On January 5, the Federal Trade Commission caught the attention of employers across the country by issuing a Notice of Proposed Rulemaking (NPRM). The proposed rule would ban the vast majority of non-compete clauses used in the United States.
The FTC estimates that approximately 30 million people in the U.S. are subject to non-compete clauses in employment contracts, so the rule, if it takes effect as written, would have major repercussions throughout the U.S. economy. Existing non-compete clauses would have to be rescinded to come into compliance with the rule, and employers in all but a small number of industries would be prohibited from signing employees to non-compete clauses in the future. Violation of the rule could lead to penalties, including a financial penalty of up to $50,000 per day of violation.
Many employers expressed shock at the scope of the proposed changes and the impact a near-total ban on non-competes could have on their businesses. But don’t panic! The NPRM is just the first chapter in what promises to be a long and twist-filled story. The implementation of the non-compete rule is a long way off—if it happens at all.
Still, the FTC is clearly focused on non-competes, and has other enforcement mechanisms, which it is looking to use. Therefore, this is a good time to examine existing non-competes, as there are best practices that employers should consider to mitigate the risks of federal or state enforcement actions.
Time is on the Side of Employers
Employers can exhale and relax a bit simply because nothing the FTC has done requires immediate action.
The NPRM requires a period of public comment, which runs through March 20 and could be extended by the FTC, which seems possible given how significant this rule is. The FTC will review all public comments (more than 10,000 have been submitted to date) and debate a final rule, a process that is likely to take months. Even if the final rule is approved, it would not become effective until 60 days after publication in the Federal Register and companies would have another 180 days to come into compliance with the rule, as currently written.
So even if there are no delays or complications – and complications seem likely, given the complexity and controversy surrounding the proposed rule – the FTC’s best-case scenario for implementing a ban on non-competes seems likely to be early 2024. And “complications” are highly likely to delay that much further.
The U.S. Chamber of Commerce has already vowed to fight the NPRM with “all the tools at [their] disposal, including litigation.” And in a 2021 statement to the FTC, the Chamber questioned the agency's legal authority to even implement a wholesale ban of non-competes. That sentiment was echoed by the lone Republican Commissioner, Christine Wilson, who was the sole vote against the NPRM. Commissioner Wilson published a scathing dissent, in which she draws a roadmap for at least some of the possible legal challenges to the rule.
Thus, it is virtually a foregone conclusion that any ban on non-compete clauses will be challenged in federal court. The stakes simply are too high for employers to give in without a legal fight. Having its authority challenged is a similar high stakes situation for the FTC. If the non-complete ban is challenged in court, a federal judge may well stay the rule while the case is proceeding. Such a legal battle likely would take years, particularly since such a case may ultimately be headed for the Supreme Court.
Finally, the implementation of the rule could become a moot point before the court proceedings are over. If a Republican wins the Presidency in 2024, any rule seems highly likely to be rescinded by a new, Republican-majority Federal Trade Commission.
What Should Employers Do in the Interim?
Even though the non-compete ban itself is a long way off from being implemented, Biden Administration officials have made it clear they take a dim view of non-compete clauses and have become far more aggressive in enforcing what they view as anti-competitive actions in the workplace. So while employers don’t need to panic, they do need to be aware of the current regulatory environment and plan accordingly.
For example, one day before issuing the NPRM, the FTC published three orders condemning and penalizing (without monetary penalty, though) three companies for non-competes the FTC said violate Section 5 of the FTC Act’s prohibition on “unfair methods of competition.” This Democrat-majority FTC takes a very broad view of what is encompassed by that phrase. In particular, this Commission seeks to “re-invigorate” Section 5’s application to “unfair methods of competition,” which for several decades has widely been taken to prohibit nothing more than other antitrust laws. This FTC takes the view that there may be a multitude of behaviors that do not violate other antitrust laws, but constitute “unfair methods of competition” under Section 5, and it is looking for cases to bring.
FTC Bureau of Competition Deputy Director Rahul Rao said, “The FTC is committed to ensuring that workers have the freedom to seek higher wages and better working conditions without unfair restrictions by employers. The FTC will continue to investigate, and where appropriate challenge, noncompete restrictions and other restrictive contractual terms that harm workers and competition.”
It is extremely costly and burdensome to go through an FTC investigation. Therefore, it is best to seek legal advice on the legality of any non-competes, as there are standards under which they remain acceptable. Non-complete clauses occupy a complex, tricky area of employment and antitrust law, subject to a balancing test that is not always crystal clear. Companies should review any non-compete agreements currently in use. In particular, the FTC has expressed particular concern about any such agreements that apply to hourly workers and blue-collar employees, more than non-competes governing top executives.
Non-competes are less likely to draw the ire of regulators and also more likely to be enforceable if they are narrowly tailored to meet the actual business needs. For example, non-competes that are implemented only for those employees who actually have the important relationships and/or confidential, proprietary business information that could truly harm the business if they competed directly against the company. It is also helpful if they are reasonable and related to the actual business need in terms of duration and geographic scope.
While the time is ripe for a review of practices involving non-competes, there is no current need to panic about the FTC’s proposed non-compete ban, as there are many steps remaining before such a ban becomes reality. Lastly, companies who want to comment may do so here, and there will be a public hearing on February 16, at which comments may be made.