The FTC's Proposal To Ban Noncompetes Is On Shaky Legal Ground

• Jurisdiction: United States,Federal
• Law Firm: Kelley Drye & Warren LLP
• Subject Matter: Employment and HR, Contract of Employment, Employee Rights/ Labour Relations
• Author: Ms Jessica L. Rich, William C. MacLeod and Katherine White
• Published date: 19 January 2023

By now, most of our readers have likely heard about the FTC's proposed rule to ban noncompete clauses in employment contracts, including from Kelley Drye's other posts on the topic discussing the sheer breadth of the proposal and the potential implications for employers. In this post, we zero in on an issue that merits a lot more attention than it's getting - namely, the serious legal and practical questions that the FTC's proposal raises.

Brief recap of how we got here and what the rule would require

This is the first of many rulemakings that the FTC has said it will launch based on its supposed authority to issue rules banning "unfair methods of competition" ("UMCs") under the FTC Act. Notably, starting with a statement of regulatory priorities submitted to OMB in December 2021, the FTC has said repeatedly that it may launch multiple competition rulemakings based on this authority (as well as multiple consumer protection rulemakings based on its Magnuson-Moss authority, which it has done). More recently, the FTC issued a policy statement taking an expansive view of what's an UMC, so the scope of the FTC's intended reach here could be very broad indeed.

In brief, as described in more detail in our earlier posts, the proposed rule would:

• Make it illegal for an employer to: (1) enter into or attempt to enter into a noncompete with a worker, defined broadly to include a range of employees and independent contractors at all levels of income and seniority, with few exceptions; (2) "maintain" a noncompete with a worker, meaning that employers must rescind existing agreements and inform current and former employees that the agreements are no longer in effect; or (3) represent that a worker is subject to a noncompete if the employer has no good faith basis to believe the worker is subject to an enforceable noncompete.
• Preempt inconsistent state statutes, regulations, orders, or interpretations unless such laws afford a worker greater protection than the protection provided under the rule.
• Extend to other agreements - e.g., non-disclosure agreements or agreements to pay for the costs of training new employees - if they "function like" noncompetes.

The FTC is conducting this rulemaking under the Administrative Procedures Act, meaning that the rule could be finalized and published in the Federal Register after just one round of public comments. Stakeholders can challenge the rule in court (as, e.g., arbitrary or capricious, unconstitutional, or in excess of...