On Thursday, January 5, 2023, the Federal Trade Commission (“FTC”) proposed a sweeping rule that, if passed, would deem non-compete clauses an “unfair method of competition” prohibiting all employers from entering into these restrictions with employees.
The scope of the ban is extremely wide, as it would apply not only to those provisions specifically identified as non-compete clauses, but also to other provisions written so broadly as to function as a bar to the worker’s ability to work with a competing employer, establish a competing business, or work in the same field after the conclusion of their employment with the employer. While the proposed rule includes two examples of such de facto non-compete clauses, the rule’s functional test is broad enough to potentially implicate non-solicitation clauses, as well. Further, forfeiture for competition plans will no longer be viable under the rule if adopted in its current format.
The prohibition contains a single exception for non-competes “entered into by a person who is selling a business entity or otherwise disposing of all of the person’s ownership interest in the business entity, or by a person who is selling all or substantially all of a business entity’s operating assets,” and applying to someone with a “substantial” ownership stake, meaning “an owner, member, or partner holding at least a 25 percent ownership interest in a business entity.”
The proposed rule otherwise contains no exemption for specific industries and makes no distinction between high-wage or low-wage workers or between senior executives and more junior workers. Moreover, the prohibition would have retroactive effect, so employers would be required to issue rescission notices to current and former employees who are subject to non-competes.
Meanwhile, many states are already considering and enacting legislation to limit or eliminate non-competes in their entirety. Legislators may be further emboldened to increase the prohibitions against non-competes in anticipation of revisions to the proposed rule because the proposed rule specifies it would supersede any state statute or regulation to the extent inconsistent, but that a statute or regulation that provides broader protections to workers would not be considered inconsistent and therefore would not be superseded.
The proposed rule will be open to public comment 60 days after the proposed rule is published in the Federal Register, pursuant to which the FTC will review the comments and may make changes in a final rule. Seward & Kissel LLP will continue to monitor for any updates.
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If you have any questions regarding the proposed rule, or any other employment-related issues, please contact Anne C. Patin at (212) 574-1516 or your relationship partner at the Firm.