The Federal Trade Commission (“FTC”) recently released a Notice of Proposed Rulemaking (“NPRM”) concerning non-compete clauses, or agreements between a worker and a company in which the worker agrees not to compete with the company after the employment ends. The Non-Compete Clause Rule would, among other things, impose a categorical ban on non-compete clauses and prohibit companies from entering into and maintaining agreements containing non-compete clauses with workers or representing to a worker that the worker is subject to an enforceable non-compete clause without a good faith basis to believe such representation to be true. The term “worker” would be broadly defined as a person who works for a company, whether paid or unpaid, including, without limitation, an employee, independent contractor, intern, or volunteer. If adopted, the Non-Compete Clause Rule would require companies to rescind any agreements containing non-compete clauses that were entered into prior to the effective date of the final rule and provide a notice to the worker stating that the non-compete clause is no longer in effect and may not be enforced against the worker. Such recission and notice would be required to occur prior to the compliance date specified in the final rule. Further, the Non-Compete Clause Rule would not only ban non-competes, but would also have an impact on non-disclosure agreements and non-solicitation agreements under certain circumstances.

The Non-Compete Clause Rule would contain a limited exception for non-competes that are entered into in connection with the sale of a business in which the seller disposes of all of his or her ownership interests in the business or all or substantially all of the business’ operating assets. In such event, a non-compete entered into by a worker who holds at least 25% of the ownership interests in the business at the time it is entered into would not be subject to the Non-Compete Clause Rule and would remain enforceable subject to existing restrictions under state and federal law. 

Although non-competes are common and generally enforceable so long as the worker receives consideration in exchange and the non-compete is otherwise reasonable, the FTC has taken the position that such clauses are an unfair method of competition. 

The FTC is seeking public comment on this NPRM, which will be reviewed along with the FTC’s further analysis of non-competes and may impact the final rule. The public comment period will open the date the proposed rule is published in the Federal Register and will end 60 days following such publication. To submit a comment, visit www.regulations.gov, or mail your comment to:

Federal Trade Commission

Office of the Secretary

600 Pennsylvania Avenue NW, Suite CC-5610 (Annex C)

Washington, DC 20580. 

Please note that you must reference “Non-Compete Clause Rulemaking, Matter No. P201200” in your comment, and that all comments will be placed on the publicly accessible website at www.regulations.gov.

ZLG is monitoring new developments with regard to this NPRM.  If you have questions or concerns regarding how the proposed Non-Compete Clause Rule would impact your business, please do not hesitate to contact us.

THIS CLIENT ALERT IS A GENERAL OVERVIEW OF THE FEDERAL TRADE COMMISSION’S NOTICE OF PROPOSED RULEMAKING CONCERNING WORKER NON-COMPETE CLAUSES. IT, THEREFORE, IS NOT INTENDED TO BE, AND SHOULD NOT BE CONSTRUED AS, LEGAL ADVICE.