FTC proposes rule to ban nearly all employee non-compete agreements

Proposed rule would be a near-total ban on employee non-competes

The proposed rule defines as an “unfair method of competition,” and thus a violation of Section 5 of the FTC Act,¹ for an “employer to enter into or attempt to enter into a non-compete clause with a worker; maintain with a worker a non-compete clause; or represent to a worker that the worker is subject to a non-compete clause where the employer has no good faith basis to believe that the worker is subject to an enforceable non-compete clause.” In the NPRM, the FTC explains that it has determined that non-competes are an “unfair method of competition” based on a series of preliminary findings on the issue. Among other things, the FTC asserts that non-compete agreements reduce the earnings of employees (both those subject to non-competes and those that are not subject to such agreements), inhibit competition more broadly by limiting the ability of would-be competitors to hire talent, and also result in higher prices to consumers.

In addition to prohibiting future employee non-competes, the proposed rule would require employers to rescind existing employee non-competes and provide individualized notice to employees (current and former) of that rescission. The proposed rule not only would apply to regular employees, but would also extend to independent contractors, interns and externs, unpaid or volunteers, apprentices, and sole proprietors who provide a service to the company. The only exception is that the proposed rule would allow non-compete clauses between the seller and purchaser of a business where the party restricted by the non-compete is an owner, member, or partner holding at least a 25% ownership interest in the business that is being sold.

While the proposed rule is drafted in broad strokes, it would “generally not” prohibit other types of restrictions, such as non-disclosure and non-solicitation provisions, unless “they are so unusually broad in scope that they function” as non-competes. However, the FTC provides limited guidance in the NPRM as to what constitutes an “unusually broad” provision.

FTC’s broader reinterpretation of its enforcement authority under Section 5

This proposed rulemaking comes on the heels of a November 2022 FTC Policy Statement in which the FTC outlined a significant expansion of the FTC’s mandate to target “unfair methods of competition” under Section 5. That Policy Statement expressed a virtually unbounded view of the FTC’s authority under Section 5, stating that “Section 5 reaches beyond the Sherman² and Clayton³ Acts to encompass various types of unfair conduct that tend to negatively affect competitive conditions.” The November 2022 Policy Statement came after the FTC voted 3-2 in July 2021 to rescind a 2015 Policy Statement providing that the agency’s assessment and enforcement of standalone “unfair methods of competition” under Section 5 would be: (1) guided by the antitrust laws and the promotion of the consumer welfare standard; (2) evaluated under a framework similar to the “rule of reason”; and (3) limited when the Sherman or Clayton Acts are “sufficient to address the competitive harm arising from the act or practice.”

This proposed rule is among the first of what may be many attempts by the FTC to establish novel “unfair methods of competition.” Indeed, the day prior to announcement of the NPRM, the FTC announced consent orders with three different companies based on the agency’s assertion that the employers’ use of non-competes with their employees violated Section 5.

The consent orders track the proposed rule by, among other things, prohibiting the companies from entering or attempting to enter into, or otherwise maintaining or enforcing, a non-compete with any employee. The consent orders also require the companies to void and nullify existing employee non-compete agreements, and provide employees with notice of the same.  In a dissent to one of the orders, Commissioner Wilson warned that these cases “foreshadow[] how the Commission will apply the new Section 5 Policy Statement” to “summarily condemn[]” certain “[p]ractices that three unelected bureaucrats find distasteful.” In another dissent, Commissioner Wilson criticized the complaints as “woefully devoid of details” to support the allegations that the non-competes violated Section 5.  According to Commissioner Wilson, the complaints lacked allegations that the non-competes were unreasonable in scope or duration or that the companies were actually enforcing the non-competes. Commissioner Wilson further criticized the complaints for summarily dismissing potential business justifications for non-competes and for lacking any factual allegations to support the idea that the non-competes had an effect on competition.

