Is a Federal Ban of Noncompete Agreements on the Horizon?

By: Erwin J. Shustak, Managing Partner & Rick Gambriel, Law Clerk       

The FTC’s Proposal

On January 8, 2023, the Federal Trade Commission (“FTC”) proposed a new, far-reaching rule that prohibits employers from imposing noncompete contracts, or contract clauses, on employees and independent contractors.[1]  

This new rule is the federal government’s first foray into the increasingly common world of noncompete agreements and affects all employees, all independent contractors, and all employers, wherever located and regardless of size or industry. There is no threshold in the rule’s applicability dependent on the size of the employer or nature of the employer’s business.

The FTC estimates this ban will increase wages by up to $300 billion per year and improve job mobility for nearly 30 million U.S. workers. (Id. at 15). According to the FTC, this rule will apply to the roughly 20% of all U.S. employees and independent contractors currently bound by a noncompete agreement or clause in their employment contracts. (Id.).

What is a Noncompete Agreement?

A noncompete agreement or clause (typically inserted in what is presented to prospective employees as a “standard employment agreement”) is an express contractual term between an employee and employer prohibiting the employee from competing with the employer by either working for a competing company or starting their own business in the same industry. Generally, but not always, these prohibitions limit time duration and geographic location, lasting for a set amount of time following termination of employment.

In the past, these prohibitions were mostly used in limited specific, high-skilled, high-wage, or high-technical jobs, where there was a compelling reason for the employer to prevent competition where sensitive trade secrets were at stake, disclosure of which could harm the former employer if disclosed to an actual or potential competitor. In the past decade or so, however, employers have increasingly imposed noncompete agreements on diverse jobs and positions, including non-technical, non-sensitive, and hourly wage earners, which is what caught the FTC’s attention in the first place.

In comments on the ban proposal (FTC-2023-0007), the FTC points to the increasing use of noncompete agreements imposed on employees working in healthcare, tech, and retail to prohibit employees from leaving their employment and competing with their former employer. The effect, according to the FTC, is a negative effect on employee free mobility.

Employers have long relied on noncompete agreements, ostensibly to protect sensitive, proprietary, and confidential information, including client information, intellectual property, and trade secrets from falling into the hands of competitors. According to the FTC, however, there are more narrow methods to protect what is confidential, proprietary information than contractually prohibiting an employee from accepting employment from a competitor or leaving and starting their own business. (Id. at 121).

The FTC determined these noncompete agreements are used as threats, or “hammers”, to threaten and prevent employees from leaving and seeking employment with a competitor. (Id. at 119). The FTC found that far too often, employers use their considerable bargaining power to coerce prospective and existing employees into signing these contracts, even if there is a much narrower way to protect what are trade secrets and proprietary information. By, for example, the use of narrowly tailored trade secrets agreements.

There is little debate the widespread use of noncompete agreements harms both the employee/independent contractor and stifles competition by preventing employees from seeking better jobs and competitors from having freer access to the best available talent. According to the FTC, these anti-competitive agreements ultimately impact the consumer since markets with fewer new entrants usually result in higher prices.

Because of increased capital requirements in training and developing employees, an artificially created bar to entry is imposed on competing companies, leading to increased pass-through costs for the consumer. This is most prevalent in the healthcare industry, where the FTC believes freer employee mobility will lead to a reduction in direct consumer spending of $148 billion. A rapid increase in innovation is expected to take place upon implementing this rule, which would increase quality in products but drive prices up. The FTC points out that, in the long-term, consumers may be better off even with a price increase.[2]

What Does the Rule Provide?

To address the many problems it found with these anti-competitive agreements, the FTC’s proposed rule generally prohibits employers from requiring prospective or existing employees from requiring employees to sign either standalone noncompete agreements or including them in employment contracts. The rule would make it illegal for an employer to:

  • Enter into or attempt to enter into a noncompete clause with a worker;
  • Maintain or enforce a noncompete clause with a worker; or
  • Represent to a worker in some cases that the worker is subject to a noncompete clause. (Id. at 1).

