FTC issues proposed rule banning noncompete agreements

On January 5, 2023, the Federal Trade Commission (FTC) voted 3-1 to propose a rule that, if adopted, will dramatically affect companies that use noncompete agreements to protect their business interests.

Answers to questions

Under the proposed rule, virtually all agreements that prevent a worker from accepting employment with another business post-termination would be prohibited. The only exception would be a noncompete agreement that’s entered into by a substantial owner (a person holding at least 25% interest) of a business as part and parcel of the sale of that business (or asset purchase).

Here are some answers to a few key questions about the proposed rule:

What happens to my company’s existing noncompete agreements? They would be rescinded, and you would be required to notify both existing and former employees of the rescission.

Does the proposed rule also prohibit nonsolicitation provisions? Maybe. The proposed rule purports to allow employers other legal avenues to protect trade secrets and other sensitive information. It incorporates a “functional test,” however, that means a nonsolicitation or nondisclosure agreement could be deemed invalid if it’s worded so broadly that it has the effect of prohibiting new employment.

Does this apply to noncompete agreements between businesses? No, and the proposed rule explicitly excludes the franchisor/franchisee relationship. Existing federal antitrust law, however, would continue to apply to restrictive covenant agreements in those relationship contexts.