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De-Facto Non-Competes in the FTC’s Proposed Rulemaking De-Facto Non-Competes in the FTC’s Proposed Rulemaking

De-Facto Non-Competes in the FTC’s Proposed Rulemaking

In the short time since the Federal Trade Commission (FTC) on January 5, 2023, released its Notice of Proposed Rulemaking (NPRM) on the Non-Compete Clause Rule, [1] much has been written about it and its potential effects. [2]

Non-compete provisions span multiple industries, and employers often incorporate them into their “standard” hiring forms. In a non-compete clause, an employee agrees not to work for another competitor company for a specific period of time after their current employment ends. Non-competes are typically also bounded by a designated 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 might encourage the free flow of information and, in that sense, promote innovation for the company, whereas they might in the alternative curtail such free exchange. 

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; [3] (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to the compliance date; and (3) requires an employer to provide notice to the worker that the non-compete clause is no longer in effect and may not be enforced against the worker, among other provisions. [4] 

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.” [5] 

 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.” [6] 

Such proposed de facto language is unsettling because it is subjective and untested. This is particularly so 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, if the de facto provision becomes a final rule, employers will need to carefully consider whether any alternative protections, including an overly broad non-disclosure agreement, would be considered a non-compete in the eyes of 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 greater administrative burden, this may start to become the norm if the proposed rule is adopted. 

Given the potential widespread effect, it will be worthwhile to closely track the language of the final rule.  

[2]  See, e.g.,;;;
[3]  Pursuant to 15 U.S.C. 45, the FTC is empowered to investigate unfair methods of competition and unfair or deceptive acts or practices “in or affecting commerce.” 
[4] at Proposed Rule 910.2.
[5]  Id. at Proposed Rule 910.1(b)(2) (emphasis added).
[6]  Id. at Proposed Rule 910.1(b)(2).

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.
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