FTC Rule Would Ban Non-Compete Clauses

Recently, the Federal Trade Commission (FTC) published a proposed rule that would ban employers from imposing non-compete clauses in employment contracts. The proposed rule comes after a string of lawsuits the FTC filed against three companies that imposed anticompetitive non-compete clauses on their workers. According to the FTC, such clauses constitute an unfair method of competition in violation of Section 5 of the Federal Trade Commission Act. Other agencies have also expressed some level of involvement in cases surrounding non-compete agreements. In March 2022, the U.S. Department of Justice (DOJ) filed a statement of interest encouraging a Nevada state court to stop non-compete agreements between a medical group and its employees.

What are Non-Compete Clauses?

Non-compete clauses are terms within an employment contract that prevent an employee from working for a competing employer or starting a competing business within a specific geographic area and period of time after a worker’s employment ends. As such, non-compete clauses limit competition by design. Therefore, the FTC regularly scrutinizes these types of clauses under federal antitrust laws. State and local jurisdictions also regularly review such clauses, particularly when they concern unequal bargaining power between employers and workers.

Recent Cases Involving Non-Compete Clauses

The FTC recently sued three companies and two individuals, ordering them to void non-compete clauses they imposed on employees. Notably, this marks the first time the FTC has sued to halt such contractual restrictions. In its complaints, the FTC pursued the following entities:

• In one case, the employer created unequal bargaining power against low-wage security guards by requiring restrictive contracts that prohibited the employees from working for competing companies within 100 miles of the job site for two years. The employer sued individual employees and blocked them from accepting jobs.
• Another case involved an Ohio-based employer who banned employees from working for, owning, or being involved with any U.S. business selling similar products or services for one year without consent from the employer.
• The last case involved a manufacturer who imposed restrictions banning workers from performing “the same or substantially similar services” in the U.S., Canada, or Mexico for two years after the end of employment.

The FTC ordered relief in each case prohibiting the employers from enforcing or threatening to enforce any non-compete clauses against employees. Additionally, the FTC’s order required the employers to void the clauses without penalizing employees; provide copies of the order to employees and hiring managers; and provide notice to employees that they may work for another company, run a business, or compete at any time after their employment.

Proposed Rule to Ban Non-Compete Clauses

According to the FTC, non-compete clauses hinder innovation and competition by preventing potential entrepreneurs from entering the market or sharing new ideas with other companies. Subsequently, this could harm consumers by forcing prices to increase. The FTC’s proposed rule to ban non-compete clauses would prohibit employers from imposing such restrictive clauses against employees. The proposed rule would make it illegal for an employer to:

• enter into or attempt to enter into a non-compete agreement with a worker;
• maintain and enforce a non-compete;
• convey in any way that a worker is subject to such a clause.

In addition, the proposed rule would apply to independent contractors as well as non-exempt employees. Finally, employers would need to inform workers that any non-compete agreements would no longer be in effect. By FTC estimates, stopping the practice could increase wages by $300 billion a year and provide greater career opportunities for 30 million Americans. Note that the proposed rule would generally not apply to nondisclosure agreements unless they were broad enough to function as non-competes. If the FTC’s rule is finalized, employers will need to review and revise their hiring contracts and employee handbooks to reflect the change, in addition to including other critical employment laws necessary in an employee handbook.