The future enforceability of non-compete agreements nationwide has recently been called into question by the Federal Trade Commission (FTC). The FTC––which protects consumers from anticompetitive, deceptive, and unfair business practice––recently (January 5, 2023) proposed a rule to prohibit employers from imposing non-compete clauses on workers. While the use of non-compete agreements in the employment setting has been the subject of political talk over the years, this is one of the most aggressive steps taken by the federal government to insert itself into an area of the law that previously has been primarily governed on a state-by-state basis, with enforceability of these post-employment restrictive covenants hinging on the unique laws of each jurisdiction.
Indeed, each state has its own statutory or common law rules with respect to the enforceability of non-compete agreements. In some states like California, non-compete agreements are almost entirely unenforceable. In other states like Texas, non-compete agreements can be enforceable if certain conditions are met. And in states like Oklahoma, non-compete agreements are generally unenforceable with limited exceptions (when connected to the sale of goodwill in a business, or as part of the dissolution of a partnership). The bottom line is that the law with respect to non-compete agreements is not uniform, which causes legal and practical issues for employers that operate in numerous states.
The FTC’s proposed rule would create a uniform law on non-compete agreements by making them unenforceable in the United States. In support of its proposed rule, the FTC argues that non-compete agreements significantly reduce workers’ wages; stifle new businesses and new ideas; exploit workers and hinder economic liberty; and employers have other less harmful mechanisms to protect their trade secrets and other valuable investments. The proposed rule provides that “noncompete clauses are an unfair method of competition” and bans employers from entering non-compete clauses with their workers, including independent contractors. Significantly, if the proposed rule is adopted, it will be applied retroactively, forcing employers to rescind existing non-compete clauses with workers and actively inform their employees that the non-compete agreements are no longer in effect.
The proposed rule is currently open for public comment until at least March 10, 2023. During the comment period, employers and organizations that represent employers’ interests (such as the United States Chamber of Commerce) are permitted to critique the rule and offer suggestions, revisions or amendments. Once the comment period closes, the FTC can issue a new proposed rule, terminate the rulemaking process, or move on to a final rule. To the extent the FTC issues a final rule, it will be subject to scrutiny from both Congress and the courts, especially with respect to whether the FTC has the power to issue such a rule and whether it implicates issues of federalism, or violates the Supreme Court’s “Major Questions” doctrine which places limitations on the ability of federal regulatory bodies to enact rules that are outside of its congressional mandate. In the meantime, we will continue to monitor the proposed rule’s progress and keep you informed on any developments.