THE FTC PROPOSES RULE THAT WOULD BAN NON-COMPETE CLAUSES

The Federal Trade Commission (“FTC”) has proposed a rule that would, in its words, “categorically” ban non-compete clauses in labor contracts.

Non-compete clauses are terms in labor agreements that prevent a worker from accepting employment with a competitor or starting a competing business after leaving an employer, generally for a certain period of time and within a certain geographic area.  As the basis for its proposed rule, the FTC determined that “it is an unfair method of competition for an employer to enter into or attempt to enter into a non-compete clause with a worker, maintain with a worker a non-compete clause, or represent to a worker that the worker is subject to a non-compete clause where the employer has no good faith basis to believe that the worker is subject to an enforceable non-compete clause.”

The proposed rule would:

  • Prohibit employers from entering into non-compete clauses with workers 60 days after publication of the final rule in the Federal Register
  • Require employers to rescind existing non-compete clauses no later than 180 days after publication of the final rule in the Federal Register
  • Require employers to notify workers previously subject to a non-compete clause that the clause is no longer in effect

The proposed rule is wide-ranging.  Although many state laws limit their bans on non-compete clauses to lower paid workers, the proposed rule would cover highly paid and highly skilled workers as well as lower paid workers.  The proposed rule also broadly defines worker to include employees, independent contractors, interns, and volunteers.  There is, however, a limited exception for non-compete clauses between a seller and buyer of a business where the party restricted by the non-compete clause is an owner, member, or partner holding at least a 25% ownership interest.  The proposed rule does not apply to other types of clauses commonly used in labor agreements, such as non-disclosure clauses. However, the proposed rules would use a functional standard to determine whether a particular clause is a non-compete clause rather than looking solely at what the clause is called in a contract.

The FTC estimates that the proposed rule could increase wages by nearly $300 billion per year and expand career opportunities for about 30 million Americans.  In a press release, FTC Chair Lina M. Kahn stated:

The freedom to change jobs is core to economic liberty and to a competitive, thriving economy.  Noncompetes block workers from freely switching jobs, depriving them of higher wages and better working conditions, and depriving businesses of a labor pool that they need to build and expand. By ending this practice, the FTC’s proposed rule would promote greater dynamism, innovation, and health competition.

Non-compete clauses have been widely used in the healthcare industry. As one example of a non-compete clause that would be banned under the rule, the FTC cited a clause in an ophthalmologist’s contract with a medical services firm that prevent him from engaging in the practice of medicine in two Idaho counties unless the physician paid the firm a significant fee.  In comments to the proposed rule, the FTC estimated that for a physician with 10 years of experience in a state that currently enforces non-compete clauses, the prohibition on non-competes would lead to a 12.7% increase in earnings. For physicians with just one year of experience, The FTC estimated that the increase in earnings would be 37.4%.  The comments to the proposed rule also cited to evidence showing that non-compete clauses increase consumer prices and concentration in the healthcare sector.

The proposed rules are linked here. Comments are due 60 days after publication in the Federal Register.

The attorneys at Whatley Kallas will continue to follow this issue as the FTC adopts final rules and as any court challenges to the final rules unfold, with a particular focus on how the rules impact healthcare providers.