Jan 6, 2023

FTC Issues Proposed Non-Compete Clause Rule to Effectively Ban New and Existing Non-Competes

Written by: Duris L. Holmes

Almost 18 months after President Biden signed Executive Order 14036 on “Promoting Competition in the American Economy,” the Federal Trade Commission has issued its proposed Non-Compete Clause Rule.  If adopted, the rule would impose sweeping changes on both current and future non-compete clauses. 

The rule would make it an unfair method of competition for an employer to:

  • enter into or attempt to enter into a non-compete clause with a worker;
  • maintain with a worker a non-compete clause; or
  • represent to a worker that the worker is subject to a non-compete clause where the employer has no good faith basis to believe that the worker is subject to an enforceable non-compete clause.

The rule not only prohibits new non-compete clauses but requires employers to rescind existing clauses and to notify its employees of the rescission before the rule takes effect.  The only exception is for non-compete clauses in contracts to sell existing businesses, and certain non-disclosure agreements (“NDAs”) and client or customer non-solicitation agreements may be allowed so long as they are not so broad as to prevent employment in a manner similar to a non-compete clause.  Therefore, employers should pay special attention to protecting their trade secrets and customer base through NDAs and non-solicitations clauses. 

There was some question as to whether how the proposed rule would impact state law, which has historically been the only regulation of non-competes.  The proposed rule would supersede any state law or regulation less restrictive than the proposed rule.  At present, only three states ban non-competes, so the proposed rule is a substantial departure from the norm and would supersede most of Louisiana’s non-compete law.

Once the proposed rule is published in the Federal Register, there will be a 60-day public comment period.  For more information, see Non-Compete Clause Rulemaking | Federal Trade Commission (ftc.gov) or contact Duris L. Holmes at dholmes@deutschkerrigan.com.