On January 5, 2023, the Federal Trade Commission (FTC) announced a proposed regulation that would prohibit non-compete agreements in the workplace. The proposed rule follows on the heels of a statement issued by the FTC in November 2022 declaring its intention to exercise authority under Section 5 of the FTC Act and an earlier Executive Order issued by President Biden in July 2021 urging the FTC to promulgate new rules governing non-competes.

The proposed rule would prohibit an employer from requiring its employees or independent contractors to sign non-compete agreements and “de facto non-compete” agreements—non-disclosure or other agreements that have the effect of precluding the worker from working in the same field. The proposed regulation would require all employers to evaluate agreements to determine whether they run afoul of the rule and then, within 180 days after the regulation’s effective date, rescind any non-compete agreements (or de facto non-compete agreements) by providing notice to workers that they are no longer bound by the agreements they previously signed.

The proposed regulation contains a narrow exception for the use of non-competes in the purchase of a business, but it only allows a purchaser to utilize non-competes with workers who are also owners, members, or partners of entities with 25% or more ownership interest in the purchased entity.

The Effect on Texas Businesses

The effect of the regulation would be wide-ranging and definitive. The rule supersedes all state statutes, regulations, orders, or interpretations that are inconsistent with it, including statutes like Subchapter E of the Texas Free Enterprise and Antitrust Act of 1983 (“Texas Antitrust Act”), that permit non-competes in certain circumstances. The regulation would land with particular force on industries that have relied on non-competes as part of their business model.

The Texas Antitrust Act, for example, includes a special provision that allows physician non-competes, provided certain conditions are met, including that the physician be provided the option of buying out the non-compete for a reasonable price. A recent study published in the Journal of Human Resources found nearly half of all physicians have signed non-compete agreements. Should the FTC’s proposed rule go into effect, practice groups that have invested in physicians to help them develop their practice would be faced with the potential loss of that investment 180 days after the regulation goes into effect. On the other hand, for physicians seeking to change jobs but stay within their communities, the proposed rule offers the prospect of far greater flexibility, in line with state laws that prohibit or narrowly limit physician non-competes – like Colorado, Delaware, and South Dakota.

Those industries which rely heavily on mergers and acquisitions could face similar challenges. Non-competes help protect the value of the asset acquired, but the regulation would prohibit non-competes with many minority shareholders, and key employees, including those developing important intellectual property.

What is Next?

The proposed regulation was published in the Federal Register on January 8, 2023, opening a 60-day public comment period which will end on March 10, 2023. Following this comment period, the FTC will then consider any comments and make revisions to the regulation.

The regulation is sure to face legal challenges, including a direct challenge to the FTC’s authority to implement a regulation with such sweeping effect on commerce absent an act of Congress. Just last year, for example, the Supreme Court struck down an Environmental Protection Agency regulation as an unconstitutional overstep by an administrative agency into the legislative process. See West Virginia v. EPA, 142 S. Ct. 2587 (2022). The West Virginia opinion reined in administrative power under the so-called “major questions doctrine,” by limiting the agency’s ability to address “major questions” with “vast economic or political significance” absent clear statutory authority from Congress.