The federal Fair Trade Commission started 2023 with a bang by announcing a newly proposed rule that, if adopted, will categorically ban non-competes for almost all U.S. workers – including independent contractors. Under the proposed rule, the ban not only applies to new non-compete provisions, but will effectively invalidate almost all non-competes already in place. The proposed federal ban is intended to invalidate state laws that allow non-competes.
While this Proposed Rule has not been finalized and the FTC is considering alternatives, it appears that the FTC is bent on pressing forward to categorically ban all non-competes for at least some categories of workers.
Key Takeaways of the Proposed Rule
- The Proposed Rule defines a non-compete as a “contractual term” between a company and a worker (including independent contractors, volunteers and interns) that prevents the worker from seeking and/or accepting employment with some other person or business, and/or operating a business, after the termination of the worker’s employment.
- The Proposed Rule, as currently written, will create a blanket ban on non-competes between companies and nearly all workers.
- The Proposed Rule would override any existing state laws governing non-competes.
- The Proposed Rule is retroactive, meaning if it is adopted, it will invalidate all non-competes that are currently in effect (except for specifically exempted “significant owner workers”). Companies will need to provide a specific notice of this invalidation to any current or former workers who are subject to a non-compete within a specific time period. If the Rule is adopted, the FTC will provide model language for these notices.
- Currently, there are two categories of exemptions from the Proposed Rule:
- Agreements with “Substantial Owner” workers for the sale of the Company or the worker’s entire ownership interest in the Company. Substantial Owner workers are members, owners or partners of a Company who have at least a 25% ownership interest in the Company. Owners with less than 25% ownership cannot be subject to a non-compete if they sell under the FTC’s proposed ban.
- Agreements between Franchisors and Franchisees. However, this is limited to just the Parties to the Franchise Agreement; workers of the Franchisor or Franchisee are not exempt under the Proposed Rule.
- The FTC is considering adding certain additional exemptions or “rebuttable presumptions” for certain other categories of employees. See “Alternatives” below for more details.
- The Proposed Rule further prohibits Companies from telling workers that they are subject to a non-compete unless the Company has a valid, good-faith belief that the worker falls under one of the above exemptions.
- The Proposed Rule will not apply to most “non-disclosure” or “confidential information” provisions (provisions limiting the use and disclosure of a company’s confidential information).
- The Proposed Rule will also not apply to properly crafted customer non-solicitation/non-servicing provisions. However, because of concerns over the abuse of these kinds of non-solicitation rules, the FTC indicates it will likely scrutinize these kinds of provisions to make sure they are not non-competes disguised as customer non-solicits.
Possible Alternatives
The FTC’s analysis outlines four possible alternative approaches it is currently considering. However, the FTC’s analysis of these alternatives strongly indicates that the following option is the most viable of the four:
- Keep the ban on all non-competes for most workers, but add a rebuttable presumption for certain categories of workers (such as highly-paid workers or “senior executive” workers).
- This alternative would make it so that non-competes with these categories of workers are presumed invalid, but a company can rebut this presumption by showing that the non-compete is necessary, the benefits outweigh any non-competitive impacts, or there are no non-competitive impacts.
- The burden of proof will likely be very high, and it will rest solely on the Company seeking to enforce the agreement.
- This alternative would make it so that non-competes with these categories of workers are presumed invalid, but a company can rebut this presumption by showing that the non-compete is necessary, the benefits outweigh any non-competitive impacts, or there are no non-competitive impacts.
- The FTC seems especially interested in receiving comments on this alternative and the potential categories of workers that would be subject to a rebuttable presumption test.
What Employers Should Expect
The FTC is currently seeking comments and feedback on the Proposed Rule from the public. Anyone can comment, and these comments will become part of the public record. You can submit a comment to the FTC here. The review period ends on March 10, 2023. Berenzweig Leonard will continue to send updates as this story develops over the coming weeks and months.
It seems highly likely that any Final Rule will categorically ban non-competes for at least certain classes of workers. While it is premature at this time to rescind existing non-competes, companies can get a head start now by reviewing their current use of non-competes to evaluate the potential impacts of these proposed changes. Companies should also begin looking at the language in their current non-disclosure and non-solicitation/non-servicing provisions to make sure those provisions will withstand the rule change if the non-compete ban goes into effect.
Please contact us today if you have any questions about the FTC’s proposed rule change, or if you need assistance evaluating your restrictive covenant documents.