FTC Announces Rule to Prohibit Non-Competes

On January 5, 2023, the Federal Trade Commission (“FTC”) announced a proposed new rule that would ban employers from imposing non-compete agreements on their workers. Non-compete agreements and clauses restrict workers from leaving their employers and working for competitors or from establishing their own potentially competing company. Non-competes usually have a stipulated amount of times or geographic area in which the non-compete is effective. Thus, workers must either wait out the non-compete, move and work in a distant location, or work in an unrelated field. The FTC estimates that approximately 30 million American workers are affected by non-competes.

The proposed rule would declare non-competes as an “unfair method of competition.” Non-compete clauses would have to be rescinded by the compliance date, which is 180 days after the final rule is published. Employers must also provide notice to the worker, within 45 days of rescinding the non-compete, in an individualized communication that the worker’s non-compete clause is no longer in effect and may not be enforced against the worker. One exception to the FTC’s proposed rule exists where a non-compete may be entered into with a business owner selling their ownership interest in the business entity.

Bans against non-competes are not new. Some states have laws that automatically void non-competes including California and Oklahoma. Others require the worker’s income to meet a minimum threshold. Should the FTC rule go into effect, it would supercede any state law currently inconsistent with it, meaning that even in states where non-competes are enforced, the practice would no longer be permitted.

There are alternatives to non-competes that have proven effective in jurisdictions like California that will likely be permitted under the new FTC rule. Courts have enforced the protection of trade secrets. While former employees are permitted to work for rivals or establish their own competing businesses, they cannot misuse information or trade secrets they acquired from their former employer. If you have concerns about non-compete clauses with your employees, contact Sprowls Law for a consultation on how you can protect your business’ interests.