Update – Non-compete clauses: FTC proposes banning non-competes in the USA

Following on from my previous blog post from July 2021 discussing the future of the non-compete clause, on 5 January 2023 the USA’s Federal Trade Commission published a proposal entitled “Non-Compete Clause Rulemaking”. In short, it proposes a United States nationwide ban on non-compete clauses.

The proposal is far-reaching: “The Federal Trade Commission proposes preventing employers from entering into non-compete clauses with workers and requiring employers to rescind existing non-compete clauses.”

It follows the July 2021 Executive Order of President Biden which was interpreted by many as indicating his intent to outlaw non-competes at the federal level (i.e. effective across all US states, notwithstanding state-by-state rules to the contrary). Many questioned whether the Order was mere messaging and doubted whether it would make its way into solid proposals. Those concerns seem to have been assuaged at least in part.

How far down the road is the proposed change?

What now follows is an FTC process which allows for a 60-day consultation period during which stakeholders – workers’ organisations, employers and (as day follows night) corporate lobby groups – provide comments and propose changes to the proposal. Time will tell if the proposal bears any resemblance to its current wording when the process is complete.

Interestingly, it also appears that the vote for the proposed changes ran along party political lines. The FTC is made up of (up to) five Commissioners appointed by the US President and confirmed by the Senate. The current affiliation of the members is three Democrats and one Republican, with one seat vacant. The sole Republican Commissioner, Christine S. Wilson, was appointed by President Trump and recorded the only vote against the proposed rule change. Whilst that is perhaps not surprising given Commissioner Wilson’s long-history in competition law, corporate governance and the Republican party’s declared affiliation with the protection of business interests, I would suggest that the party-line vote hints at legal challenges and much political wrangling to come before we see anything like settled change.  

What is the proposed wording?

The starting point of the proposed rule defines a non-compete clause as an “unfair method of competition”. 

According to the proposed wording, the rule would apply to all “workers”, including “employees, individuals classified as an independent contractor, externs, interns, volunteers, apprentices, or sole proprietors who provides a service to a client or customer”. 

However, it would not apply to non-compete clauses between two business entities, including between a franchisee and franchisor (which remain subject to antitrust law). That said, the proposed rule would apply to a “natural person who works for a franchisor or franchisee”.

It would also apply retroactively as well as for all future employment contracts. The proposed rule would require employers to rescind existing non-compete clauses no later than the rule’s compliance date (proposed at 180 days after publication of the final rule) and provide written notice to workers released from non-compete clauses.

Potential exceptions?

Several potential exceptions to the ban have been proposed: 

  • The only limited exception currently contained in the proposal is to allow non-competes between the seller and buyer of a business. This exception would only be available where the party restricted by the non-compete clause is an owner, member, or partner holding at least a 25% ownership interest in the business entity being sold; 
  • Comment is invited on two further exceptions: 
    • Whether senior executives should be exempted from the Proposed Rule, or subject to a rebuttable presumption that a non-compete clause is unlawful rather than an outright prohibition; and
    • Whether low- and high-wage workers should be treated differently under the Proposed Rule (e.g., creating a minimum salary above which a non-compete clause may be permissible and exempt from the Proposed Rule).

Why does it matter?

The FTC notes that “approximately one in five American workers – approximately 30 million people – are bound by a non-compete clause and are thus restricted from pursuing better employment opportunities.” It estimates that “the proposed rule would increase American workers’ earnings between $250 billion and $296 billion per year”.

As discussed in my previous blog post, there is ample evidence that non-compete clauses – especially when applied outside senior management – stifle competition, wages and innovation and, whilst they may prove strategically beneficial for one employer or another, have a negative impact on the economy as a whole. 

Owing to the global nature of many of the companies most reliant on non-compete provisions to protect their confidential information, trade secrets and movement of workers, it is fair to assume that any such change in the US would have an impact on businesses in the UK, especially those with offices in the US or trade with the international community. 

Presumably, more information will be available in April when the 60-day period for responses ends. Watch this space. 

This article was written by Jeremy McKeown, a tenant of 12KBW and a member of our employment team.

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