Introduction
FTC authority
Comment


Introduction

On 5 January 2023, the Federal Trade Commission (FTC) released a notice of proposed rulemaking (NPRM) that would ban employers from imposing non-compete provisions on their workers. The proposed rule would prohibit employers from entering into non-compete clauses with their workers, including independent contractors, and would require employers to both rescind existing non-compete clauses with workers and actively inform them that the clauses are no longer in effect. An employer that entered a non-compete clause prior to the compliance date must rescind the non-compete clause no later than the compliance date, and must provide notice to a worker within 45 days of rescinding the non-compete clause.

The NPRM invites the public to submit comments regarding the proposed rule to the FTC, which will be considered before issuing a final rule. Comments will be due 60 days after the Federal Register publishes the proposed rule. The compliance date will be 180 days after the date of publication of the final rule.

FTC authority

The FTC asserts that it has the authority to issue the proposed rule pursuant to section 5 of the FTC Act, which bans unfair methods of competition. However, it is unclear whether the FTC has the statutory authority to regulate non-compete agreements between employers and employees as opposed to between companies. Additionally, the Supreme Court's decision last year in West Virginia v EPA casts further doubt on the FTC's authority to issue such a rule. In that case, the Court held that the Environmental Protection Agency (EPA) lacks authority under the Clean Air Act to impose emission gaps by shifting electricity production from higher-emitting to lower-emitting producers. The Court said the EPA's action represented a major question of economic and political significance and that an administrative agency has no power to make a decision about such major questions unless Congress clearly gave it such authority. Similarly, the FTC's proposed rule might not withstand a legal challenge under the "major questions" doctrine.

The Workforce Mobility Act 2021 was introduced in Congress to prohibit the use of non-compete clauses other than in the sale of a business or partnership but did not pass. Traditionally, states have regulated non-compete clauses. California, North Dakota and Oklahoma have largely eliminated non-compete clauses. In recent years, several other states have increasingly limited the use of non-compete clauses, particularly for low-wage workers. In most states the enforceability of non-compete clauses has been determined under general standards of reasonableness related to duration, geography, scope of activity and sufficiency of consideration.

Comment

The FTC's proposed rule would nullify non-compete clauses, affecting millions of workers around the country, and would take authority away from states, which traditionally have regulated non-compete clauses. It is anticipated that the FTC's action will be vigorously opposed by business groups and challenged in court before a final rule would go into effect.

Until such time as a final FTC rule goes into effect, employers may continue to enforce and enter into non-compete clauses with their workers, subject to applicable state laws.

For further information on this topic please contact Frederick L Warren at FordHarrison ​by email ([email protected]). The FordHarrison website can be accessed at www.fordharrison.com.