The FTC has not banned all non-compete agreements. While the FTC has issued a proposed rule that would ban all non-compete agreements, at this time it is just a proposed rule and therefore has no legal effect.
In 2021, President Biden issued an executive order on “Promoting Competition in the American Economy.” Part of this executive order encouraged the FTC to “ban or limit non-compete agreements,” which he highlighted during his recent state of the union address. The FTC has since proposed the “Non-Compete Clause Rule” which, among other things, would ban employers from entering into or maintaining a non-compete agreement with their employees. The proposed rule is closed for public comment as of April 19, 2023. At that time, the FTC had several options including: issuing a new proposed rule based on the comments, terminating the rulemaking process, or issuing a final rule. It is still early in the process and there is currently no timeframe on when the final rule would be issued, if at all.
However, if a rule were to be issued, it would likely face significant legal challenges across the country. The new rule would impose federal restrictions on contractual relationships nationwide, an area typically left to the states. Many experts have expressed doubt that such a broad ban on non-competes would survive judicial review. Therefore, it is likely that various business associations and corporations would file lawsuits challenging the FTC’s legal authority to pass such a rule and seek an injunction to stop the FTC from enforcing the rule.
While it is wise to monitor any developments from the FTC, it would be premature to change or modify any non-compete agreements as a response to this proposed rule. It remains important to understand your state law on non-competes and to make sure your agreements are properly tailored to your state.
This proposed ban is not to be confused with the recent NLRB ruling that restricts the use of non-disclosure clauses in severance pay agreements. The NLRB decision applies to both federal and state law and is effective immediately.
We are grateful for the significant research and drafting contribution to this article from our Law Clerk, Clint Nuckolls. Clint is a second-year student at SMU Dedman School of Law.