Noncompetes Under Fire from the Federal Trade Commission

By Carlie Bacon

UPDATE: The public comment period on the FTC’s notice of proposed rulemaking regarding the Non-Compete Clause Rule closed on April 19, 2023. The FTC has made no recent announcement about the status of the proposed rule.      

Employment noncompetition agreements may soon become a thing of the past.

On January 5, 2023, the U.S. Federal Trade Commission announced a proposed rule banning noncompetes. The proposed rule follows President Joe Biden’s July 2021 Executive Order promoting competition and encouraging the FTC to promulgate new rules to “curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.” The FTC based its rule on a preliminary finding that noncompetes are an unfair method of competition that violates Section 5 of the Federal Trade Commission Act.

Currently, employers must conform their non-competition practices to a patchwork of state laws, with states like Oregon and Washington restricting noncompetes, while states like California have already barred them altogether.

If enacted, the FTC’s new rule would be a nationwide sea change, making it illegal for employers to:

  • enter into or attempt to enter into a noncompete with a worker;
  • maintain a noncompete with a worker; or
  • represent to a worker, under certain circumstances, that the worker is subject to a noncompete.

Employers with existing noncompetes would be required to rescind them within six months of the rule taking effect, and provide individual, written notice to the employee that the noncompete is no longer in effect within 45 days of rescinding it. The proposed rule applies broadly to any person who works—paid or unpaid—for an employer, including employees, independent contractors, externs, interns, volunteers, and apprentices.

The proposed rule is open for public comment through March 10, 2023, after which time the FTC will issue a final rule, and Tonkon Torp will provide an updated alert. In the meantime, employers with noncompetes may want to anticipate phasing out any noncompetition agreements and clauses from their employment agreements.

This update is prepared for the general information of our clients and friends. It should not be regarded as legal advice. If you have questions about the issues raised here, please contact any of the attorneys in our Labor & Employment Practice Group, or the attorney with whom you normally consult.

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