No More Non-Competes?

On January 5, 2023, the Federal Trade Commission (FTC) issued a Notice of Proposed Rulemaking for a “Non-Compete Clause Rule” (NCCR) that would prohibit non-compete agreements between employers and employees, along with other employment related agreements such as non-disclosure provisions that, in the FTC’s view, function as “de facto” non-compete clauses. The FTC maintains that it has the authority to regulate, and prohibit, such provisions under Section 5 of the FTC Act.1

Specifically, the proposed rule would provide that it is “an unfair method of competition for an employer to enter into or attempt to enter into a non- compete clause with a worker; to maintain with a worker a non-compete clause; or, under certain circumstances, to represent to a worker that the worker is subject to a non-compete clause.”2 The one exception in the proposed NCCR is for non-compete clauses between the seller and buyer of a business, so long as the restricted party has at least a 25% stake in the business.3 The proposed NCCR also defines certain terms like “workers” to carve-out non-competes between franchisors and franchisees (as opposed to non-competes restricting employees and independent contractors).4

The proposed NCCR, if promulgated in its current form, effectively treats non-compete agreements as per se illegal, meaning they would be summarily invalidated regardless of any actual or likely harm to competition. Per se treatment is currently reserved for only the most egregious anticompetitive agreements, such as price-fixing, bid-rigging, and customer/market allocation. If promulgated as a final rule, the NCCR would mark a stark departure from current antitrust and employment law governing non-competes.

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