To protect owners who sell their businesses, the proposal does contain a carve-out for noncompete clauses in contracts for the sale of a business by a substantial owner, member, or partner who sells all of his or her ownership interest in a business. (Id. at 215). This exception requires the selling owner must own at least a 25% ownership interest in the business being sold. (Id. at 5). Yet the FTC has not promulgated details of how ownership interests are computed.

When analyzing whether a contract contains a noncompete clause, the FTC lays out a “functional test”, to determine whether a contractual provision operates as a “de facto noncompete clause”. (Id. at 108). The FTC proposed rule provides two examples:

1) A nondisclosure agreement between an employer and a worker written so broadly that it effectively precludes the worker from working in the same field after the worker’s employment with the employer ends. (Id. at 109, citing Brown v. TGS Mgmt. Co., LLC, 57 Cal. App. 5th 303, 306, 316–319 (2020)).

2) A contractual provision between an employer and a worker that requires the worker to reimburse the employer or a third-party entity for training costs if the worker’s employment terminates within a specified period, where the required payment is not reasonably related to the actual costs the employer incurred for training the worker. (Id., citing Wegmann v. London, 648 F.2d 1072, 1073 (1981)).

The FTC rule would apply retroactively and rescinds existing noncompete agreements and requires employers who have such agreements to affirmatively inform the affected workers they no longer are bound by the offending provision.[3]

Former employees as well must be contacted and given the same information, provided the former worker’s contact information is readily available. (Id. at 126). The rule anticipates a 180-day compliance period for disseminating this information following publication of the final rule. (Id. at 216). The FTC clarifies that rescission of these offending clauses will not vitiate other terms within the employment contract of the affected workers. (Id. at 215).

Consequences for Violation

Violations of the new rule will result in civil penalties or injunctions. The FTC retains authority to issue a complaint if it believes the rule has been violated. A charge that is contested by the respondent employer is adjudicated before an administrative law judge (ALJ) in a trial-like proceeding. The ALJ will issue an initial decision upon the conclusion of the proceeding, which will contain findings of fact and conclusions of law.

The ALJ’s findings also must include a recommendation for either a cease-and-desist order, or dismissal of the complaint. Either the employer or the FTC may appeal the ALJ’s initial decision to the full FTC Commission. Following any appeal, once the Commission issues a final decision, the case may then be appealed in a federal court with jurisdiction over both parties.[4]

After a final cease-and-desist order, the Commission may then seek an array of remedies in court including civil penalties, restitution, damages, injunctive relief, orders of rescission or reformation of contracts. The FTC may also make referrals to the U.S. Department of Justice for criminal prosecution, if so, warranted by the facts of the case. (Id.).

How Does the FTC’s Proposed Rule Impact California’s Noncompete Laws?

Unlike many other states, California has a long public policy of prohibiting anti-competitive employment and other agreements. For example, while New York is known as a “pro-employer” state, California is well known as a “pro-worker” state.

Existing California law strictly limits an employer's ability to prohibit employees from moving to another competitor or even competing against their former employer. California is one of only three states that ban noncompete agreements, favoring free mobility of employees. California’s prohibition of noncompete agreements dates to the nineteenth century, following a public policy rationale favoring open competition and rejecting the common-law rule permitting the clauses if they were reasonably imposed.[5]

California's long tradition of protecting the mobility of employees to pursue any lawful occupation is codified in the California Business & Professions Code § 16600. That statute provides “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” A very broad, very specific prohibition that disallows in California what is permitted in most other states.

The California law, however, contains two, narrowly written and interpreted exceptions to the use of noncompete agreements in California. (Cal. Bus. & Prof. Code § 16601 & § 16602). The first exception is with a true sale of a business. (Id.). The second is when a partnership or limited liability company dissolves. (Id.).

