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Regulatory Alert – FTC Proposes Federal Ban and Recission of Non-Compete Agreements

Proposed Federal Ban of Non-Compete Agreements

On January 3, 2023, the Federal Trade Commission (FTC) released a proposal named Non-Compete Clause Rulemaking. The rule would state in relevant part:

(a) Unfair methods of competition. 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.

Further, any previously entered non-compete agreements would be required to be rescinded, with notice to the employee within 45 days of rescission. Exceptions to the proposed rule would include persons selling a business or disposing of ownership in a business, a person selling all or most of a business’ operating assets or if when the person entered the non-compete agreement, they were a substantial owner or partner in the business.

The purpose of the proposal is to remove the restrictions on workers from leaving jobs, to increase competition for workers and to raise wages for workers previously subject to the agreements. “The Commission estimates that the proposed rule would increase American workers’ earnings between $250 billion and $296 billion per year. The Commission is asking for the public’s opinion on its proposal to declare that non-compete clauses are an unfair method of competition, and on the possible alternatives to this rule that the Commission has proposed.” FTC Non-Compete Clause Rule, 16 CFR Part 910 (2023).

Currently no Federal ban on non-compete clauses exists. Pennsylvania recognizes non-compete agreements as valid, as a form of restrictive covenants, so long as the agreement satisfies the following requirements:

Consistent with this legal background, currently in Pennsylvania, restrictive covenants are enforceable only if they are: (1) ancillary to an employment relationship between an employee and an employer; (2) supported by adequate consideration; (3) the restrictions are reasonably limited in duration and geographic extent; and (4) the restrictions are designed to protect the legitimate interests of the employer.

Socko v. Mid-Atlantic Sys. Of CPA, Inc., 126 A.3d 1266, 1274 (Pa. 2015).

The Commission estimates that the proposed ban and recission would affect nearly one in five Americans, with an estimated 30 million people currently subject to non-compete agreements. The Federal Trade Commission welcomes public comments on the proposed rule through March 10, 2023.

Link to Federal Register Notice: