On January 5, the Federal Trade Commission (FTC) proposed a new rule that would ban the majority of noncompete agreements in the United States (US). Used at hospitals and health systems, sandwich shops, and tech companies—employers use noncompete clauses to prevent employees from fleeing to competing workplaces—and taking clients and trade secrets with them.
By signing a noncompete clause, employees agree not to work for a competing employer or start a competing organization for a specific period of time after their employment ends. Currently, 18% of the workforce, or nearly 30 million people, are covered by noncompetes.
The FTC argues that the agreements are inherently exploitative, unfairly restrict employees’ freedom to pursue better job opportunities, and stymie would-be entrepreneurs. Banning them, the agency says, would increase worker earnings by almost $300 billion per year.
“The freedom to change jobs is core to economic liberty and to a competitive, thriving economy,” FTC Chairwoman Lina M. Khan said in a statement. “Noncompetes block workers from freely switching jobs, depriving them of higher wages and better working conditions, and depriving businesses of a talent pool that they need to build and expand.”
If the proposed rule passes, employers would be required to not only rescind existing noncompetes—but to also actively inform workers that prior agreements are no longer in effect.
While the FTC’s announcement came as a shock to employers who use noncompete clauses—legal experts say it will face a barrage of court battles and blockages if passed—and that the FTC’s rulemaking authority may be on shaky legal ground in the first place.
What would the FTC’s noncompete rule do?
The FTC’s ban defines a prohibited noncompete clause 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.”
As drafted, the new rule would not only ban employers from entering into noncompetes with employees and independent contractors—but also require them to rescind existing noncompete clauses and notify employees that the clauses are no longer valid within 180 days of publication.
Moreover, the proposed rule would also treat other restrictive employment contracts, like non-disclosure agreements and non-solicitation agreements, as “functional noncompete clauses” if they are broad enough to prevent employees from becoming employed.
What legal challenges are expected?
If the proposed rule passes, it is guaranteed to face a litany of legal challenges—with the US Chamber of Commerce (USCOC) leading the charge. USCOC CEO, Suzanne Clark, has already made clear that the Chamber will “oppose the proposed regulation with all the tools at our disposal, including litigation.”
“If the FTC can regulate noncompete agreements without authorization from Congress, there is no aspect of employment or commercial arrangements that it doesn’t have the authority to regulate or ban arbitrarily,” Clark wrote.
Her argument that the FTC may be overstepping its regulatory power is echoed in a 14-page dissent from FTC Commissioner Christine Wilson—the commission’s sole Republican member. In her dissent, Wilson questions the Commission’s rulemaking authority and points to the Supreme Court’s “major questions doctrine,” which holds that courts should not default to agency interpretations regarding issues of “vast economic or political significance.”
“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,” Wilson wrote. “If a court were to conclude that the Noncompete Clause Rule is a major question, the FTC would be required to identify clear Congressional authorization to impose a regulation banning noncompete clauses… as discussed above, that clear authorization is unavailable.”
In the conservative-leaning Supreme Court, it is unlikely that the rule would survive.
“I ultimately think that the Supreme Court, if [the proposed rule] gets there, will strike the rule because the FTC does not have the authority to regulate noncompetes,” Erik Weibust, an attorney at Epstein Becker Green told HRDive.
Still, some legal experts, like Fisher Phillips attorneys Risa Boerner and Michael Greco, suggest that the proposed rule is a long time in the making and will likely pass “in some form.”
“It is a culmination of many efforts dating back at least to the FTC’s January 2020 workshop on noncompete clauses, which the FTC mentions multiple times in its NPRM,” Boerner and Greco wrote in a recent blog. “It also has behind it the weight of President Biden’s July 2021 Executive Order on Promoting Competition in the American Economy.”
For now, employers should know that any rule changes are a ways away. Stakeholders have until March 10 to submit public comments on the rule, which if passed, would not take effect for 180 days after the final rule is published.
Lia Tabackman is a freelance journalist, copywriter, and social media strategist based in Richmond, Virginia. Her writing has appeared in the Washington Post, CBS 6 News, the Los Angeles Times, and Arlington Magazine, among others. She writes nonprofit-specific content for 501c.com.