California courts have strictly construed these statutory exceptions, consistently finding that limitations acceptable in other states, such as time and geographical scope still are invalid and unenforceable in California. Aside from these limited statutory exceptions, California courts have also ruled that an employer may prohibit an employee from using the employer's trade secrets to compete with the employer in a contract. A previous and more permissive application under the Ninth Circuit’s “narrow restraint” doctrine was summarily dismissed by the California Supreme Court in the seminal case Edwards v. Arthur Anderson. (44 Cal.4th 937, 945 (2008)). Reasoning that section 16600 has two express exceptions, the Court in that case found the Legislature did not intend additional exceptions to be included. (Id.). Thus, California has firmly rejected any interpretation not specifically provided for in the statute.

The California law applies not only to employers based in California, but to out-of-state employers who employ California residents. Noncompete agreements entered into outside of California that contain a choice-of-law provision applying the law of another state, will be struck down if it applies to someone who resides or works within California.[6]

Impacts of the FTC Proposal to California Employers and Workers

While California has long banned noncompete agreements, and, at first blush, it would appear the FTC rule would bring the rest of the country into line with California’s public policy, there will still be significant effects on California employers if the rule is adopted.

For example, the FTC sale of a business exception is more restrictive than California’s corresponding exception which, unlike the FTC proposal, has no threshold ownership percentage. As mentioned above, the FTC rule also requires employers to affirmatively revoke existing noncompete agreements and notify workers they no longer will be in effect, placing a new burden on employers. But the need for development of tailored methods to protect company information in compliance with California law will be the most prominent impact.

California employers will seek various alternatives to protect their IP, trade secrets, and other proprietary information. Since employees regularly have access to sensitive information about the business, employers have a significant interest in safeguarding themselves from misappropriation of confidential information upon termination of the employment relationship. Many employers routinely incorporate confidentiality or nondisclosure conditions into contracts that limit the use of that knowledge post-employment. Businesses will need to expand the use of these protection tools in the new era of increased job mobility which this FTC proposal will boost.

In fact, the FTC cites the use of other methods including nondisclosure agreements that are narrowly tailored as the correct tool for businesses vice the use of noncompete agreements.[7]

California courts generally enforce nondisclosure agreements (NDAs), which prohibit former employees from revealing true trade secrets, intellectual property, and other confidential information if those agreements are not overbroad and if the information sought to be protected is, in fact, found to be a true trade secret.[8] Under California law, before any misappropriation claims, trade secrets need to be identified with “reasonable particularity” in accordance with Section 3426.5 of the Civil Code.[9]

NDAs will be rejected, however, if they seek to define the protected information so over-broadly that it essentially acts as a noncompete agreement restraining the former employees.[10] To avoid being found to be overbroad and void, an NDA must include:

(1) The confidential information must be specifically defined, and the information must be labeled as confidential;

(2) Clearly state the employer owns the information;

(3) Describe the purpose behind the protection of the confidential information; 

(4) Specify what information is not considered confidential;

(5) Specify the obligations of receiving party.  For example, state how the confidential information must be protected and the limits on its use or disclosure;

(6) Specify when the confidential information can be used, must be returned, and the duration of the agreement;

(7) Provide specific rights and remedies if a breach occurs, or threatened breach, of the confidential agreement; and

(8) Provide other pertinent provisions to the specific agreement.[11]

California adopted the Uniform Trade Secrets Act (UTSA) into its own code, defining a trade secret as “information, including a formula, pattern, compilation, program, device, method, technique, or process.” (Cal. Civ. Code § 3426.1). There are two requirements for protection under this definition. The information alleged to be “confidential” must: (1) derive independent, economic value from not being generally known by others and not reasonably ascertainable on one's own; and (2) the employer has taken “reasonable efforts” to maintain its secrecy. (Id.). 

Best practices for protecting trade secrets include ensuring the information is not publicly disclosed; implementing robust protection methods; and educating the workforce on policies and procedures relating to the handling and use of the confidential information.

