The FTC’s Proposed Ban on Noncompete Clauses: Implications for Businesses and Workers

By: Eric Friske , Benjamin (Ben) Hamborg | February 8, 2023
Non-Compete Agreements

On January 5, 2023, the Federal Trade Commission (FTC) proposed a new rule that would ban the use of noncompete clauses in employment contracts. A public forum will be held on February 16, 2023, examining the proposed rule, which will serve as a supplement to the FTC’s prior request for members of the public to submit written comments. If the rule goes into effect, many Minnesota businesses, and others across the country, will be prohibited from entering into agreements that restrict their employees from leaving to work for competitors, a change that the FTC argues could lead to more competition and increase workers’ earnings by as much as $300 billion per year.

Noncompete clauses, which are agreements between employers and employees that prevent workers from leaving to work for a competitor for a set period of time, have been a contentious issue for years. While they were once used primarily in specialized industries such as technology and pharmaceuticals, they have since become common in a wide variety of fields. Critics argue that these clauses unfairly restrict worker mobility, stifle competition, and hinder entrepreneurship, while supporters believe they provide important value by protecting a company’s confidential information and valuable relationships.

In Minnesota, noncompete clauses are disfavored by the courts because they restrict employees from pursuing new job opportunities and practicing their chosen profession freely. As a result, Minnesota courts will closely scrutinize noncompete clauses to determine if they are reasonable. This scrutiny requires weighing the employer’s interests in protection from unfair competition against the employee’s right to earn a living. The nature and character of the business at issue are taken into consideration during this analysis, as are the following four factors:

Whether the restraint is necessary for the protection of the business or the goodwill (i.e., customer relationships) of the employer;
Whether the restraint is broader than necessary to adequately protect the employer’s legitimate interests;
The length of the restriction; and
The geographic scope of the restriction.

The FTC’s proposed rule, however, would ban noncompete clauses altogether, with exceptions for a limited number of situations, such as the sale of a business entity or of a person’s entire ownership interest in a business entity.

In advancing the proposed rule, the FTC argues that noncompete clauses harm both workers and consumers by limiting competition, reducing the mobility of skilled workers, and lowering wages. Critics of the proposed rule argue that noncompete clauses are necessary to protect a company’s confidential information, such as trade secrets and proprietary technology. They also argue that noncompete clauses encourage companies to invest in their employees by providing them with training and experience, knowing that they won’t be immediately poached by competitors.

Regardless of the debate, the FTC’s proposed rule would have a major impact on businesses and workers in Minnesota and across the country. Companies that rely on noncompete clauses to protect their information and investment in employees would need to reevaluate their policies and find alternative ways to protect their interests. Workers, on the other hand, would have greater mobility and the ability to freely seek employment opportunities, potentially leading to higher wages and greater competition in the job market.

The FTC is currently accepting comments on the proposed rule, and it remains to be seen what the final outcome will be. However, it’s clear that the FTC’s proposal, if it goes into effect, represents a significant shift in the way that noncompete clauses are regulated and could have far-reaching consequences for businesses and workers alike.