FTC Proposes a Rule to Ban Nomcompetes and More

Earlier today, I posted on three unprecedented enforcement actions filed yesterday by the FTC against companies using noncompetes.

Well, that was yesterday.

Today, the FTC took another unprecedented step. It proposed a rule (called the “Non-Compete Clause Rule”) that would essentially ban all employee noncompetesand agreements (like nondisclosure agreements) that can be interpreted as a “de facto noncompete.

The notice of the proposed rule explains the following:

The proposed rule would provide that it is an unfair method of competition—and therefore a violation of Section 5—for an employer to enter into or attempt to enter into a non-compete clause with a worker; maintain with a worker a non-compete clause; or, under certain circumstances, represent to a worker that the worker is subject to a non-compete clause

The proposed rule itself provides a “functional test”:

The term non-compete clause includes a contractual term that is a de facto non-compete clause because it has 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.

The rule then gives two examples of other agreements that could be banned as “de facto noncompetes”: any nondisclosure agreement “that is written so broadly that it effectively precludes the worker from working in the same field after the conclusion of the worker’s employment with the employer” and certain training repayment agreements.

There is a lot to unpack here, as the proposed rule has potentially enormous consequences for companies and the protection of their trade secrets and their customer relationships.

I will be posting a follow-up with my analysis and recommendations, but wanted to get this out now so people have a heads up. (And thank you to the many people who reached out about this today.)

The FTC has also invited public comments (as required by the rule-making process). Comments will be due 60 days after the Federal Register publishes the proposed rule.

Not surprisingly, I will be submitting comments, and welcome anyone interested in joining me (subject of course to reviewing the draft) to contact me by email.