Is the FTC trying to ban non-compete clauses?
On July 9, 2021, President Biden signed an executive order intended to promote competition in the American economy that, in part, “encourage[s]” the Federal Trade Commission 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.”
On Jan. 19, 2023, the FTC published its proposed rule on non-compete agreements in the Federal Register. On Jan. 5, 2023, the FTC announced its plans to propose a rule (RIN: 3084-AB74) barring employers from entering into or enforcing non-compete clauses with employees or independent contractors and requiring companies to nullify any existing ones. The ban would exempt agreements between buyers and sellers of a business entity who have an ownership interest.
The FTC, under Chair Lina Khan, argues that non-competes reduce worker mobility, leading to reduced wages for all workers, not just those with non-competes in their contracts. It calculates that a ban could add almost $300 billion a year to nationwide wages.
For more information on the FTC’s rulemaking, see the agency’s fact sheet.
Sample non-compete clause for employment contracts
This unilateral non-compete clause may be used in an employment agreement with a management employee. It prohibits the employee from competing with the employer during the term of employment and for a period of 12 months post termination. Non-compete agreements are governed by state law, which should be consulted for issues of validity and enforceability.
[Section #] Noncompetition. Employee shall not, during Employee’s employment with Employer and for a period of [twelve (12) months] following the termination of Employee’s employment, whether such termination is voluntary or involuntary and regardless of the reason for the termination, [in any geographic region for which Employee had direct or indirect responsibility on behalf of Employer,] perform duties or services for a Direct Competitor, whether as an employee, consultant, principal, advisor, board member, or any other capacity, that are substantially similar to the duties or services Employee performed for Employer at any time during the last [twelve (12) months] of Employee’s employment with Employer, or that require Employee to use, disclose, or otherwise take advantage of any Proprietary Information obtained in the course of Employee’s employment with Employer. For purposes of this section, a Direct Competitor means any entity that offers or plans to offer products or services that are materially competitive with any of the products or services being manufactured, offered, marketed, or are being actively developed by Employer as of the date Employee’s employment with Employer ends.
[Download our 50-state survey on non-compete clauses to see how states govern non-competes and their enforceability.]