What Does The Proposed FTC Ban On Noncompete Clauses Mean For Your Business?

• Jurisdiction: United States,Federal
• Author: Joshua Blank and Francesco De Prospero
• Law Firm: Arnold & Porter
• Published date: 27 January 2023

On January 5, 2023, in response to the Biden Administration's July 2021 executive order,¹ the Federal Trade Commission (FTC) proposed a new rule which, if finalized, will prohibit employers from imposing or enforcing noncompete clauses in agreements with workers, including employees and independent contractors, nationwide and in almost all contexts (excluding, specifically, provisions relating to certain sales of businesses). The rule classifies noncompete clauses as an "unfair method of competition" and not only bars most noncompete provisions going forward, it also requires employers to rescind existing noncompetes and provide individualized notice of that rescission to current and former employees.

While the FTC's stated focus is on the general work force, and specifically on those workers with no or very low bargaining power,² the proposed rule will have broad-reaching impacts on the technology industry, where protection of valuable proprietary information is crucial to commercial success and noncompetes are a longstanding tool. Without them, how can tech-focused companies protect their legitimate business interests?

To understand what the change means to your business, it is crucial to look at where the proposed rule stands now, what the next eight months look like, how the rule may be contested, how far-reaching the rule could be, and what steps can be taken now.

Where are we now and how could the rule be challenged?

The proposed rule is subject to a comment period that runs for 60 days after publication, with the rule going into effect 180 days after publication of the final rule in the Federal Register. The proposed rule will most likely be challenged with regard to its enforcement on jurisdictional and constitutional grounds. Further, it is likely to be challenged based on its broad scope for classes of employees. The rule, as...