On January 5, 2023, the Federal Trade Commission (“FTC”) unveiled a proposed rule that would essentially ban the use of noncompete clauses in employment agreements. The proposed rule would also require employers to rescind current noncompete clauses and inform their current and former employees that they have stopped enforcement of such clauses.
A copy of the FTC’s proposed rule can be found here:
https://www.ftc.gov/legal-library/browse/federal-register-notices/non-compete-clause-rulemaking
The FTC’s proposed rule is not yet in effect, as it still has to undergo public comment and review. If enacted, however, its virtual ban on this common contractual provision could reshape the employment law landscape, as employers utilize these clauses in a myriad of industries such as health care, finance, and technology.
The proposed rule contains a carve out for noncompete clauses entered into with respect to the sale of a business, and does not presently restrict the use of non-solicitation or confidentiality provisions.
The FTC’s proposed rule is similar to efforts made by California, North Dakota, Oklahoma, and Washington, D.C. to ban the use of noncompete agreements with few exceptions. Other states, such as Connecticut, Colorado, Illinois, and Virginia, have also sought to limit the use and scope of noncompete agreements. For example, Connecticut limited the use and scope of noncompete agreements and other restrictive covenants for physicians. Under Conn. Gen. Stat. Ann. § 20-14p, noncompete clauses cannot continue for more than a period of one year and contain a geographic restriction of more than 15 miles from where the physician practices.
Other states are also considering legislation that would prohibit noncompete agreements and certain restrictive covenants, and authorize employees to bring civil actions against employers for alleged violations of such prohibitions.
In light of these recent pushes to ban or limit the scope of noncompete clauses, employers should be prepared to revise their standard noncompete provisions in their employment agreements to ensure compliance with federal and state law.