On January 5, 2023 the Federal Trade Commission proposed a new rule that would prohibit employers from imposing noncompete clauses on their employees, predicated on a preliminary finding that such provisions constitute a method of unfair competition in violation of Section 5 of the Federal Trade Commission Act. In its press release announcing this proposed rule the FTC stated that “[t]he freedom to change jobs is core to economic liberty and to a competitive thriving economy,” and further characterized the widespread use of noncompete clauses as an exploitative practice that suppresses wages and prevents entrepreneurs from starting new businesses.

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The FTC’s proposed ban is extremely broad and would apply to all types of employees regardless of their position and income level, and regardless of whether they have access to confidential information. It would also apply retroactively, requiring rescission of existing noncompete clauses and notification to employees of such rescission. However, the proposed regulation would not apply to non-competes entered into in connection with the sale of a business where the restricted party owns at least 25% of the business.. It would also not apply to noncompete provisions outside of an employment context. The FTC has set a deadline of March 20, 2023 for public comment on the proposed rule.

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The FTC’s proposed ban on noncompete clauses has generated substantial criticism from business groups and commentators. Among the salient criticisms are that the FTC’s proposed rule constitutes a hammer where a more delicate instrument is called for. In particular, the retroactive effect of the rule, the lack of any exception for executives and highly paid employees, and the risk that the rule may be so broad as to include some non-disclosure agreements in its scope have attracted significant criticism.

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It appears likely that the FTC’s proposed rule will be somewhat scaled back before adoption of a final rule. It also appears probable that regardless of its final form the FTC’s rule will be challenged in the courts. The FTC’s authority to regulate an area traditionally left to the states is not a given and will likely be subjected to judicial scrutiny.