A Practical Guide for Submitting Comments to the FTC’s Proposed Noncompete Clause Rule

Comments on the Federal Trade Commission’s (FTC) proposed noncompete clause rule are due March 20. As this comment period will likely be the only opportunity to provide input, workers, businesses, and other members of the public should consider supporting their comment submissions with pertinent details on key topics requested by the FTC.

As addressed in recently published Morgan Lewis LawFlashes and FAQs, the FTC announced a notice of proposed rulemaking (NPRM) that would prohibit businesses from using noncompete clauses in contracts with workers. The 218-page NPRM outlines the contours of the proposed rule and its defined terms as well as numerous justifications for and alternatives to the proposed rule. The FTC will be accepting public comment on the proposed rule through April 19, 2023.

Public comment to the proposed rule may be submitted on paper by mailing the comment to the Federal Trade Commission, Office of the Secretary, 600 Pennsylvania Avenue NW, Suite CC-5610 (Annex C), Washington, DC 20580. Public comment may also be submitted online through the FTC’s Rulemaking Docket. Each comment must reference the “Non-Compete Clause Rulemaking, Matter No. P201200” and identify the name and state of the individual or business submitting the comment. Since opening the comment docket for the proposed rule on January 8, 2023, the FTC has received tens of thousands of comments from individuals and businesses addressing their views on the FTC’s proposed rule and alternatives. The FTC will consider these comments—as well as all other comments received by no later than April 19—before issuing its final rule. The proposed rule would establish an effective date of 60 days, and a compliance date of 180 days, after publication of a final rule in the Federal Register.

This comment period will likely be the only opportunity for businesses (as well as all other members of the public) to provide input on the proposed rule. As a result, businesses should strongly consider submitting comments that address the key topics on which the FTC has requested comment. Businesses should consider supporting their comment submissions with pertinent details about the industry in which the business operates, the anticompetitive or procompetitive effects of noncompete clauses in that industry, and the business’s position(s) on the proposed rule, the justifications for the proposed rule, and alternatives to the proposed rule.

The below guide identifies the key topics on which the FTC is interested in receiving comments from workers, businesses, and other members of the public.

THE PROPOSED RULE AND FOUR ALTERNATIVES

Should the proposed rule categorically prohibit employers from imposing noncompete clauses on workers or adopt one of the following alternatives?

• Alternative #1 would categorically ban the use of noncompete clauses for some workers and apply a rebuttable presumption of unlawfulness to noncompete clauses for other workers.
• Alternative #2 would categorically ban the use of noncompete clauses for some workers and not apply any requirements to other workers.
• Alternative #3 would apply a rebuttable presumption of unlawfulness to noncompete clauses for all workers.
• Alternative #4 would apply a rebuttable presumption of unlawfulness to noncompete clauses for some workers and not apply any requirements to the other workers.

DEFINITION OF “EMPLOYER”

The proposed rule would define “employer” as a person, as defined in 15 USC 57b-1(a)(6), “that hires or contracts with a worker to work for the person.” “Person” is defined under 15 USC 57b-1(a)(6) as “any natural person, partnership, corporation, association, or other legal entity, including any person acting under color or authority of State law.” Should the definition of “employer” be modified?

DEFINITION OF “WORKER”

The proposed rule would define “worker” as “a natural person who works, whether paid or unpaid, for an employer,” including, but not limited to, “an employee, individual classified as an independent contractor, extern, intern, volunteer, apprentice, or sole proprietor who provides services to a client or customers.” Should the definition of “worker” be modified?

DIFFERENT STANDARDS FOR DIFFERENT WORKERS

Should the rule ban noncompete clauses for all workers in all industries?

• If not, should the rule apply different standards to workers based on the worker’s job functions or occupations?
• Should the rule apply a different rule for senior executives?
• Should the rule apply different standards to workers based on some combination of job functions/occupations and the worker’s earnings?
• Should the rule apply different standards based on the worker’s earnings?

FRANCHISEES/FRANCHISORS

Should the rule cover noncompetes between franchisors and franchisees?

FUNCTIONAL/DE FACTO TEST FOR OTHER TYPES OF RESTRICTIVE COVENANTS

Should the definition of noncompete clause explain that whether a contractual term is a noncompete clause depends on a functional test? Such covenants would be considered noncompete clauses where they are so unusually broad in scope that they function as such. These other types of provisions include, among others:

• Non-disclosure agreements (NDAs)—also known as “confidentiality agreements”—which prohibit the worker from disclosing or using certain information
• Client or customer non-solicitation agreements, which prohibit the worker from soliciting former clients or customers of the employer
• No-business agreements, which prohibit the worker from doing business with former clients or customers of the employer, whether or not solicited by the worker
• No-recruit agreements, which prohibit the worker from recruiting or hiring the employer’s workers
• Liquidated damages provisions, which require the worker to pay the employer a sum of money if the worker engages in certain conduct
• Training-repayment agreements (TRAs), a type of liquidated damages provision in which the worker agrees to pay the employer for the employer’s training expenses if the worker leaves their job before a certain date

REASONABLE ALTERNATIVES

What tools other than noncompetes might employers use to protect valuable investments, and how sufficient are these alternatives?

CHOICE-OF-LAW PROVISIONS

Do employers use choice-of-law provisions to evade the laws of states where noncompete clauses are relatively less favorable?

SALE OF BUSINESS EXCEPTION - 25% BUSINESS INTEREST

An exception to the proposed rule would apply where the seller of the business is a substantial owner of, or substantial member, or substantial partner in the business at the time the person enters into the noncompete clause. “Substantial owner, substantial member, and substantial partner mean an owner, member, or partner holding at least a 25 percent ownership interest in a business entity.” Should the rule modify “substantial owner, substantial member, or substantial partner” as an owner, member, or partner holding some percentage other than a 25% ownership interest in a business entity—for example, 50% or 5% or 10%, and/or should it cover persons who may not technically be owners but who are receiving a portion of the deal consideration as part of the transaction?

NOTICE TO CURRENT AND FORMER WORKERS

Should the rule require employers to provide notice to current and former employees that the worker’s noncompete clause has been rescinded?

HOW WE CAN HELP

Since the FTC announced the NPRM, Morgan Lewis lawyers have advised clients across many industries about aspects of the proposed rule, including the comment submission process, and are available to assist with drafting and submitting comments to the FTC.