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Financial Services Law Insights and Observations

FTC seeks to ban noncompete clauses

Federal Issues Agency Rule-Making & Guidance FTC FTC Act Noncompete

Federal Issues

On January 5, the FTC announced a notice of proposed rulemaking (NPRM) regarding banning the use of noncompete clauses in employment contracts. Among other things, the NPRM, would make it illegal for employers to: (i) enter into, or attempt to enter into, a noncompete agreement with a worker; (ii) maintain a noncompete agreement with a worker; or (iii) represent to a worker that the worker is subject to a noncompete agreement. The NPRM also would require employers to rescind existing noncompete agreements and notify workers that those agreements are no longer in effect. The NPRM extends to both paid and unpaid workers as well as independent contractors. It also extends to non-disclosure agreements or agreements to repay training costs upon early termination of employment if such agreements amount de facto to a noncompete. Finally, the NPRM extends to noncompetes related to the sale of a business unless they involve a person who owns at least 25 percent of the sold business. The ban would be pursuant to Sections 5 and 6(g) of the FTC Act, which declare “unfair methods of competition in or affecting commerce” to be unlawful, and authorize the FTC to issue rules prohibiting such methods.

According to FTC Chair Lina M. Khan, noncompete clauses “block workers from freely switching jobs, depriving them of higher wages and better working conditions, and depriving businesses of a talent pool that they need to build and expand.” She noted that by ending noncompete clauses, “the FTC’s proposed rule would promote greater dynamism, innovation, and healthy competition.” According to Commissioner Christine S. Wilson’s dissent, the NPRM is a “radical departure from hundreds of years of legal precedent that employs a fact-specific inquiry into whether a noncompete clause is unreasonable in duration and scope, given the business justification for the restriction.”

Comments are due by March 10.