As you may recall, on January 5, 2023, the Federal Trade Commission (“FTC”) released a Notice of Proposed Rulemaking on the Non-Compete Clause Rule that would ban employers from imposing non-competes on their workers.
As a brief refresher, with a non-compete clause, an employee agrees not to work for another competitor company for a specific amount of time after their current employment ends. Non-competes are also typically bounded by a specific geographic area and/or industry or field. They function in part to protect an employer’s confidential information and practices, including trade secrets and know-how, and to shield such information from flowing to a competitive company through a former employee. To an employer, such protections encourage the free flow of information and promote innovation for the company, whereas they might curtail such free exchange in the employee’s mind.
Along with the Notice of Proposed Rulemaking, the FTC released the text of a proposed rule. The proposed rule in its current form (1) makes the act of an employer entering into or attempting to enter into a non-complete clause with a worker, or maintaining such a non-compete clause, an unfair method of competition and subject to the FTC’s enforcement powers; (2) requires an employer to rescind a non-compete clause that was entered into with a worker prior to the compliance date; and (3) requires an employer to provide notice to the worker that the non-compete clause is no longer in effect and may not be enforced against the worker, among other provisions.
But, going one step further, the proposed rule also prohibits de facto non-compete clauses by including a functional test to determine whether a contractual term is a non-compete clause:
“The term non-compete clause includes a contractual term that is a de facto non-compete clause because it has the effect of prohibiting the worker from seeking or accepting employment with a person or operating a business after the conclusion of the worker’s employment with the employer.”
The proposed rule provides two examples of de-facto non-competes:
“A non-disclosure agreement between an employer and a worker that is written so broadly that it effectively precludes the worker from working in the same field after the conclusion of the worker’s employment with the employer”; and
“A contractual term between an employer and a worker that requires the worker to pay the employer or a third-party entity for training costs if the worker’s employment terminates within a specified time period, where the required payment is not reasonably related to the costs the employer incurred for training the worker.”
Such proposed de facto language is problematic because it is subjective and untested. The potential problem is exacerbated because the proposed rule unequivocally states that it “shall supersede any State statute, regulation, order, or interpretation to the extent that such statute, regulation, order, or interpretation is inconsistent with” the proposed rule. To date, only a handful of states effectively ban non-compete clauses (the FTC points to three—California, North Dakota, and Oklahoma).
So, suppose the de facto provision becomes a final rule. In that case, employers will need to carefully consider whether any alternative protections, including an overly broad non-disclosure agreement, would be viewed as a non-compete to the FTC. Employers will also need to re-evaluate their employment forms—not just the non-compete clause, but any clause or agreement that could arguably be deemed to be a functional or de facto non-compete. But, one step further, companies may need to adopt stricter processes for sharing confidential information with employees and more carefully vet which employee has access. While such processes would be a more significant administrative burden, this may become the norm if the proposed rule is adopted.
Given the potential widespread effect, it will be worthwhile to track the language of the final rule closely.
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About Harrison Oldham
Harrison grew up in Mansfield, Texas. He attended Texas A&M University for his bachelor’s degree, where he met his wonderful wife, Kelsey. After graduating magna cum laude from Texas A&M, he attended SMU Dedman School of Law, graduating with honors in 2012. Today, Harrison and his wife live in Dallas, Texas with their son, Teddy.
Since graduating from SMU Law, Harrison has worked exclusively in the field of business law. He has spent time in private practice and in-house, working with clients of every size; from single person startups to Fortune 250 companies. Today his practice focuses on serving the diverse needs of businesses and individuals throughout Texas. You can learn more about Harrison by visiting his website, at: http://