Last week, the Federal Trade Commission (FTC) issued a Notice of Proposed Rulemaking (NPRM) that would ban employers from entering into noncompete agreements with their employees. A noncompete agreement or clause is a contract or contract term, typically between an employer and an employee, that prevents the employee from working for a competitor or starting a competing business, usually within a certain geographic area and for a given time period once the worker’s employment with the current employer ends.

The FTC proposal maintains that noncompete agreements constitute “unfair methods of competition” and that they impede innovation and prevent entrepreneurs from starting new businesses. However, noncompete clauses/agreements are designed to protect employers from employees who would steal their ideas, business practices, and/or intellectual property for use in their own businesses or to share with a competitor of their employer, likely to enhance their own opportunities for professional advancement.

The proposed rule is extremely broad; it would apply to employees and independent contractors, whether paid or unpaid. If adopted as proposed, the rule would prohibit the future use of noncompete agreements between employers and employees, would require employers to rescind any noncompete agreements currently in use, and would require employers to inform employees that any noncompete agreements they had previously signed are no longer effective.

This NPRM will solicit comments from members of the public for roughly the next two months. Once the comment period closes, the FTC will review the feedback it receives, and it may make changes to the proposal based on the comments and the FTC’s continued analysis of the issue. Should the proposal be finalized in substantially similar form, we can expect to see litigation over the legality of the ban as well as the FTC’s power to issue it.

PIA members use noncompete agreements to protect their businesses, and we plan to submit comments on the NPRM defending their use.