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FTC Proposes National Ban of Noncompete Agreements

This article originally appeared in IA Magazine.

Recently, the Federal Trade Commission (FTC) proposed a new rule that could potentially prohibit the use of noncompete agreements. The rule would apply to employees, independent contractors, interns, volunteers, apprentices, and other types of workers.

The "Non-Compete Clause Rule," if ultimately promulgated, would ban any “contractual term between an employer and a worker that prevents the worker from seeking or accepting employment with a person, or operating a business, after the conclusion of the worker's employment with the employer."

The proposed rule would prohibit the use of any agreement that is broadly crafted to effectively preclude a worker from working in the same field after the conclusion of employment with a particular employer. It also makes clear that the ban applies to any requirement for a worker to pay an employer or other party for training costs upon the termination of employment within a specified time frame when the payment is not reasonably related to the costs incurred by the employer.

However, the proposal includes a limited exception that would permit the use of noncompete clauses between a seller and buyer of a business if the person restricted by the agreement is an owner, partner or member with at least a 25% ownership interest in the entity.

A growing number of states, including California, Oregon, North Dakota and Oklahoma, have banned or significantly restricted the use of noncompete agreements in recent years. The FTC's proposal would not affect any state law or regulation that provides workers with greater protections but would trump any state measures that are inconsistent with the draft regulation.

The proposed rule also addresses noncompete agreements that are in place today. In such instances, it would require employers to rescind existing restrictions and to individually notify each affected current or former worker that the clauses are unlawful and no longer enforceable.

The FTC appears focused on and concerned with agreements that block workers from securing employment or starting a competing business within a particular geographic area and period of time after employment ends with a particular business.

The proposal, however, would not prevent the use of all types of restrictive employment covenants. The notice distinguishes noncompete agreements from covenants that merely “affect the way a worker competes with their former employer after the worker leaves their job" and notes that covenants do not prevent workers from competing with former employers “altogether."

The proposal also states that other types of employment covenants, including nondisclosure agreements and client or customer nonsolicitation agreements, would not be affected by the rule unless they are “so unusually broad in scope that they function as [noncompete clauses]."

The publication of the proposed noncompete clause rule is only the first step in the rulemaking process. Comments on the proposal will be due in early March. The FTC will then weigh the received input and potentially make revisions before issuing a final regulation.

The FTC's notice specifically invites comments on a number of items, including whether senior executives and highly skilled and highly compensated workers should be subject to a less restrictive standard than other workers. The Big “I" will review today's proposal in greater detail in the coming days.

About the Author

Wes Bissett is Big “I" government affairs senior counsel.

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Lee Loftis

Chief Legislative Officer