The Proposed Nationwide Ban on Noncompetition Agreements by the Federal Trade Commission

The FTC’s proposed rule would upend established legal precedent in the forty-six states that permit post-employment noncompetition covenants that are appropriately tailored to protect the legitimate business interests of employers. The FTC’s proposed ban would apply both retroactively and prospectively, rendering tens of millions of existing post-termination noncompetition covenants unenforceable. Notably, the FTC’s proposed rule would not apply to post-termination noncompetition covenants between franchisors and franchisees. But the FTC expressly requested comments on whether the ban should be expanded to franchise agreements. The public comment period on the proposed rule ended on April 19, 2023. While the FTC could promulgate its new rule, or a version of it, any day, the FTC is not expected to act until April 2024. That said, the FTC, if it is going to act, will almost certainly act with sufficient time for the rule to become final before the 2025 Congress is seated and the 2025 Presidential term begins. The rule is very likely to face significant legal challenges.

The FTC’s proposed rule, as well as recent action by other federal agencies and some states, potentially signals growing hostility towards post-employment noncompetition covenants, particularly as applied to low-wage employees. The prospect of a federal ban on post-termination noncompetition covenants and the prospect of more states banning post-termination noncompetition covenants creates significant strategic issues for the many companies that have traditionally relied upon noncompetition covenants as an important part of their business strategy and a key tool in their toolkit for protecting trade secrets and confidential information.

This article begins with an overview of the current landscape on post-termination noncompetition agreements in the employment context, including state statutes that already have banned noncompetition agreements and several notable cases in Delaware that some have interpreted as a pro-employee shift in how Delaware courts, which have a strong reputation as being “pro-business,” approach noncompetition agreements. Next, the article addresses recent FTC and other federal agency activity regarding noncompetition agreements before turning to the FTC’s proposed rule and the significant legal challenges that it likely will face if promulgated as proposed. Finally, the article concludes by addressing next steps in the FTC rulemaking process and the impact of the evolving, patchwork landscape for noncompetition agreements on how employers can protect their legitimate business interests.

Read the full article here.