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FTC Votes to Ban Non-Compete Agreements

April 23, 2024

FTC Votes to Ban Non-Compete Agreements

April 23, 2024

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Even if the federal courts conclude that the FTC had the authority to make a rule under the FTC Act, there will be challenges to the legality of the non-compete rule itself.

On April 23, 2024, the Federal Trade Commission (FTC) voted 3-2 to approve a final rule banning non-competes with all workers 120 days after publication in the Federal Register, and invalidating existing non-competes with all workers except senior executives. Although the final rule abandons many aspects of the rule proposed in January 2023 (see our prior Alert), the final rule represents a sea change in the law relating to non-compete clauses in the United States.

The final rule makes it an unfair method of competition under Section 5 of the FTC Act to: (1) enter into or attempt to enter into a non-compete clause after the effective date with any worker; (2) enforce or attempt to enforce a non-compete clause entered into after the effective date of the rule with a senior executive or an existing or future non-compete clause with any other worker; or (3) represent to any worker, other than a senior executive with an existing non-compete, that the worker is subject to a non-compete clause. 

How Does the Non-Compete Rule Affect Future Non-Competes?

The non-compete rule bans non-competes signed after the rule takes effect for all “workers”―defined as persons who work or worked on a paid or unpaid basis, without regard to the workers’ title or status. The term includes, without limitation, “an employee, independent contractor, extern, intern, volunteer, apprentice, or sole proprietor who provides a service to a person.” It also includes persons who work for a franchisee or franchisor, but does not include the franchisee in the context of a franchisee-franchisor relationship. It includes everyone from low-wage earners to CEOs and other senior executives.

How Does the Non-Compete Rule Affect Existing Non-Competes?

The final non-compete rule makes unenforceable, after the rule takes effect, existing non-competes for all workers other than senior executives. “Senior executives” are defined as workers who earn more than $151,164 in total annual compensation and who are in a policy-making position. Those in “policy-making positions” include “a business entity’s president, chief executive officer or the equivalent, any other officer of a business entity who has policy-making authority, or any other natural person who has policy-making authority for the business entity similar to an officer with policy-making authority.”

An employer that entered into a non-compete clause with a current or former worker who is not a senior executive must, prior to the effective date, provide “clear and conspicuous notice” (by hand, mail, email, or text message) to the current or former worker “that the worker’s non-compete clause will not be, and cannot legally be, enforced against the worker.” The final rule contains model language for the required notice.

Which Types of Contract Clauses Are Covered by the Non-Compete Rule?

The non-compete rule covers any written or oral contractual term, policy, or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from (1) seeking or accepting work in the United States with a different person where such work would begin after the conclusion of the employment; or (2) operating a business in the United States after the conclusion of the employment. The non-compete rule does not appear to prohibit restrictions on competition during employment.

The final rule does not expressly cover non-solicitation or confidentiality clauses, and did not adopt the proposed ban on “de facto” non-competes. In its comments, the FTC noted that “whether a specific clause falls within the scope of the final rule will necessarily depend on the precise language of the agreement at issue.”

When Does the Non-Compete Rule Take Effect?

The non-compete rule takes effect 120 days after publication of the final rule in the Federal Register.

Are There Any Exceptions to the Non-Compete Rule?

There are a few exceptions to the final rule:

  • The non-compete rule does not apply to a non-compete clause entered into “pursuant to a bona fide sale of a business entity, of the person’s ownership interest in a business entity, or all or substantially all of business entity’s operating assets.”
  • The non-compete rule does not apply to a cause of action related to a non-compete clause that accrued prior to the August 21, 2024, effective date.
  • The non-compete rule does not apply to a person or entity outside of the FTC’s jurisdiction (such as those acting under color or authority of state law or those the FTC referred to in its press conference as “true non-profits” that are outside the rule-making authority of the FTC).

The FTC declined to exempt partnerships from the rule, but noted that:

  • A partner could qualify as a senior executive if the partner has policy-making authority about the business and meets the compensation requirement;
  • Partners could fall under the sale of business exception if the sale met those requirements.  

What Impact Does the Non-Compete Rule Have on Existing State Laws?

The non-compete rule supersedes any state statute, regulation, order or interpretation to the extent that such statute, regulation, order or interpretation is inconsistent with the non-compete rule.

Will the Non-Compete Rule Be Subject to Legal Challenge?

The non-compete rule will most certainly be the subject of legal challenges. These include, but are not limited to, challenges relating to whether the FTC has the authority to issue the non-compete rule under Section 5 of the FTC Act, the primary section the FTC cites as providing its rulemaking authority. The FTC claims that the non-compete rule is based on a finding that non-compete clauses constitute an “unfair method of competition and therefore violate Section 5 of the Federal Trade Commission Act.” (For a further discussion on this issue, see our related article). Section 5 gives the FTC authority to police both “unfair methods of competition” and “unfair or deceptive acts or practices” affecting commerce. Although Section 18 of the FTC Act contains an explicit grant of rulemaking authority to the FTC for unfair or deceptive acts or practices, the statutory authority for the FTC’s ability to make rules for unfair methods of competition is less clear. Even if the federal courts conclude that the FTC had the authority to make a rule under the FTC Act, there will be challenges to the legality of the non-compete rule itself.

Indeed, when the FTC initially proposed the non-compete rule, now-former FTC Commissioner Christine S. Wilson issued a 14-page dissent, in which she outlined the “numerous and likely successful legal challenges regarding the Commission’s authority to issue the rule.” Commissioners Melissa Holyoak and Andrew N. Ferguson, the two dissenting Commissioners who voted against the final non-compete rule, echoed their belief that the FTC lacked the authority to promulgate the rule, along with a host of other objections.

On April 22, 2024, the U.S. Chamber of Commerce held a press conference announcing its view that the non-compete rule exceeds the FTC’s authority, and that the U.S. Chamber of Commerce will file suit against the FTC as early as April 24, 2024. We expect that other parties will file similar challenges.

What Should Employers Do Now?

Employers should take these steps now, in the event that the final rule withstands legal challenge:

  • Identify a designated individual or individuals to speak on behalf of the company regarding the rule and develop consistent messaging to the worker population.
  • Work with counsel to review agreements with current and former workers to determine which agreements would fall within the non-compete rule.
  • Work with counsel to review agreement forms for purposes of assessing potential changes to those forms.

For More Information

If you have any questions about this Alert, please contact Lawrence H. Pockers, Shannon Hampton Sutherland, any of the attorneys in our Non-Compete and Trade Secrets Group, Sean P. McConnell, any of the attorneys in our Antitrust and Competition Group, any of the attorneys in our Employment, Labor, Benefits and Immigration Practice Group or the attorney in the firm with whom you are regularly in contact.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.