Special thanks to Maura Ann McBreen.
The short answer is “no.”
Typically the enforceability of non-compete clauses has been subject to state law and more recently, many states have imposed limitations on the enforceability of non-competes. Some states, like California, North Dakota and Oklahoma, ban them entirely. However, the Federal Trade Commission (FTC) on January 5, 2023 issued a proposed rule that would significantly restrict the use of non-compete clauses between employers and employees as a matter of federal law. The FTC said that the proposed rule would apply to independent contractors and anyone who works for an employer, whether paid or unpaid. It would also generally prohibit employers from using non-compete clauses and make it illegal for an employer to:
- Enter into or attempt to enter into a non-compete with a worker;
- Maintain a non-compete;
- Represent to a worker that he or she is subject to a non-compete under certain circumstances.
The proposed rule would generally not apply to other types of employment restrictions, like non-solicitation and non-disclosure agreements, unless such other employment restrictions were so broad as to function like non-competes. Since this function test is clearly open to interpretation, the reach of the proposed rule may be further expanded.
Another point: though the rule does not specify, and this remains subject to interpretation, the proposed rule is drafted broadly such that arguably it would also prohibit forfeiture for competition clauses in equity grants and carried interest award agreements.
The FTC has made a preliminary finding that non-competes constitute an unfair method of competition and therefore violate Section 5 of the Federal Trade Commission Act. The proposed rule, if enacted in its present form, would have retroactive effect. It would require employers to rescind existing non-competes within 180 days of finalization and actively inform workers that such non-competes are no longer in effect.
The FTC did allow for one narrow exception to the proposed rule. The exception would be available for a non-compete between a buyer and a seller of a business, provided the party restricted by the non-compete is the owner, member or partner holding at least a 25% ownership interest in a business entity. However, such non-compete would remain subject to anti-trust laws. It is also worth noting that certain entities are not subject to Section 5 of the Federal Trade Commission Act, notably banks, credit unions, savings and loans, common carriers, air carriers, etc.
The FTC is seeking public comments on its proposed rule through March 20, 2023. Once the FTC has a chance to review the comments and make any changes to the proposed rule, it will reissue the rule. The rule would be effective 60 days after publication in the Federal Register, and compliance with the new rule would be required 180 days after publication in the Federal Register.
Accordingly, there is no need to panic. The FTC has to digest the comments received from the public. Any rule, even one in the same form as proposed, would not require compliance until 180 days after publication in the Federal Register. Further, it is likely that any final rule banning most employer-employee non-competes will be the subject of litigation brought by both various states and by industry groups. Given the potential length of such court actions, it may be years before there is a final resolution.
For more information, see our prior client alert and video chat on the FTC’s proposed rule on non-competes.