FTC Proposes Sweeping Ban on Noncompetes: What Employers Need to Know Now

Eighteen months after President Biden’s Executive Order directing the Federal Trade Commission (“FTC”) to consider utilizing rulemaking authority to curtail “unfair use of noncompete clauses,” the FTC issued proposed rulemaking that resembles a complete ban on non-compete agreements. The January 5, 2023 proposed rule will soon enter a 60-day comment period, after which the FTC will review comments and issue a final rule. All employers should pay close attention to the progress of the proposed rule given the sea change regarding non-competes that will follow if issued. Below are key issues employers need to know about the proposed regulation:

• Prohibits noncompete by name and effect. The proposed rule isn’t limited to express non-compete agreements, but also extends to any agreement between workers and employers that has the practical impact of a noncompete. The text of the proposed rule gives two examples of functional noncompete: broad non-disclosure agreements (“NDA”) and provisions regarding workers to payback training costs upon leaving within a particular period of time. The FTC’s notice provides an additional example, explaining that customer non-solicitation agreements typically would not come within the definition of noncompetes under the proposed rule, unless the customer non-solicitation agreement was broad enough to fall under the functional noncompete test.
• Worker means any work. The proposed rule applies to “workers,” which is defined, in part, as any “natural person who works, whether paid or unpaid, or the employer.” It expressly applies not only to employees, but to interns, volunteers, apprentices, and independent contractors. The franchisee-franchisor relationship is excluded from the definition.
• Exception for 25% owners selling. The proposed rule will not apply to those selling a business entity of all interest in it so long as that person had a “substantial interest” in the business. “Substantial interest” is defined as at least a 25% owner.
• Retrospective and prospective application. This proposed regulation would apply not only to future noncompete agreements, but also any existing agreements. The proposed rule bans employers from maintaining, entering into, and representing to a worker they are subject to a noncompete without a good-faith basis to believe the worker is subject to an enforceable noncompete.
• State law expressly superseded. It’s clear this proposed rule conflicts with many states’ laws regarding noncompete agreements, including Iowa’s. The proposed rule expressly supersedes contradictory state law.
• Notice of rescission on a deadline. To comply with the proposed rule, employers would be required to rescind any non-compete, as broadly defined, “no later than the compliance date [180 days after publication of the final rule].” Employers must also provide “individualized communication” notifying current and former workers subject to a non-compete agreement of the rescission. Notice must be written and provided within 45 days of rescission. The proposed rule indicates that the requirement will extend to former workers with “readily available” contact information.
• Safe-Harbor notice language. The proposed rule includes a model notice and provides a safe harbor for employers that follow the rescission notice and timeline procedures.

There are legal questions about whether this federal agency has the authority to impose such regulations on Iowa state businesses. The FTC claims authority to make this rule under Section 5 of the Federal Trade Commission Act, which generally prohibits “unfair or deceptive acts or practices in or affecting commerce.” See 15 U.S.C. § 45. However, last year the Supreme Court ruled the EPA lacked authority to put state-level caps on carbon emissions under the Clean Air Act because that Act did not contain clear congressional authorization for the agency to enunciate such rules. W. Virginia v. Env't Prot. Agency, 213 L. Ed. 2d 896, 142 S. Ct. 2587, 2614 (2022). One FTC Commissioner, Christine S. Wilson, dissented from the FTC proposed non-compete rule arguing the agency also lacks clear authority under the FTC Act, as well as predicting other legal problems. 

Further, under the FTC Act, the FTC may only issue rules that affect businesses involved in interstate commerce.  Thus, if the rule takes effect, Iowa businesses will need to examine whether they fall under the current test for interstate commerce.

The significant proposed rule is likely to elicit numerous comments during the public comment period. Once the public comment period opens, comments may be submitted online at https://www.regulations.gov through the web-based form or via mail to the FTC and must reference “Non-Compete Clause Rulemaking, Matter No. P201200.”

At this time, Iowa businesses potentially affected by the proposed rule should exercise their rights to comment.  In anticipation that the rule may pass in its current form, businesses should assess all employment agreements that contain restrictive covenants.   Alternate means of protecting trade secrets should be considered and implemented.  Key employees and customers should be identified.  A plan for potential rescission of certain agreements should be considered. 

Nyemaster’s Labor & Employment attorneys are following this legal development closely and are available to help businesses review employment agreements for terms that may fall under the proposed rule, determine whether their business is subject to the proposed rule, and explore the impact this proposed rule may have on their business.