FTC Bans Nearly All Non-Compete Agreements

On April 23, 2024, the Federal Trade Commission (FTC) voted 3-2 to issue a Final Rule banning nearly all non-compete clauses in employment agreements nationwide. As set forth in the FTC’s fact sheet, non-compete provisions are “an unfair method of competition” and therefore violate the Federal Trade Commission Act.

The US Chamber of Commerce, however, has already filed suit to block the Final Rule.

Background

The FTC issued its proposed rule on January 5, 2023, as discussed in our January 6, 2023 E-lert, which was subject to a 90-day public comment period. The FTC received more than 26,000 comments on the proposed rule.

What is a non-compete clause?

The Final Rule defines a non-compete clause as:

(1) A term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from:

(i) seeking or accepting work in the United States with a different person where such work would begin after the conclusion of the employment that includes the term or condition; or

(ii) operating a business in the United States after the conclusion of the employment that includes the term or condition.

(2) For the purposes of this part . . . term or condition of employment includes, but is not limited to, a contractual term or workplace policy, whether written or oral.

What the Final Rule Prohibits

The Final Rule prohibits employers from entering into noncompete agreements with workers on or after the effective date, which is 120 days from publication of the Final Rule in the Federal Register. The Final Rule has not yet been published in the Federal Register.

The Final Rule also prohibits employers from enforcing existing noncompete agreements with all workers other than “senior executives.”  This represents a change from the original proposal, which did not provide a carve out for existing noncompete agreements with senior executives.

Who is a Senior Executive?

The Final Rule defines a “senior executive” as workers earning more than $151,164 annually who are in a “policy-making position.”  This will be subject to much interpretation, but the Final Rule defines “policy-making position” as:

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 officer of a subsidiary or affiliate of a business entity that is part of a common enterprise who has policy-making authority for the common enterprise may be deemed to have a policy-making position for purposes of this paragraph. A natural person who does not have policy-making authority over a common enterprise may not be deemed to have a policy-making position even if the person has policy-making authority over a subsidiary or affiliate of a business entity that is part of the common enterprise.

“Policy-making authority means final authority to make policy decisions that control significant aspects of a business entity or common enterprise and does not include authority limited to advising or exerting influence over such policy decisions or having final authority to make policy decisions for only a subsidiary of or affiliate of a common enterprise.”

This narrow definition requires workers to have the ability to exercise the highest levels of authority in an organization and encompasses approximately 0.75% of workers, according to the FTC.

Notification Requirements

The Final Rule requires employers by the effective date to notify workers whose non-compete agreements are no longer enforceable that their noncompete agreements will not and cannot legally be enforced. The FTC provides model language that employers can use to notify employees.

Exceptions

The rule does not apply to a noncompete clause entered into by a person in the context of the sale of a business entity, of the person’s ownership interest in a business entity, or of all or substantially all of a business entity’s operating assets. Notably, this exception is expanded from the proposed rule, which required the person subject to the noncompete to be an owner, member, or partner holding at least a 25% ownership in the business.

Furthermore, the Final Rule will not apply to certain banks, savings and loan institutions, federal credit unions, common carriers, air carriers and foreign air carriers, “persons, partnerships, or corporations insofar as they are subject to the Packers and Stockyards Act of 1921” as well as an entity that is not “organized to carry on business for its own profit or that of its members” (i.e. non-profit entities).

The Dissent

Commissioners Holyoak and Ferguson voted against the Final Rule, expressing doubt about the FTC’s legal authority to make such a major change to the law governing non-compete agreements. They each opined that the FTC relied upon outdated case law in determining that it had authority to issue the Final Rule. Both dissenting Commissioners expressed that, regardless of the wisdom of the policy decision, the FTC lacked the authority to make such a sweeping change, especially in the absence of a clear directive from Congress to do so. Written statements of dissent are forthcoming.

What Happens Next

The Final Rule takes effect 120 days after its publication in the Federal Register. However, given the level of controversy generated by the Final Rule, we expect there will be imminent lawsuits that seek to enjoin this law.  Including the one already filed by the US Chamber of Commerce.

We will keep you updated concerning developments related to this Final Rule.