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FTC Proposes Rule to Ban Noncompete Clauses

The Federal Trade Commission (the FTC) proposed a new rule that would ban employers from imposing noncompete agreements on their workers. The FTC estimates that the new proposed rule could increase wages by nearly $300 billion per year and expand career opportunities for about 30 million Americans.

The FTC is seeking public comment on the proposed rule, which is based on a preliminary finding that noncompetes constitute an unfair method of competition and therefore violate Section 5 of the Federal Trade Commission Act. Further, the FTC states that noncompete agreements suppress wages, hamper innovation, and block entrepreneurs from starting new businesses.

To address these problems, the FTC’s proposed rule would generally prohibit employers from using noncompete clauses. Specifically, the FTC’s new rule would make it illegal for an employer to:

  • enter into or attempt to enter into a noncompete with a worker;

  • maintain a noncompete with a worker; or

  • represent to a worker, under certain circumstances, that the worker is subject to a noncompete.

The proposed rule would apply to independent contractors and anyone who works for an employer, whether paid or unpaid. It would also require employers to rescind existing noncompetes and actively inform workers that they are no longer in effect.

The proposed rule would generally not apply to other types of employment restrictions, like non-disclosure agreements. However, other types of employment restrictions could be subject to the rule if they are so broad in scope that they function as noncompetes.

The U.S. Chamber of Commerce and other business groups have said that the proposed rule exceeds the FTC's authority, so it is likely to be challenged.


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