Employment Law Report
The Federal Trade Commission Moves to Ban Nearly All Non-Compete Agreements
By: Matthew L. Bunnell
The Federal Trade Commission (“FTC”) announced a proposed rule fifteen months ago that would effectively ban non-competition agreements.[1] On April 23, 2024, after receiving more than 26,000 comments about the proposed rule, the FTC voted 3-2 along party lines to issue a comprehensive final regulation, referred to as the Non-Compete Clause Rule (“Final Rule”), which declares most non-competition clauses to be a violation of Section 5 of the Federal Trade Commission Act.[2] The Final Rule will take effect 120 days after it is published in the Federal Register (i.e., likely sometime in late August 2024), and marks a pivotal moment in the ongoing debate surrounding non-competes, workers’ rights, and labor mobility.
Much like the proposed rule, the Final Rule broadly bans a person from entering into non-compete clauses[3] with workers[4] after the rule’s effective date and declares existing non-compete clauses with workers unenforceable after the rule’s effective date. The Final Rule does not, however, encompass existing non-compete agreements for “senior executives,” such as a company president, CEO, or other officer or individual in a policy-making position that has decision-making authority over a distinct segment of a business, who also earn more than $151,164 from that enterprise. But any effort to attempt to enter into or otherwise enforce a non-compete clause executed after the effective date (or to represent that a senior executive is subject to a non-compete clause executed after the effective date) will be deemed an unfair method of competition that restricts a senior executive’s transferability of skills. The Final Rule also does not apply to a non-compete entered into by a person pursuant to a bona fide sale of that person’s ownership interest in a business entity or of all or substantially all of a business entity’s operating assets.[5] The Final Rule likewise does not restrict non-competes between franchisors and franchisees in franchise agreements. And the Final Rule does not cover employers that are outside the FTC’s jurisdiction, including, but not limited to, banks, savings and loan institutions, federal credit unions, common carriers, air carriers, and certain non-profits.[6]
Additionally, the Final Rule provides that it is not an unfair method of competition to enforce or attempt to enforce a non-compete (or to make representations about a non-compete) if a person has a good-faith basis to believe that the Final Rule is inapplicable. The Final Rule also does not impact non-compete agreements with employees who work outside the United States. Moreover, the Final Rule does not apply where a cause of action related to a non-compete accrued prior to the effective date. Furthermore, the Final Rule does not affect enforcement of State laws that restrict non-competes where the State laws do not conflict with the Final Rule.
Many groups and businesses are expected to file lawsuits challenging the Final Rule before it becomes effective. Indeed, almost immediately, the United States Chamber of Commerce filed suit challenging the non-compete ban, arguing, among other things, that the FTC does not have authority under the Federal Trade Commission Act to make rules that regulate unfair methods of competition, and that under the United State Supreme Court’s “major questions doctrine,” the Final Rule must be vacated because the FTC acted without clear Congressional authorization. Given the High Court’s skeptical view of administrative rulemaking of late, these arguments may find favor, but only time will tell.[7]
At bottom, although the Final Rule’s ultimate fate is unknown and it is unclear whether a federal district court would issue a nationwide stay of enforcement while litigation was ongoing, one thing is clear—the recent trend at both the federal and state levels has decidedly been to narrow and restrict the use of employment-based non-competition agreements. Employers should therefore use this opportunity to think about their protectible business interests and take stock of alternative approaches, including, but not limited to, implementing or updating non-disclosure and non-solicitation agreements, ensuring systems are in place to safeguard and restrict access to trade secrets and other confidential business information, and investing in resources to promote retention.
Should you or another member of your business need any assistance examining these alternative options, analyzing the attenuated ban on other arrangements such as paid “garden leave” or severance contracts that impose forfeiture of promised compensation, or have questions about the Final Rule’s impact on current and future non-compete agreements, please contact a Wyatt lawyer. In addition, be sure to visit Wyatt’s Labor and Employment Blog for further developments and updates related to the FTC’s rulemaking, as well as other employment law topics.
[1] See The Federal Trade Commission Proposes a New Rule Banning Nearly All Non-Competition Agreements.
[2] The Final Rule also requires employers to provide clear and conspicuous notice to workers—other than senior executives who are bound by an existing non-compete—that the employer will not be enforcing such agreement against them.
[3] The confusing “de facto” test that appeared in the proposed rule has been eliminated. Nevertheless, the Final Rule’s definition of “non-compete clause” includes any term or condition that functions to prevent a worker from competing. Indeed, the Final Rule defines “non-compete clause” as “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.”
[4] The Final Rule defines “worker” as “a natural person who works or who previously worked, whether paid or unpaid, without regard to the worker’s title or the worker’s status under any other State or Federal laws, including, but not limited to, whether the worker is an employee, independent contractor, extern, intern, volunteer, apprentice, or a sole proprietor who provides a service to a person.” The definition further states that the term “worker” includes a natural person who works for a franchisee or franchisor. Thus, the Final Rule is intended to apply to all workers, whether full-time or part-time, including, but not limited to, employees, independent contractors, interns, externs, volunteers, and apprentices with very limited exceptions outlined elsewhere in the Final Rule.
[5] There is no minimum ownership level, but the sale of a business must be bona fide to avoid sham sales designed to coerce an employment-based non-compete from a worker.
[6] A non-profit health system that has non-competes with physicians or other workers may be impacted by the Final Rule. An entity must be “organized to carry on business for its own profit or that of its members” to fall under the FTC’s purview. However, the FTC still has jurisdiction over certain aspects of nonprofits, including for profit-subsidiaries and joint ventures with for profit affiliates. So the FTC may be looking to test whether some non-profit health systems are really operating as true non-profits. However, given the significant and quantifiable charitable benefits that most non-profit systems provide, the FTC may be hard pressed to find a good test case within the non-profit health care industry.
[7] It should be noted that the Final Rule includes a severability clause clarifying the FTC’s intent that the remainder of the Final Rule should remain in effect if a reviewing court were to hold any part or application of the Final Rule invalid or unenforceable.
