By: Michelle De Oliveira, Esq.
On January 5, 2023, the Federal Trade Commission (“FTC”) proposed a rule to ban non-competition agreements. If enacted, this new rule would also require employers to rescind all existing non-competition agreements. The proposed rule is based on, among other things, the FTC’s preliminary finding that non-competition agreements constitute an unfair method of competition.
Below is an overview of the FTC’s proposed rule.
How does the FTC’s proposed rule define a “non-compete clause”?
The FTC’s proposed rule defines a non-compete clause as a contractual provision between an employer and a worker that prevents the worker from “seeking or accepting employment with a person, or operating a business” after the employment relationship ends.
It also includes contractual provisions that are “de facto” non-compete clauses. These are provisions that have the “effect of” prohibiting a worker from “seeking or accepting employment with a person or operating a business” after the employment relationship ends.
What are examples of a de facto non-compete clause?
Two examples of a de facto non-compete clause include: (a) a broad non-disclosure agreement that does not allow a worker to work in the same field after an employment relationship ends; and (b) a contractual provision that requires a worker to pay training costs to the employer or to a third-party entity if the worker’s employment ends within a specified time period in circumstances in which the required payment “is not reasonably related to the costs the employer incurred for training the worker.”
These are merely examples—and there could be other contractual terms that have the “effect of” prohibiting a worker from “seeking or accepting employment with a person or operating a business” after the employment relationship ends.
How does the FTC define the term “worker”?
The FTC defines the term “worker” as “a natural person who works, whether paid or unpaid, for an employer.” It includes employees, independent contractors, externs, interns, volunteers, apprentices, a sole proprietor who provides a service to a client or customer, and a natural person who works for a franchisee or franchisor.
Who is excluded from the FTC’s proposed rule?
Franchisees in the context of a franchisee-franchisor relationship are excluded from the FTC’s “worker” definition, and therefore, would not be subject to the non-compete ban.
Moreover, the FTC’s proposed rule to ban non-competes does not apply to a non-compete clause if a person is: (a) selling a business entity or otherwise disposing of all of the person’s ownership interest in the business entity; or (b) selling all or substantially all of a business entity’s operating assets, when the person restricted by the non-compete clause is a substantial owner of, or substantial member or substantial partner in, the business entity at the time the person enters into the non-compete clause.
If the FTC’s proposed rule is enacted, what would happen to existing non-competition agreements?
If the FTC’s proposed rule is enacted, employers that entered into a non-competition agreement with a worker will be required to: (a) rescind the non-compete; and (b) provide written notice to the worker that the non-compete is no longer in effect and cannot be enforced. Notice must be provided within 45 days of rescinding the non-compete clause.
Current and former workers must receive notice. As to former workers, notice need only be provided if the employer has the worker’s contact information readily available. Model notice language is included in the FTC’s proposed rule.
Does the FTC’s proposed rule apply to non-solicitation agreements?
Yes and no. Although the proposed rule does not directly apply to a non-solicitation provision, it may very well apply if the non-solicitation provision is a de facto non-compete clause that has the “effect of” prohibiting a worker from “seeking or accepting employment with a person or operating a business” after the employment relationship ends.
How does the FTC’s proposed rule impact state laws that govern non-competition agreements?
The FTC’s proposed rule provides that it shall supersede and trump inconsistent state laws or regulations.
Does the public have a say as to the enactment of the FTC’s proposed rule?
The FTC is soliciting public comment in response to its proposed rule. The comment period is open until March 10, 2023. The FTC will review public comments and may make changes to its proposed rule in a final rule.
What is the effective date of the FTC’s proposed rule?
If enacted, the proposed rule would be in effect 180 days after the final rule’s publication. This in turn means that an actual effective date is yet to be determined.
What does this mean for workers and employers now?
As of now, nothing has changed. It is too early to know whether the FTC’s proposed rule will ever be enacted—and if it is enacted, it is too early to know what iteration of the proposed rule will make its way into a final rule.
Litigation appears inevitable as business advocacy groups have pledged to sue the FTC if the proposed rule is implemented, and the question of whether the FTC has the authority to issue and impose a nationwide non-compete ban—an issue that has been largely left to the states—remains open.
Massachusetts employers should continue to adhere to the Massachusetts Noncompetition Agreement Act (M.G.L. c. 149, § 24L), in effect since October 1, 2018—or to the applicable common law for non-competition agreements entered into before then. Businesses are also encouraged to review their non-competition agreements, and any potential de facto non-compete clauses.
Kenney & Sams will continue to monitor this closely and provide additional updates as needed. Employers and individuals who have questions are encouraged to speak with a Kenney & Sams employment attorney.
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