Trend of antitrust enforcement in labor markets

The proposed rule also follows a recent uptick in antitrust enforcement, including criminal enforcement, in labor markets.  As described in prior Hogan Lovells alerts, both the Antitrust Division of the U.S. Department of Justice (DOJ) and the FTC are increasingly scrutinizing agreements that restrict soliciting employees, employee wages, or movement of employees.⁴  Growing enforcement efforts include criminal investigations and prosecutions of no-poach agreements, wage-fixing, and other “naked conspiracies in labor markets”⁵ that DOJ argues should be considered per se violations of the antitrust laws.  Agreeing with the DOJ, federal courts in both Texas⁶ and Colorado⁷ have held wage-fixing and certain no-poach agreements to be per se unlawful and subject to criminal prosecution.  Additionally, in February 2022, DOJ submitted a statement of interest in a Nevada State court lawsuit relating to allegations by anesthesiologists that non-compete provisions in their employment agreements violated state law.  DOJ argued that the non-compete restrictions at issue in the case should be considered per se violations of Section 1 of the Sherman Act, suggesting the DOJ may soon seek to prosecute criminally employee non-compete agreements in certain circumstances.⁸

Increased scrutiny of non-competes under state laws

The proposed rule also occurs alongside a recent trend of new state laws (including in the District of Columbia) restricting employers’ use of non-compete agreements and other restrictive covenants. Some states, like California, North Dakota, and Oklahoma have generally banned the use of non-compete agreements with only a few narrow exceptions. Still others, like Colorado, Illinois, Maine, Maryland, New Hampshire, Oregon, Rhode Island, Virginia and Washington, as well as the District of Columbia, have limited the use of non-compete agreements only to those employees who earn above a certain salary threshold. Some state laws include penalties for companies that violate such laws. For example, Colorado employers that violate the law could face civil and criminal penalties.

Republican commissioner Christine Wilson issues strong dissent

The FTC Commissioners voted 3-1, along party lines, to issue the proposed rulemaking. Republican Commissioner Christine Wilson voted against the proposed rule, issuing a strong dissent in which she argued that the FTC lacked authority to issue a rule banning nearly all employee non-competes, while characterizing the proposed rule as a “radical departure from hundreds of years of legal precedent that employs a fact-specific inquiry into whether a non-compete clause is unreasonable.”

Practical implications

• The proposed rule is just that—it has been proposed, but is not final, and it may never become law. The NPRM is expected to be published in the Federal Register shortly.

• Once published, the public will have 60 days to submit comments. The public may submit comments on any aspect of the proposed rule. However, the FTC specifically requests comments on the following topics:

  • Whether franchisees should be covered by the rule;

  • Whether small businesses should be covered by the rule;

  • Whether senior executives should be exempted from the rule or subject to a rebuttable presumption rather than a ban; and

  • Whether low- and high-wage workers should be treated differently.

• The public comment period is an opportunity for the business community to explain the adverse consequences of a broad ban on employee non-compete agreements.  In her dissenting statement, Commissioner Wilson strongly encouraged businesses to submit comments on the proposal, including potential alternatives to a near-complete ban.

• Even once the comment period has expired, it will take months or longer before a final rule can be published, and  the prohibition would not go into effect until 180 days after the final rule goes into effect. 

• Any rule that may ultimately be finalized is highly likely to be subject to legal challenge, which may further delay enforcement of the final rule or prevent it from going into effect.

• Separate and apart from any final rule, as noted above, the FTC has clearly signaled that it is actively seeking to bring cases challenging employee non-competes as violations of Section 5 of the FTC Act. Certain state attorneys general have also been active in challenging employee non-competes. While it remains to be seen whether courts will adopt the FTC’s broad interpretation of its Section 5 authority, this proposed rulemaking is a good reminder for employers to consider whether their non-competes and other restrictive covenants are reasonable in terms of scope and duration, meet technical state labor and employment law requirements, and are applied to an appropriate subset of the employer’s workforce.

Next steps

If you have questions regarding the enforceability and reasonableness of your company’s current non-compete agreements, or if you are considering filing a public comment on the proposed rule, please reach out to an author of this post or the Hogan Lovells lawyer with whom you typically work.

Authored by Lauren Battaglia, Logan Breed, Katie Hellings, Ben Holt, George Ingham, Chuck Loughlin, Dan Shula, Shannon Finnegan*, Katy Forsstrom, John Hamilton, and Zachary Siegel.

*Shannon Finnegan is a Law Clerk in the New York office