On January 5, 2023, the Federal Trade Commission (the “FTC”) published a proposed rule that would broadly ban noncompetition agreements (“noncompetes”) between employers and a broad class of “workers.”

The FTC’s website states the proposed rule is meant to curb “a widespread and often exploitative practice that suppresses wages, hampers innovation, and blocks entrepreneurs from starting new businesses.”

Under the proposed rule, the term “worker” would include executives, interns, c-suite executives and most employees. The proposed rule would make it illegal for companies to:

1. enter into or attempt to enter into a noncompete with a worker;

2. maintain a noncompete with a worker; or

3. represent to a worker, under certain circumstances, that the worker is subject to a noncompete.

Note that the rule does not cover the following:

noncompetes between companies; and
noncompetes that are part of a company’s sale of its assets.

While the rule is not in effect yet, it reflects a trend of disfavoring noncompete agreements. Traditionally, enforceability of noncompetes has been determined by state courts, and many states limit enforcement of noncompetes. Currently, California, North Dakota and Oklahoma have imposed broad bands on noncompetes.

Companies have a legitimate interest in protecting their intellectual property, investments in technology, and trade secrets. Accordingly, if enacted as the FTC proposed rule is currently drafted, companies will have to carefully draft nondisclosure and other agreements so “workers” sign agreements that would comply with the FTC rule.

The proposed rule is subject to a public comment period for 60 days. A final rule would become effective 180 days following publication. If the FTC does issue a final rule, employers are expected to sue the FTC to keep the rule from being enforced.