The world on non-compete clauses may look very different in the future based upon a proposed rule from the Federal Trade Commission (FTC). On January 5, the FTC published a new proposed rule that effectively prohibits non-compete clauses in contracts between employers and workers. Davenport Evans lawyer Justin Clark explains.
As drafted, the proposed rule would supersede any conflicting state laws and impose a federal ban on non-compete clauses in employment contracts. Currently, while limited by statute, non-compete clauses are enforceable in South Dakota, outside employment contracts for certain occupations such as health care.
The proposed rule generally prohibits an employer from entering a non-compete clause with workers, maintaining non-compete clauses with workers, and representing to workers that they are subject to a non-compete clause when the employer has no good faith basis to believe the clause is enforceable. While the proposed rule defines a non-compete clause as a “contractual term,” it also prohibits false representation to workers that they are subject to an enforceable non-compete clause. Thus, employer policies and procedures with non-compete clauses may also be problematic.
The proposed rule does contain some exceptions for those employers subject to its prohibitions. It expressly exempts non-compete clauses entered in connection with certain sales of businesses. It also does not apply to other types of restrictive employment covenants, such as non-disclosure agreements and client or customer non-solicitation agreements.
The proposed rule, while still in the comment period, is likely to face litigation on a number of fronts in its current form, including claims that the FTC has exceeded its authority, that it lacks Congressional authorization, and that it impermissibly delegates legislative authority to the FTC in violation of the non-delegation doctrine.
If you believe this rule will affect your existing employment relationships, it would be worth considering the need to comment before the March 10, 2023 deadline, and to speak to an attorney about how this new proposed rule may affect your business.