On Jan. 5, 2023, the Federal Trade Commission (FTC) released a Notice of Proposed Rulemaking (“the proposed rule”) to essentially implement an all-out federal ban on non-compete clauses in employment contracts. Non-compete clauses generally restrict a person’s ability to work for a competing employer, whether by name or in general. Many times, these clauses will carve out a radius in which a person is prohibited from working with competing employers and will have limits on the duration of the ban.

However, this potential ban goes further than just your average non-compete clauses that you may be used to seeing or hearing of. There are other clauses in employment contracts that the proposed rule seeks to ban, clauses that are sometimes so broad in scope that they can be considered “de facto” non-compete clauses:

• Non-disclosure agreements (NDAs) — also known as “confidentiality agreements” — which prohibit the worker from disclosing or using certain information;
• Client or customer non-solicitation agreements, which prohibit the worker from soliciting former clients or customers of the employer (referred to in this NPRM as “non-solicitation agreements”);
• No-business agreements, which prohibit the worker from doing business with former clients or customers of the employer, whether or not solicited by the worker;
• No-recruit agreements, which prohibit the worker from recruiting or hiring the employer’s workers;
• Liquidated damages provisions, which require the worker to pay the employer a sum of money if the worker engages in certain conduct; and
• Training-repayment agreements (TRAs), a type of liquidated damages provision in which the worker agrees to pay the employer for the employer’s training expenses if the worker leaves their job before a certain date.

The latest move by the FTC may be traced or influenced by the recent attitudes towards these types of clauses and their overall chilling effects on the labor market and economy. The attitudes that the FTC may be particularly focused on may come from the current Biden Administration and recent enforcement actions by the U.S. Department of Justice Antitrust Division (Antitrust Division). On July 9, 2021, President Biden signed the Executive Order on promoting competition in the American economy as part of a “whole-of-government effort to promote competition,” in which the order explicitly encourages the FTC to “exercise the FTC’s statutory rulemaking authority under the Federal Trade Commission Act to curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.” Recently, the Antitrust Division has criminally prosecuted employers for executing wage-fixing and no-poach agreements against companies and individuals. Those attitudes may have paved the way for not only the FTC to bring forward this proposed rule but also bring its own enforcement against companies and their executives for imposing non-compete clauses just one day before the proposed rule.

Further, to support the move, the FTC cites data that bolsters the central arguments of these types of clauses. The data the FTC presents supports the notion that non-compete clauses significantly reduce earnings for workers and cause exploitation, stifle entrepreneurship and new ideas, and reduce overall economic and marketplace freedom. Additionally, the FTC cites that there are other methods to protect competition without imposing undue risks to workers and burdens on the economy.

Putting the ban in a nutshell, it would bar employers from imposing non-compete clauses in employment contracts. It would also require employers with non-compete clauses in effect before this rule to rescind all non-compete clauses that were to exist at the time the law was to go into effect. With respect to the abovementioned rescission of prior-existing clauses, the rule would require the existing clauses to be rescinded within 180 days of the publication of the final rule and that employers provide notice to all currently employed and former employees, informing them that the non-compete clause is no longer effective and that they are no longer subject to it.

There could be some potential limitations to the proposed ban, however. In the proposed rule itself, it suggests alternatives to the proposed rule for which the FTC seeks public comment on. For example, the proposed rule would not cover non-compete between franchisors and franchisees. The FTC seeks comment on whether such clauses should be covered between franchisors and franchisees and, if covered, whether there should be a categorical ban on such clauses or a rebuttable presumption of unlawfulness, or whether different types of clauses should be subject to different standards or exemptions. The FTC seeks similar comments on similar considerations regarding senior executives and treating low/high-wage workers differently.

Although the proposed rule has no immediate effect, employers may consider taking proactive measures to demonstrate good faith compliance should the rule go into effect or lean towards the attitudes/trends of the FTC and other agencies regarding these clauses, even if the rule were to not go into effect. These proactive measures may include prohibiting the use of non-compete clauses in contracts, using non-compete clauses in the meantime but making sure they are specific in scope and not overburdensome, and auditing current contracts. If the bank chooses to audit current contracts, it should be doing a careful review looking for non-compete clauses and de facto non-compete clauses as described previously, and get a head start on determining what action to take with the identified clauses should the rule go into effect. 

Prince Girn, JD, serves Compliance Alliance as Associate General Counsel. He received his bachelor’s degree in political science from the University of California, Davis and received his Juris Doctor from San Joaquin College of Law. Prince is as a member of our expert Hotline team where his knowledge in areas of lending, real estate, and credit procedures makes him an asset for our member banks. He is also a writer for the Bankers Alliance monthly magazine and other state banker publications.