On July 9, 2021, President Joe Biden issued an Executive Order promoting competition, including “72 initiatives by more than a dozen federal agencies to promptly tackle some of the most pressing competition problems across our economy.” One of these initiatives included the Federal Trade Commission (FTC) banning non-compete agreements.
On January 5, 2022, under a new proposed rule, the FTC would ban the enforcement of non-compete agreements that prohibit employees from working for competitors or starting similar businesses. Specifically, the FTC’s new proposed rule has three components:
- Prevent employers from entering into non-compete clauses with workers
- Require employers to take active steps to rescind existing non-compete clauses
- Proposes explicit notice requirements applying to both current and former employees
The proposed rule applies to independent contractors and anyone who works for an employer, whether paid or unpaid. It requires employers to rescind existing non-compete agreements and actively inform workers that they are no longer in effect.
What is a non-compete agreement?
A non-compete agreement legally binds a current or former employee from competing with an employer for a specific time after employment ceases, including starting their own business. These contracts outline how long the employee must refrain from working with a competitor, in a geographic location, or a specific market. In addition, some may define the damages the employer is entitled to if an employee breaches the agreement.
The proposed rule would generally not apply to other employment restrictions, like non-disclosure agreements (NDA). NDAs prevent the employee from revealing information the employer considers proprietary or confidential, such as client lists, underlying technology, or information about products in development.
When does the proposed rule not apply?
The proposed rule would not apply to covenants relating to the sale of a business.
Specifically, the proposed rule would not apply to a person selling a business entity or otherwise disposing of all of the person’s ownership interest in the business entity. In addition, it would not apply to a person selling all or substantially all of a business entity’s operating assets. To qualify as a substantial owner, the person (subject to the non-compete clause) must be “an owner, member, or partner holding at least 25 percent ownership interest in a business entity.”
What current rules apply to non-compete agreements?
Currently, non-compete agreements are managed by state legislation. For example, California, North Dakota, Oklahoma, and Washington, D.C. ban non-compete agreements with a few narrow exceptions. In addition, Colorado, Illinois, Maine, Maryland, New Hampshire, Oregon, Rhode Island, Virginia, and Washington prohibit non-compete agreements unless the worker earns above a certain threshold.
Why is this important?
The proposed rule also includes specific notice requirements relating to the rescission of non-compete clauses. Under this section, an employer must notify the individual worker that their non-compete clause is no longer in effect and may not be enforced. Such notices must follow several guidelines:
- Notification must be given in individualized communication. It cannot be done through a general group notice like a company newsletter.
- Notification cannot be oral. It must be provided in an individualized email, text, or paper.
- The notice must be provided to the worker within 45 days of the employer’s rescission of the non-compete clause.
- The employer must provide this notice to both current and former workers still bound by a previous non-compete agreement or clause.
Make Public Comment
The FTC is seeking public comment on the proposed rule based on a preliminary finding that non-compete agreements constitute an unfair method of competition and therefore violate Section 5 of the Federal Trade Commission Act. The FTC will review the comments and may make changes in a final rule based on the comments and further analysis of this issue. Comments will be due 60 days after the Federal Register publishes the proposed rule. After this period, the FTC will move to make the rule final. The proposed rule would then go into effect 180 days after the final rule’s publication date.