.C. 45 and 46(g), the FTC issued its proposed order this month. Many commentators have taken exception to the legal basis granting the FTC the authority to issue this order, and there is already substantial opposition to the proposed rule by employers and others.

The public is invited to send the FTC its comments regarding the rule, and the deadline for submitting comments is March 10, 2023. By law, the FTC is supposed to review and consider all comments timely submitted and at that point the FTC can withdraw the proposed rule, amend the proposed rule and republish, or adopt the proposed rule as drafted. Once the final regulation has been adopted it will become effective 180 days after publication of the final rule. That means that non-compete agreements are still enforceable as of now if permitted under state law, and even if the proposed rule is adopted we expect there to be several court challenges to the proposed rule.

Please feel free to call Brian Asberry at 417-882-9090 with questions or contact us online today.

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