On January 5, 2023, the Federal Trade Commission (FTC) proposed its long-awaited new rule banning non-compete agreements. This was an anticipated event after a July 9, 2021, executive order from President Biden that directed the FTC “to curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.”
1. In public comments about the FTC’s intent to propose a rule concerning “non-compete” provisions, it was unclear whether the FTC intended to implicate all restrictive covenants such as non-solicit/accept/service provisions relating to clients, non-poach provisions relating to employees, or simply true “non-compete” provisions. This proposed rule targets both non-competes and de facto non-competes, and looks to treat broad non-poach and non-solicit/accept/service provisions as de facto non-competes.
2. According to the proposed rule, “it is an unfair method of competition for an employer to”:
The Supplementary Information the FTC provides on de facto non-compete provisions also notes that other provisions, when broad can be de facto non-competes including:
See the FTC website for more information here.
The proposed rule does not mention nor explain whether or not notice provisions, garden leave provisions or employment agreements for terms would be considered “de facto” non-competes. The proposed rule also omits any mention on whether or not forfeiture for competition provisions will be permitted (such as under New York’s employee choice rule).
6. The proposed rule is both retroactive and proactive, banning new non-compete provisions, maintaining existing non-compete provisions, or claiming to a worker that they are subject to an enforceable non-compete clause when it is really not enforceable.
7. The proposed rule explicitly requires the rescission of non-compete clauses with workers by providing a notice to the worker in an “individualized communication” that “the worker’s non-compete clause is no longer in effect and may not be enforced against the worker.”
8. The proposed rule would supersede state law unless such law provides greater protection than this proposed rule (i.e., California law concerning client-based restrictions).
9. Compliance requirements would go into effect 180 days after the date of publication of the final rule. The proposed rule has yet to be published. Given the major financial impact (see here concerning the “Major Questions Doctrine”), questionable FTC authority to make a retroactive rule voiding restrictive covenants in asset purchase and merger agreements, and the likelihood of a volume of public comments, there is a significant likelihood that the Final Rule will not be in effect in the 2023 calendar year.
Concerns with the Proposed Rule
The proposed rule has significant deficiencies that are sure to be noted during the public comment period such as:
Based on this proposed rule, what’s next?
1. Watch this space but don’t overreact. Based on a number of factors, this proposed rule is unlikely to be in force in 2023. First, the proposed rule needs to be published in the Federal Register. Next, a 60-day comment period will occur, after which changes may [should!] be made to the proposed rule. Then, 180 days after publication of the final rule it would be in force. Prior to this occurring, there is a high likelihood that, if the proposed rule remains significantly similar to its present form, one or more parties would seek to enjoin it and it would be the subject of litigation for a significant period of time.
2. Diligently observe other state legislators who pass similar laws in the space including if the then Final Rule is enjoined. Given the many state laws enacted concerning restrictive covenants since 2016, it is anticipated that States will continue to legislate rules concern the use of restrictive covenants anticipated to be in a prospective and more thoughtful manner.
3. Consider the restrictive covenants you are using on a going forward basis in your sale and employment agreements and make sure they comply with existing state law. Whether or not this proposed rule is finalized and creates legal obligation or is enjoined, state legislatures and attorneys general are bound to be more active in pursuing the “ claim[s]… to a worker that they are subject to an enforceable non-compete clause when it is really not enforceable” and courts are more likely to look at overbroad covenants in a dim light.
Attorney Advertising. The information contained in this Legal Alert provides a general summary of the topics covered and is not intended to be and should not be relied upon as legal advice. You should consult with your legal counsel for advice and before making legal, business or other decisions.
|Drogin, Laurent S. Partner and Chair of Labor and Employment Practice and Co-Chair of Restrictive Covenant Practice||Partner and Chair of Labor and Employment Practice and Co-Chair of Restrictive Covenant Practice||212.216.8016|
|Kleinmann, David N. Partner and Co-Chair of Restrictive Covenant Practice||Partner and Co-Chair of Restrictive Covenant Practice||212.216.1115|