Proposed Rule Attempts To Ban Non-Compete Clauses As Method Of 'Unfair Competition' Under Section 5 Of FTC Act

• Jurisdiction: United States,Federal
• Law Firm: Akin Gump Strauss Hauer & Feld LLP
• Subject Matter: Corporate/Commercial Law, Antitrust/Competition Law, Employment and HR, Antitrust, EU Competition , Contract of Employment, Franchising
• Author: Mr Corey W. Roush, Robert G. Lian Jr., J. Matthew Schmitten and Taylor Randleman
• Published date: 16 January 2023

Key Points

• In an unprecedented step, the Federal Trade Commission has proposed a categorical, nationwide ban on non-compete clauses between employers and employees (or independent contractors) According to the FTC's Director of Policy Planning, this would also include a ban on training repayment agreements and non-solicitation agreements that have the same effect as non-compete clauses.
• The Commission is currently accepting comments on the proposed rule through March 6, 2023, raising the possibility that a proposed rule could go into effect this year.
• If enacted, the proposed Non-Compete Clause Rule will almost certainly be subject to a legal challenge on various grounds including that the Commission lacks authority to issue binding regulations for "unfair methods of competition," under the major questions doctrine addressed in West Virginia v EPA and/or under the non-delegation doctrine.
• The proposed rulemaking does not necessitate any change in business practices at this time, but businesses should pay close attention to the proceedings as they unfold.

Overview

On January 5, 2023, the Federal Trade Commission (FTC or the "Commission") released a Notice of Proposed Rulemaking (NPR) for the Non-Compete Clause Rule that would, among other things, make it unlawful for an employer to:

• Enter into or attempt to enter into a non-compete clause with a "worker."¹
• Maintain with a worker a non-compete clause.
• Under certain circumstances, represent to a worker that the worker is subject to a non-compete clause.

The NPR is based on a preliminary finding by the FTC that non-competes constitute an "unfair method of competition" and therefore violate Section 5 of the Federal Trade Commission Act.

The proposed rule follows the FTC's recent Section 5 policy statement (the "Policy Statement"), which described the agency's plans to leverage Section 5 of the FTC Act to give the FTC more rulemaking authority. Like the Policy Statement, the NPR was issued on a party-line vote of 3-1, with Commissioner Christine Wilson dissenting. The NPR also follows President Biden's July 2021 competition executive order, which directed the FTC "to exercise [its] statutory rulemaking authority under the Federal Trade Commission Act to curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility."

Though the FTC Act is more than a century old, the proposed Non-Compete Clause Rule represents the agency's first attempt at issuing binding regulations under Section 5 to prohibit an alleged "unfair method of competition."

Current Law on Non-Compete Clauses

A non-compete clause is a contractual term between an employer and a worker that purports to prevent the worker from accepting employment (or certain roles) with a competitor, or operating a competing business, after the conclusion of the worker's employment with the employer. A typical non-compete clause limits the worker from performing particular categories of work for a competitor in specified geographic areas for a fixed period of time after a worker's employment ends. Breaches of those agreements can give rise to claims for money damages and injunctive relief by the employer.

State law has historically been the principal authority governing the enforceability of non-compete clauses. Indeed, non-competition provisions are widely used and have been upheld by common...