FTC Proposes Ban on Non-Compete Clauses

FTC proposed the "Non-Compete Clause Rule," which would prohibit employers from (i) entering into, or attempting to enter into a non-compete clause and (ii) representing to employees that they are subject to a non-compete clause.

The proposed rulemaking would prevent employers from implementing noncompete clauses going forward, and would require employers to terminate any currently active noncompete clauses and inform those employees that their contract is no longer valid. FTC asserted that noncompete clauses harm workers and reduce competition by preventing workers from pursuing better opportunities and preventing employers from hiring qualified candidates.

FTC argued that limiting workers' ability to move freely within a given industry empowers employers to suppress wages and avoid having to compete to attract workers. The proposed rule defines the term "worker" to include any "employee, individual classified as an independent contractor, extern, intern, volunteer, apprentice, or sole proprietor who provides a service to a client 12 or customer."

Further, FTC asserted that noncompete clauses hinder innovation. The agency encouraged employers to consider alternative methods for protecting trade secrets and other valuable investments that are significantly less harmful to workers and consumers.

FTC Chair Lina M. Kahn, Commissioner Rebecca K. Slaughter and Commissioner Alvaro M. Bedoya called the proposal necessary, given the magnitude and scope of the economic impacts caused by noncompete clauses. Dissenting, FTC Commissioner Christine S. Wilson argued that the proposal (i) deviates from FTC's fact-specific approach as to whether noncompete clauses are unreasonable and (ii) that FTC lacks the experience and the expertise to address the issues raised.