One legal “tool” generally not available to California employers is the use of nonsolicitation agreements, which prevent an employee from soliciting the business of specific customers of the employer. These types of agreements also are prohibited under the California Business and Professional Code. These agreements, however, still may be enforceable in California provided they are tailored reasonably for the situation and do not infringe on employee rights. They must either contain, “no overall negative impact on trade or business,” or fall under the trade secrets exception outlined above. [12]

California's ban on noncompete agreements is often credited as a significant factor in the rise of Silicon Valley as a national tech center.[13] The ability of engineers, programmers, and other tech workers to move from one firm to the other, unhindered by noncompete agreements has been critical to the rapid innovation that resulted from this free mobility. (Id.). With a federal ban, other states will be forced to be more like California and new states, possibly with lower living and operating costs, may emerge as new, tech growth centers. The use of other incentives (i.e., remote/hybrid work or training programs) by employers to attract the best talent likely will increase and may change the landscape of work in California.

Status and Potential for Litigation

The proposed rule is still in the 60-day comment period and is expected to face a bevy of legal challenges. Two challenges already have been identified that ultimately may wind up in the courts if the FTC rule is adopted in its current form:

1) The FTC was not delegated the authority it claims to have under Section 5 of the Act (the statute the FTC cites for its authority) to engage in this kind of rulemaking; and

2) The implication of the “major questions doctrine,” which holds that on issues of vast economic or political significance, agencies cannot regulate such issues (and courts must not defer to agency interpretations of statutes) unless the agency had clear authorization from Congress. The FTC rule derives from the FTC and there has been no direct and specific for the rule from Congress.

Regardless of the outcome, it is clear the tide is turning on the use of noncompete clauses in the United States. A complete ban may take more time, but the federal government favors a policy of free employment mobility, exacerbated by the Covid “nomadic” and “WFH” patterns unlikely to revert to what they had been.

This is the time for employers to review restrictive covenants they may now employ and modify them to be closer to the FTC rule, and, in turn, focus more on strengthening their IP protection.


Shustak Reynolds & Partners, P.C. focuses its practice on securities and financial services law and complex business disputes.
We represent many broker-dealers, registered representatives, investment advisors, investors and businesses.
Attorney Erwin J. Shustak can be reached in the firm’s San Diego office at (619) 696-9500.

[1] Fed. Trade Comm’n, 16 CFR Part 910 - RIN 3084-AB74, Non-Compete Clause Rulemaking, Matter No. P201200 at 1, 115 (January 9, 2023)

[2] Fed. Trade Comm’n, 16 CFR Part 910 - RIN 3084-AB74, Non-Compete Clause Rulemaking, Matter No. P201200 at 103, 180 (January 9, 2023).

[3] Fed. Trade Comm’n, 16 CFR Part 910 - RIN 3084-AB74, Non-Compete Clause Rulemaking, Matter No. P201200 at 124.

[4] Frequently Asked Questions About the FTC's Proposal to Ban Non-Compete Agreements, Fisher Phillips,

[5] Edwards v. Arthur Anderson, LLP, 44 Cal. 4th 937, 945 (2008).

[6] See Application Grp., Inc. v. Hunter Grp., Inc., 61 Cal. App. 4th 881, 895 (1998).

[7] Fed. Trade Comm’n, 16 CFR Part 910 - RIN 3084-AB74, Non-Compete Clause Rulemaking, Matter No. P201200 at 185.

[8] Dee M., Non-Compete Agreements in California Law - Are They enforceable?, Shouse Law Group (2023),

[9] Cal. Civ. Proc. Code § 2019.210.

[10] See Dowell v. Biosense Webster, Inc., 179 Cal. App. 4th 564, 579 (2009).

[11] Melissa Marsh, California Confidentiality and Non-Disclosure Agreements, Your Legal Corner (2009),

[12] Loral Corp. v. Moyes, 174 Cal. App. 3d 268, 280 (1985).

[13] Gillian Lester & Elizabeth Ryan, Choice of Law and Employee Restrictive Covenants: An American Perspective, 31 Comp. Lab. L. & Pol'y J. 389, 392 (2010).

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