FTC Issues a Proposed Rule Banning Employer-Worker Non-Compete Clauses
On January 5, the FTC proposed a rule that would ban non-compete agreements between employers and workers as an unfair method of competition, violative of Section 5 of the FTC Act – a move foreshadowed by FTC Chair Lina Khan from September 2021. According to the Fact Sheet published by the FTC, roughly 30 million American workers are bound by non-compete provisions. The FTC estimates that this rule could increase worker earnings by “$250 billion to $296 billion per year.”
The proposed rule marks the FTC’s first attempt at developing rules to prohibit specific “unfair” methods of competition since it issued a Policy Letter in November 2022 outlining guiding principles for what conduct the Commission believes violate Section 5 of the FTC Act. If the rule is finalized similar to its current form, the rule is likely to have significant implications for employers.
What is in the Rule?
Under the FTC’s proposal, an employer would violate the FTC Act if they maintained a non-compete agreement with a worker, entered or attempted to enter into a non-compete agreement with a worker, or represented to the worker that they are subject to a non-compete clause.
Under the proposed rule, a “non-compete” clause is defined as a “contractual term between an employer and a worker that prevents the worker from seeking or accepting employment with a person, or operating a business, after the conclusion of the worker’s employment with the employer.” Other restrictive covenants that would not directly affect an employee’s ability to find alternative employment, such as non-solicitation or non-disclosure agreements (NDAs), would not violate the rule. However, the Commission emphasized that it would review the function and effect of such provisions to determine whether they might constitute a violation. Thus, a broad NDA that effectively bars the employee from working in the same field, or a requirement for the employee to pay the employer for training costs that far exceed the costs the employer actually incurred, would still violate the rule because it has the effect of restricting a worker’s ability to find new employment.
The FTC created an exception to this rule for a person selling all, or substantially all, of a business entity when the non-compete agreement is created. The FTC notes that the proposed rule applies to employer-worker relationships, so the exception covers a narrow set of circumstances where a seller of a business goes on to work for the buyer, such as a start-up founder continuing on with the company’s buyer. Without an employer-worker relationship, the rule is not implicated.
The Proposed Rule Continues the FTC’s Focus on Labor Markets
FTC Chair Lina Khan has made the labor market a primary focus for the regulatory agency. In 2022, the FTC and DOJ requested public input on how the merger guidelines should analyze impacts to the labor market. The FTC also teamed with the National Labor Relations Board (NLRB) to cooperatively address labor market concentration.
In certain prior merger challenges, the FTC has entered consent decrees that prevented the use of non-compete agreements that would impede the ability of divestiture buyers to hire the personnel needed to compete in the market. Preventing or removing non-compete provisions for divestiture buyers may not be a change in practice for the FTC, but last week marked the first time the FTC sought enforcement action against a company to block the enforcement of a non-compete agreement as an unfair method of competition. Concurrent with issuing the proposed rule, the FTC obtained settlements from three companies that precludes them from enforcing or threatening to enforce non-compete provisions against their employees, among several other requirements. The consent orders will be published in the Federal Register, at which time a 30-day public comment window will open.
Legal Challenges are Likely Should this Rule be Finalized
The proposed rule could attract several challenges, both as to the validity of the rule itself as well as whether the FTC has the authority to issue such a rule. Today, enforceability of non-compete agreements are primarily regulated at the state level, and courts have recognized the validity of properly crafted non-compete agreements. According to the Notice issued by the FTC, 47 states permit non-compete agreements to some degree. As Chair Khan noted, these varying restrictions create “natural experiments” for researchers to analyze the impact of noncompete agreements on labor markets. However, this also means that 47 state courts have held non-compete agreements that conform to the common law of that state are lawful, binding agreements. The proposed rule contains an explicit preemption such that it will “supersede any State statute, regulation, order, or interpretation,” that is inconsistent with the rule.
The FTC draws its rulemaking authority from Section 6(g) of the FTC Act, which grants the FTC the power to “make rules and regulations for the purpose of carrying out the provisions of this subchapter.” However, Commissioner Christine Wilson – the lone dissenting Commissioner to the proposed rule – provides multiple avenues for potential challengers to question the FTC’s authority to issue the proposed rule. According to Commissioner Wilson, the legislative history of the FTC Act does not support the assertion that Congress intended to give the FTC rulemaking authority over business practices, and likely triggers challenges under the “Major Questions” and “Non-Delegation” doctrines.
A 60-day public comment period will begin as soon as the proposed rule is published in the Federal Register. RGH is well-positioned to provide expert and nuanced advice and counsel in response to this and other actions taken by US antitrust authorities.
 See Proposed Rule §910.2(a)
 See Proposed Rule §910.1(b)(1)
 See Non-compete Clause NPRM (ftc.gov) p. 110
 See Proposed Rule §910.3
 See Non-compete Clause NPRM (ftc.gov) p. 128
 In the Matter of DaVita Inc., and Total Renal Care, Inc., FTC File No. 211-0013, Concurring Statement of Commissioner Christine S. Wilson (Oct. 25, 2021) (“Moreover, a repeal of non-competes to effectuate a remedy is not novel: past consent orders have included provisions that prohibit merging parties from enforcing non-competes to aid divestiture buyers in hiring employees.”)
 Lina Khan, Lina Khan: Noncompetes Depress Wages and Kill Innovation, The New York Times (Jan. 9, 2023), Opinion | FTC Chair Lina Khan on the Problems with Noncompetes – The New York Times (nytimes.com)
 Dissenting Statement of Commissioner Christine S. Wilson Regarding the Notice of Proposed Rulemaking for the Non-Compete Clause Role, Commission File No. P201200-1, at 10-11 (Jan. 5, 2023) (NPRM for the Non-Compete Clause: Dissenting Statement of Commissioner Wilson (ftc.gov)) (“For decades, consistent with the statements in the FTC Act’s legislative history, Commission leadership testified before Congress that the Commission lacked substantive competition rulemaking authority.”)
 Id. at 11-12. (“Under the major questions doctrine … a court asks ‘whether Congress in fact meant to confer the power the agency has asserted,’” and “agency action will trigger the application of the major questions doctrine if the agency claims … the power to (1) resolve a matter of great political significance, (2) regulate a significant portion of the American economy, or (3) intrude in an area that is the particular domain of state law …. If a court were to conclude that the Non-Compete Clause Rule is a major question, the FTC would be required to identify clear Congressional authorization to impose a regulation banning non-compete clauses. Yet, as discussed above, that clear authorization is unavailable.”)
 Id. at 12. (“The doctrine is based on the principle that Congress cannot delegate its legislative power to another branch of government, including independent agencies.”)