The non-compete clause, popular with employers and equally unpopular with employees, may end up being banned under federal law. The Federal Trade Commission (FTC) recently proposed the “Non-Compete Clause Rule,” which would declare it an unfair method of competition under federal law for an employer to do or attempt to do the following: (1) enter into an agreement containing a non-compete clause with a worker, (2) maintain a non-compete clause with a worker, or (3) represent to a worker that they are subject to a non-compete clause.

Non-compete clauses are often used in employee agreements to restrict a worker’s ability to work for a competitor or start their own business in a specific industry or geographic region for a certain period of time after they leave their current employer. The clauses are often used by employers to protect their confidential information, trade secrets, and customer relationships. While the clauses can be beneficial for employers seeking to restrict the use of their confidential and proprietary information, they can also be controversial because they often limit a worker’s career mobility and job opportunities.

Some states have taken steps to address these limitations. California, Oklahoma, and a handful of other states ban non-compete clauses except in certain limited situations. Other states, such as Oregon and Virginia, prohibit the agreements for employees earning below certain amounts. However, other states permit non-compete clauses and allow employers to enforce them against workers or former workers.

The FTC’s proposed rule, which would supersede all inconsistent state rules on non-compete clauses, aims to create a uniform body of law that addresses these differing views by prohibiting employers from using non-compete clauses. In addition to prohibiting the use of non-compete clauses, the proposed rule would require employers who have previously entered into any agreements with non-compete clauses with their workers to:

1. Rescind those agreements before the rule takes effect;
2. Provide notice to their workers and former workers that such workers are no longer subject to the clauses;
3. Give such notice within 45 days of the rule taking effect; and
4. Provide such notice to the affected worker or former worker in an “individualized communication.”

This proposed rule will have a wide impact for several reasons. First, the rule broadly defines “worker” so as to prohibit non-compete clauses against independent contractors, interns, externs, volunteers, and others as well as employees. Second, there are a few exceptions proposed. To start, the rule would not apply to relationships between franchisors and franchisees, which would continue to be governed by Federal antitrust and other laws. The rule would also not apply to non-compete clauses entered into by individuals or entities selling their businesses or disposing of all their interest in such businesses or individuals or entities selling all or substantially all their business’ operating assets if such individuals or entities are substantial members or partners in the business at the time they entered into the agreement containing the non-compete clause.

Overall, the FTC’s proposed Non-Compete Clause Rule raises a number of concerns for employers. While it aims to protect workers’ freedom of mobility, it may significantly hinder the ability of employers to protect their legitimate business interests and could potentially lead to an increase in the misuse or theft of proprietary information. If implemented, employers may need to consider alternative approaches to protect their assets such as implementing stricter access controls on trade secrets and confidential information, such as password-protection, encryption, and generally limiting access to sensitive data to only those employees who need to access such data.  

Additionally, the rule’s retroactive effect would create chaos and confusion for employers, as they would have to hastily unravel agreements that may have been in place for years. The “individualized communication” notice requirements and 45-day timelines are also burdensome as it would be difficult, if not impossible, for employers to quickly track down and individually notify every worker or former worker who ever signed an agreement with a non-compete clause.

 This rule will even impact employers across the country, even those in states like California that already have laws restricting non-compete clauses. As an employer, ensure your legal counsel is monitoring the Non-Compete Clause Rule and the potential impact it could have on your business. The FTC is currently taking public comments through March 10, 2023, after which it will prepare and announce the final rule.