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Proposed FTC Rule Would Ban Employers From Issuing Noncompete Clauses

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The Federal Trade Commission (FTC) recently published a proposed rule that would ban noncompete clauses in employment agreements. The FTC’s proposed rule is based on President Joe Biden’s 2021 Executive Order on Promoting Competition in the American Economy (FTCA). This order encouraged the agency to exercise its statutory rule-making authority under the Federal Trade Commission Act to “curtail the unfair use of noncompete clauses and other clauses or agreements that may unfairly limit worker mobility.” If adopted, the FTC’s rule would:

• Ban employers from entering into noncompete clauses with workers and independent contractors.
• Require employers to rescind existing noncompete clauses with employees.
• Require employers to actively inform their employees that their noncompete agreements are no longer in effect.

The agency’s proposed rule includes a limited exception for noncompete clauses between a seller and buyer of a business. Additionally, nondisclosure and non-solicitation agreements are excluded from the definition of a noncompete clause.

Under current law, noncompete agreements are governed by state and common law. Most states place limits on noncompete agreements, requiring their geographic scope, duration and competitive activity restrictions to be reasonable. While several states have banned or restricted the use of noncompete agreements, the FTC’s proposed rule would create a nationwide ban on noncompete clauses. If the rule becomes final, employers would be required to rescind existing noncompete clauses and notify employees who have been subject to these clauses of the rescission in writing within 45 days of the rule’s implementation.

Comments on the proposed rule are due 60 days after the FTC publishes the proposed rule in the Federal Register. Once the comment period has closed, the agency may reopen the comment period, issue a new proposed rule, terminate its rulemaking, or move on to a final rule. As currently drafted, the FTC’s rule would become effective 60 days after the final rule is published in the Federal Register, and employers would have to comply with the new rule within 180 days of its publication. However, it will likely be some time before this proposed rule becomes final, if ever, as the agency’s rule is likely to be challenged legally.