On January 5, 2023, the FTC proposed a controversial rule (the “Proposed Rule”) that would ban nearly all non-compete clauses in the United States, irrespective of whether they applied to senior executives, licensed professionals or low-wage workers. The Proposed Rule is expansive, in that it would ban both new non-competition agreements (including those applying to independent contractors) and require employers to rescind existing non-competes. The Proposed Rule also would also prohibit non-compete clauses in the context of overbroad non-disclosure agreements or requirements that workers repay training costs after separation, that prohibit or restrain workers from seeking other employment.

The announcement of the Proposed Rule came almost immediately after the FTC filed 3 separate enforcement actions to force the target companies to eliminate non-compete restrictions that affected thousands of their workers. This was the first time that FTC had used its authority to challenge non-compete restrictions on workers ranging from low-wage security guards to manufacturing workers to engineers that barred them from seeking or accepting work with another employer or operating a competing business after they left the companies. .

The FTC’s emphasis on non-competition agreements, generally, is consistent with the Biden administration’s focus on antitrust enforcement in labor and employment matters, which is a foundational element of a July 2021 Executive Order on Promoting Competition in the American Economy (the “Executive Order”). Both the FTC and the Department of Justice - Antitrust Division have taken a number of enforcement actions and made policy pronouncements that unmistakably demonstrate the agencies’ commitments to act on the Executive Order’s mandate regarding labor and employment.

The agency received over 20,000 public comments on the Proposed Rule. All such comments must be reviewed as part of the rulemaking process. The volume of responses has extended the estimated timing of the issuance of a final rule as late as April 2024. Given the current roster of FTC commissioners, this ban on non-competes, in some form, is expected to pass. Once any final rule becomes effective, litigation challenging its validity is a near certainty, with opponents pledging to sue the FTC over any ban. That ensuing litigation could take months or longer, and the outcome of any specific lawsuit cannot be known. What is predictable, however, is that a court decision addressing the legality of any non-compete ban could take many months (if not longer) after the FTC issues a final rule.

While the FTC rulemaking process is underway, other agencies are also taking action as part of the Biden administration’s approach to competition. For example, in May 2023, the National Labor Relations Board issued legal guidance that it would consider most non-compete agreements to violate the National Labor Relations Act. Most importantly, President Biden remains committed to going after non-competes, touting the proposed ban in this year’s State of the Union address and in other statements.

As a general matter, it is safe to say that most non-compete provisions remain lawful for now, and the uncertainty created by the issuance of the Proposed Rule is likely to persist for a year or more. By taking the important steps described below, employers can better position themselves to control the risks and possible disruptions that are likely to result from future actions at the federal level and in the states where they operate:

  • Make the effort to understand your company’s non-compete provisions, in anticipation of proposed changes in the enforcement environment;
  • In connection with new employment and independent contractor arrangements, think carefully about what you hope to achieve with a non-compete provision and consider whether that objective could be achieved in some other, less restrictive way that would minimize the risk of potential legal challenges or invalidation of the non-compete at some point in the future; and
  • By developing a plan for compliance and alternative solutions to protect the interests that non-competes have protected up to now, organizations can insulate themselves from the impact of any forthcoming changes in the law. Some companies may find that they do not enforce their employee’s non-compete provisions and may choose to allow the provisions to be invalidated if the FTC rule goes into effect. Others may wish to challenge the rule in court if and when it becomes effective. Either way, companies should make informed decisions regarding their planned response to the possible invalidation of all non-competes by the FTC.

Our law firm has significant experience in representing clients in matters involving HHS-OIG. Please contact George W. Bodenger, Esquire at 610.212.5031 or at gwb@bodengerlaw.com if you have any questions regarding this article.