Federal Trade Commission Proposes Banning Noncompete Clauses

On January 5, 2023, the Federal Trade Commission (FTC) proposed a new rule that, if formally enacted, would ban employers nationwide from entering into noncompete agreements with new employees and would require employers to terminate existing noncompete agreements binding current or former employees. The FTC’s basis for this new proposed rule is that noncompete clauses are an unfair method of competition violating federal law.

Noncompete clauses prevent employees from seeking or accepting work with a different employer for a period of time in a geographic area following the end of employment. The proposed rule would apply both to expressly named noncompete clauses and to “de facto” noncompete agreements that have the effect of prohibiting employment, including broad nondisclosure and confidentiality clauses and clauses that would require an employee who resigns within a certain time period to pay a former employer for training costs not reasonably related to costs incurred by the employer in training the worker. Potentially, nonsolicitation clauses are not banned if they are narrowly tailored and do not prohibit competing employment.  For existing noncompete agreements, in addition to requiring the employer to cancel the agreement, the proposed rule would also require the employer to provide individualized notice to all current and former employees that their noncompete agreements are cancelled.

The only stated exception to the rule is for noncompete clauses related to the sale of a business or ownership interest, provided that the person being restricted is at least a 25 percent owner of the business. The rule would preempt and supersede all inconsistent state laws.

The FTC is seeking public comment on the proposed rule, with all proposed comments being due 60 days after publication in the Federal Register. If the rule passes, compliance with the rule will be required within 180 days after final publication. No effective date has been proposed; however, the earliest potential date is September 2023.


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