FTC Proposes Rule to Ban Noncompete Agreements

Yesterday (Jan 5, 2023), the Federal Trade Commission proposed a rule that would prohibit employers and employees from entering into so-called “noncompete agreements”, stating that the agreements harm competition, suppress labor mobility and reduce wages even for those not bound by a noncompete agreement.

In the proposed rule, the FTC said other forms of restrictive covenants, such as nondisclosure agreements and client or customer nonsolicitaton agreements, would not be included in the law’s definition of a noncompete agreement. If the rule goes into effect, employers would be required to rescind existing noncompete clauses and provide notice to employees that such clauses are no longer in effect.

It is difficult to overstate how big a change to existing law this new rule would be. The business community will certainly work hard to water down or kill the proposed rule if they can because, on balance, business favors being able to enforce noncompete agreements. This is especially true of larger businesses, who use such agreements to lock up the available labor pool in a given market and make it difficult for newer, smaller employers to come into a market and compete.

Noncompetes are even more harmful to employees, who often do not fully understand the import of the documents they sign when starting a new job and can find themselves locked out of their chosen field if they later quit or are fired.

Public comments on the proposal will be open for a 60-day period