Both the U.S. Senate and the Federal Trade Commission Propose Regulations That Would Completely Ban Most Non-Competes

Ashley Graves, Law Clerk

            The Federal Trade Commission (“FTC”) issued a Notice of Proposed Rulemaking on January 5, 2023, that would ban a majority of non-compete clauses in the employment context.  Even more recently, U.S. Senators have reintroduced legislation titled the Workforce Mobility Act (“WMA”), which, if enacted, would prohibit the use, enforcement, and attempted enforcement of most post-employment non-competes.  

The FTC’s Proposed Rule and the 2023 Workforce Mobility Act (S.220)

            The FTC’s proposed rule would ban non-compete clauses, characterizing them as unfair methods of competition.  A contractual term would not need to be labeled a “non-compete” to fall under the proposed rule’s ban, as any contractual term that has the de facto effect of a non-compete would fall under the proposed rule’s scope as well. 

            Under the proposed rule, the right of individuals to bargain over restrictive covenants for compensation or job security would be taken away.  Further, if the rule is passed, employees and employers may need to renegotiate prior agreements since the proposed rule not only bans the creation of non-competes, but existing ones as well; all of which would need to be rescinded along with a written notice of rescission from the employer.  The proposed rule is also not limited to the employer/employee relationship, and extends to individuals classified as independent contractors, externs/interns, volunteers, and apprentices.

            The proposed rule does exclude non-compete agreements entered into as part of the purchase and sale of a business, so long as the person subject to the non-compete agreement is a substantial owner or member of the business being sold.  The rule defines “substantial owner” as an owner, member, or partner holding at least a 25% ownership interest in a business entity.

            Congress’ proposed version of a non-compete ban (the WMA) would be more restrictive than the FTC’s proposed rule because the WMA would empower the FTC to enforce its provisions and would allow the Department of Labor to investigate violations and enforce the Act in court.  Further, the WMA provides that the Secretary of Labor “shall issue regulations as necessary” to carry out the Act.  Any “individual who is aggrieved by a violation” of the Act could also bring a private action in any appropriate federal District Court for damages and attorneys’ fees.  Last, the Act allows state Attorneys General to enforce the Act if they have “reason to believe that an interest of the residents of the State has been or is threatened or adversely affected by any person who violates any provision of” the Act “or any rule promulgated under” the Act.  State Attorneys General may seek injunctive relief or restitution.

            Notably, like the FTC’s proposed rule, the Act would not apply to non-competes entered into as part of the sale of a business or dissolution of a partnership.[1]  The Act also clarifies that it would not restrict the ability of employers to enter into agreements with employees which prohibit the employee’s disclosure of the employer’s trade secrets—either during employment or after the employment ends.

Key Takeaways

            Both employers and employees may currently benefit from being able to bargain for non-compete arrangements, as employers can ensure protection of valuable confidential business information from competitors for a period of time after an employee leaves, while employees may use non-competes to potentially negotiate for increased salaries and/or severance packages.  A nationwide ban on non-compete agreements would certainly frustrate such goals.  With that said, the FTC is holding a period of public comment that ends on March 20 in order for employers and other interested parties to voice their concerns.[2]  In the meantime, Colorado employers should continue complying with the non-compete restrictions detailed in Colo. Rev. Stat. § 8-2-113.  Please refer to footnote 3 for a discussion of Colorado’s unique restrictions on non-compete agreements.[3]

[1] A copy of the proposed 2023 version of the Workforce Mobility Act can be found here: https://www.jacksonlewis.com/sites/default/files/docs/workforce-mobility-act.pdf.

[2] https://www.regulations.gov/document/FTC-2023-0007-0001

[3] https://www.rockymountainemployersblog.com/blog/2022/8/11/colorados-new-non-compete-laws-are-here-what-employers-need-to-know