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January 9, 2023

Stroock Client Alert

By: Howard S. Lavin, Elizabeth E. DiMichele

On January 5, 2023, the Federal Trade Commission (“FTC”) published a proposed rule which would generally make it illegal for an employer to:

  • enter into or attempt to enter into a non-competition restriction with a worker;
  • maintain a non-competition restriction with a worker; or
  • represent to a worker that he or she is subject to a non-competition restriction.

The proposed rule would apply to independent contractors and anyone who works for an employer, whether paid or unpaid. It also would require employers to rescind existing non-competition restrictions and advise workers that they are no longer in effect.

Scope of the Ban

The scope of the ban is not entirely clear. Certainly, the proposed rule bars non-competition clauses, but at least in certain circumstances could cover non-solicitation and non-disclosure restrictions, such as a non-disclosure provision that is written so broadly that it effectively precludes the worker from working in the same field after the conclusion of service with the employer. In this regard, the FTC explained that the term non-competition clause includes contractual terms that are de facto non-compete clauses because they have the effect of prohibiting 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.

Sale of Business Exception

Under the proposed rule, the non-competition ban will not apply to non-competes entered into by a person selling a business or disposing of all or substantially all of a business entity’s assets. This exception would apply only if the seller owns at least a 25% interest in the business entity being sold.

Notice and Comment, including Alternatives to Categorical Ban

The FTC seeks comments, including about alternatives to a categorical ban, which may also accomplish many of the objectives of the proposed rule, including whether the rule should apply uniformly to all workers or whether there should be exemptions or different standards for different categories of workers. For example, the FTC could apply a rebuttable presumption of unlawfulness to non-competes for certain workers, such as “exempt” executives or learned professionals under the federal Fair Labor Standards Act. Alternatively, the FTC could apply the rebuttable presumption to workers who earn more than $100,000 per year.

A 60-day public comment period will begin once the FTC publishes the proposed rule in the Federal Register. After the comment period, the FTC will consider the comments and then is likely to publish a final rule. As drafted, the FTC contemplates the final rule becoming effective 180 days after the FTC publishes the final rule in the Federal Register.

Anticipate Litigation

One should anticipate litigation challenging the FTC’s final rule. Indeed, the U.S. Chamber of Commerce stated that an “outright ban [of] noncompete clauses in all employer contracts … is blatantly unlawful” and predicted that “this unlawful action will not stand.”

January 9, 2023

Stroock Client Alert

By: Howard S. Lavin, Elizabeth E. DiMichele

On January 5, 2023, the Federal Trade Commission (“FTC”) published a proposed rule which would generally make it illegal for an employer to:

  • enter into or attempt to enter into a non-competition restriction with a worker;
  • maintain a non-competition restriction with a worker; or
  • represent to a worker that he or she is subject to a non-competition restriction.

The proposed rule would apply to independent contractors and anyone who works for an employer, whether paid or unpaid. It also would require employers to rescind existing non-competition restrictions and advise workers that they are no longer in effect.

Scope of the Ban

The scope of the ban is not entirely clear. Certainly, the proposed rule bars non-competition clauses, but at least in certain circumstances could cover non-solicitation and non-disclosure restrictions, such as a non-disclosure provision that is written so broadly that it effectively precludes the worker from working in the same field after the conclusion of service with the employer. In this regard, the FTC explained that the term non-competition clause includes contractual terms that are de facto non-compete clauses because they have the effect of prohibiting 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.

Sale of Business Exception

Under the proposed rule, the non-competition ban will not apply to non-competes entered into by a person selling a business or disposing of all or substantially all of a business entity’s assets. This exception would apply only if the seller owns at least a 25% interest in the business entity being sold.

Notice and Comment, including Alternatives to Categorical Ban

The FTC seeks comments, including about alternatives to a categorical ban, which may also accomplish many of the objectives of the proposed rule, including whether the rule should apply uniformly to all workers or whether there should be exemptions or different standards for different categories of workers. For example, the FTC could apply a rebuttable presumption of unlawfulness to non-competes for certain workers, such as “exempt” executives or learned professionals under the federal Fair Labor Standards Act. Alternatively, the FTC could apply the rebuttable presumption to workers who earn more than $100,000 per year.

A 60-day public comment period will begin once the FTC publishes the proposed rule in the Federal Register. After the comment period, the FTC will consider the comments and then is likely to publish a final rule. As drafted, the FTC contemplates the final rule becoming effective 180 days after the FTC publishes the final rule in the Federal Register.

Anticipate Litigation

One should anticipate litigation challenging the FTC’s final rule. Indeed, the U.S. Chamber of Commerce stated that an “outright ban [of] noncompete clauses in all employer contracts … is blatantly unlawful” and predicted that “this unlawful action will not stand.”

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