Non-Compete

A Proposed Ban on Non-Compete Clauses Sparks Debate Across States and Industries

Reni de la NuezNews & Insights

By Reni de la Nuez

On January 5th, 2023, the Federal Trade Commission (“FTC”) proposed the addition of a new rule to the Code of Federal Regulations.[1] The proposed rule, entitled “Part 910—Non-Compete Clauses,” would comprise Subchapter J: Rules Concerning Unfair Methods of Competition and would place a federal ban on non-compete clauses in contracts.[2] As currently written, this proposed rule provides guidance as to what qualifies as a non-compete clause and requires that employers not only refrain from including new non-compete clauses in contracts, but also that they rescind previous non-compete clauses and provide notice to employees that any existing non-compete clauses are no longer valid.[3]

In this proposed rule, a non-compete clause is defined as “a contractual term between an employer and a worker that prevents 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.”[4] The proposed rule provides that implicit non-compete clauses, such as overbroad non-disclosure agreements or contractual terms that require a worker to reimburse an employer for job training costs if the employment terminates within a specified timeframe, would also be prohibited given their tendency to discourage workers from seeking new opportunities.[5] This ban would “supersede any State statute, regulation, order, or interpretation to the extent that such statute, regulation, order, or interpretation is inconsistent with [the rule].”[6]

As a functional test, the proposed rule requires that contractual clauses be evaluated to determine whether they have the effect of preventing an employee from seeking or accepting employment after terminating a previous employment contract.[7] Thus, clauses not immediately identifiable as non-competes could also be held invalid under this rule. California has long rendered non-compete clauses unenforceable, likely due to their tendency to limit workers’ liberty and prevent professional growth.[8] California Business and Professions Code Section 16600 provides that, “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind [unless otherwise excluded] is to that extent void.”[9] In 2008, the court in Edwards v. Arthur Anderson LLP held that “restraint” applied broadly to any practice that would prevent a worker from seeking new employment, such as instructions against soliciting professional services or continuing professional services for clients acquired under previous employment.[10]

Outside of California, the use of non-compete clauses remains common. For example, Amazon, which is headquartered in Seattle, prohibits employees from “directly or indirectly” engaging in the “development, manufacture, marketing, or sale of any product or service that competes with any [Amazon] product or service” for 18 months following their separation.[11] The company has sued its current and former employees for violation of this clause, including in an instance in which it refused to release an employee from her non-compete agreement even after she complained of workplace harassment and discrimination.[12] Amazon’s refusal to release the employee severely limited her ability to find other work in her area of expertise, pressuring her to remain with the company.[13]

While employers might perceive a prohibition on non-compete clauses as a risk to their competitiveness, research indicates that non-competes might in fact impair innovation.[14] Additionally, one primary reason provided by companies for using non-compete clauses is to protect trade secrets.[15] However, according to Andy Wu, Assistant Professor of Business Administration at Harvard Business School, companies are now at a lower risk of losing trade secrets thanks to third party financial firms that track data theft and the increasingly complex internal organization of companies wherein knowing one piece of information might not be enough to replicate a valuable product in a meaningful way.[16] Thus, non-compete clauses in employment contracts ultimately may not benefit employees nor their employers. 

In an FTC forum meeting to discuss the proposed rule, those on both sides of the debate had an opportunity to provide insight as to whether they believe a federal ban on non-compete clauses would do more to help or hinder innovation.[17] Najah Farley, a senior staff attorney at the National Employment Law Project, opined that a federal ban on non-compete clauses is the only way to prevent employers from strategizing ways to ensure that “potentially unenforceable agreements are enforced through intimidation” such as “cease and desist letters . . . [that] chill workers and keep them from moving on to other employment.”[18] Other commentators had opposing beliefs, such as Edwin Egee of the National Retail Foundation, who argued that a rule against non-competes should distinguish between “high-level, highly compensated employees and other workers” to protect the interests of high-level executives that have an interest in protecting “trade secrets, customer relationships, and confidential information” in the retail business.[19]

Should the proposed FTC rule be enacted, companies in jurisdictions that currently allow non-compete clauses will have to find other ways to prevent employees from seeking work with competitors and potentially disclosing trade secrets. In California, employers should be prepared to review their current contracts and ensure that they notify employees of any unenforceable or de-facto non-competes that would consequentially be invalidated.


[1] Proposed Non-Compete Clause Rule, 88 Fed. Reg. 3482 (Jan. 19, 2023) (to be codified at 16 C.F.R. 910), https://www.ftc.gov/system/files/ftc_gov/pdf/p201000noncompetenprm.pdf.

[2] Id.

[3] Id.

[4] Id.

[5] Id.

[6] Id.

[7] Id.

[8] Id. (noting that California has prohibited non-compete clauses since 1872).

[9] Cal. Bus. & Prof. Code § 16600.

[10] Edwards v. Arthur Andersen LLP, 44 Cal. 4th 937, 947-950 (2008).

[11] Megan Rose Dickey. Tech’s Non-Compete Agreements Hurt Workers and Anger Some Lawmakers, Protocol (May 13, 2021), https://www.protocol.com/policy/tech-non-compete.

[12] Id.

[13] Megan Rose Dickey, Amazon’s Non-Compete Agreement ‘Unfairly Handcuffed’ Her: How One Senior Manager is Pushing Back, Protocol (May 3, 2021), https://www.protocol.com/people/whistleblower-amazon-charlotte-newman.

[14] Kristen Senz, How Eliminating Non-Competes Could Reshape Tech, Harvard Business School Working Knowledge (Jan. 18, 2022), https://hbswk.hbs.edu/item/how-the-end-of-noncompetes-could-reshape-tech.

[15] Proposed Non-Compete Clause Rule, 88 Fed. Reg. 3482 (Jan. 19, 2023) (to be codified at 16 C.F.R. 910), https://www.ftc.gov/system/files/ftc_gov/pdf/p201000noncompetenprm.pdf.

[16] Senz, supra note 14.

[17] Transcript of FTC Forum Examining Proposed Rule to Ban Noncompete Clauses (Feb. 16, 2023), https://www.ftc.gov/system/files/ftc_gov/pdf/FTC-Forum-Examining-Proposed-Rule-to-Ban-Noncompete-Clauses-February-16-2023.pdf.

[18] Id. at 35.

[19] Id. at 21.