Reprinted from the February 10th edition of The Legal Intelligencer. (c) 2022 ALM Media Properties. Further duplication without permission is prohibited.

On January 5, 2023, the Federal Trade Commission (“FTC”) proposed rules imposing a broad restriction on non-competition agreements (“Proposed Rule”). The Proposed Rule would require employers to rescind existing non-compete agreements, and would preempt conflicting state laws. The ban marks a dramatic change not only in the law, but in the relationship between employers and their key employees.

The Proposed Rule defines “non-compete clauses” as follows: any agreement that prevents a worker from seeking or attempting to seek employment with any employer; or, any agreement that is a de facto non-compete clause. A de facto noncompete clause has the “effect of prohibiting the worker from seeking or accepting employment.” The Proposed Rule provides examples of a de facto non-compete clause: a non-disclosure agreement drafted so broadly that it effectively precludes the employee from working in their chosen field; or a contractual term that requires the employee to pay the employer or a third party its training costs if employment terminates within a specified time period, but only where the payment is not reasonably related to the actual costs incurred by the employer.
The Proposed Rule mandates that it is a prohibited unfair method of competition to enter into or “attempt to enter into” a noncompete clause with an employee, or to maintain an existing non-compete agreement, or to represent to an employee that they are subject to a noncompete without a good faith basis to believe they are.