Federal Trade Commission Seeks to Ban Noncompete Agreements

Following an announcement last year that the Federal Trade Commission (FTC) would use Section 5 of the FTC Act to aggressively police conduct it deems unfair (see our Legal Alert), the Agency kicked off the new year with two actions aimed at banning noncompete agreements between employers and workers.

On January 5, the FTC issued a Notice of Proposed Rulemaking aimed at categorically banning noncompete agreements nationwide. This closely followed the FTC’s January 4 announcement that it had reached settlements with three companies charged’ with violating Section 5 of the FTC Act.

The proposed rule would make it illegal for virtually all employers to:

• enter into, or attempt to enter into, a noncompete agreement with a worker;

• maintain a noncompete agreement with a worker; or

• represent to a worker that the worker is subject to a noncompete agreement.

The rule would require employers to rescind existing noncompete agreements and notify workers that those agreements are no longer in effect.

Consistent with this sweeping prohibition, the proposed rule eschews employment definitions contained in state or federal law and would apply to independent contractors, volunteers, interns, and anyone else working for an employer, paid or unpaid. 

The proposed rule includes a narrow exception for noncompetes between a buyer and seller of a business, where the restricted party is an owner, member, or partner holding at least 25 percent ownership interest in an entity. The rule also would not apply to other forms of agreements–such as non-disclosure agreements or non-solicitation agreements that may limit what a worker does post-employment–unless they restrain such an unusually large scope of activity that they functionally operate as noncompete clauses. The rule would not prevent employers from limiting the activities of workers during their employment. 

Although the FTC proposes moving forward with the broad rule as outlined above, it offers several proposed alternatives, including:

• a categorical ban on noncompete agreements for employees earning below a wage threshold (e.g., $100,000) with no changes to the law of noncompete agreements for employees earning above that threshold; or

• no ban on noncompete agreements, but a rebuttable presumption that noncompete agreements are illegal for all employees.

The FTC’s notice also raises for consideration “whether the rule should apply uniformly to all workers or differentiate between categories of workers” and “whether [the FTC] should adopt different standards for noncompete clauses with senior executives.”

The FTC seeks comments on the proposed rule and the alternatives over the next 60 days, after which the FTC will likely adopt a final rule, with compliance mandated 180 days thereafter. Notably, the Commission adopted the proposed rule with a 3-1 vote with Commissioner Christine S. Wilson dissenting. Wilson’s dissent calls the proposed rule a “radical departure from hundreds of years of legal precedent” on noncompete agreements, decrying a “lack of clear evidence to support the proposed rule.” We expect employers and/or industry groups will mount legal challenges to the FTC’s broad exercise of rulemaking authority in this area, as well as its efforts to use Section 5 as an enforcement tool.

In its news release, the FTC notes that the proposed rule and recent enforcement actions “make progress on the agency’s broader initiative to use all of its tools and authorities to promote fair competition in labor markets.” These actions also are consistent with the recent focus of the U.S. Department of Justice on antitrust violations in the labor space, as we reported here and here. 

Ballard Spahr’s Labor and Employment and Antitrust and Competition Groups are prepared to answer questions regarding antitrust issues in the context of the labor market as well as questions regarding noncompete agreements and other types of restrictive covenants. Please contact us if we can assist you in understanding your company’s legal requirements and the measures your business should take to remain in compliance with applicable law.

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