The recent Federal Trade Commission (FTC) vote to ban most non-competes has unveiled a surprisingly bold agenda less than six months out from a U.S. presential election. The FTC’s 3-2 vote was down party lines, with Democrats securing the majority vote.
The final rule established by the vote (the “Final Rule”) defines a “non-compete clause” (commonly referred to as a non-compete agreement) as any term or condition of employment that keeps a worker from or punishes a worker for certain acts that may be seen as competing. Such acts include “(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.”
While the Final Rule only applies to for-profit employers, the FTC has indicated that it may still have jurisdiction over some entities that claim non-profit status with the IRS. Moreover, there are very limited exceptions to the Final Rule, for example, non-compete agreements with certain “executives” who earn more than $151,164. The Final Rule even applies to most existing non-competes.
Despite the undeniably positive spirit the Final Rule may have on most American employees out the gate, this partisan power move seems surprising just months before a major election.
For several decades, even some of the more conservative states have enacted certain legislative prohibitions to restrict certain non-compete arrangements, which have withstood judicial challenges. For instance, since 2001, Oklahoma has had in place a strict non-compete statute, which courts have consistently upheld and enforced, even in Texas. See, e.g., Cardoni v. Prosperity Bank, 2014 WL 6473283, at *3 (S.D. Tex. Nov. 18, 2014) (Texas District court denying reconsideration of lower court’s ruling that bank employee’s non-compete agreement was unenforceable and in violation of Oklahoma law even where all of the business was situated in Texas). That same trend of legislative prohibitions and bans has also been present in more liberal states. As recently as 2023, Minnesota became yet another state to join the pack with the enactment of its non-compete ban statute (See Minn. Stat. Ann. § 181.988). The quote, “the wheels of justice turn slowly, but grind exceedingly fine” comes to mind, which states have seemed to heed.
This several decades-long push by the states to limit non-compete enforceability, both on the legislative front and through judicial efforts, begs the question: Was it really necessary for the FTC to create this Final Rule? Because the Final Rule supersedes any state laws that otherwise “permit or authorize a person to engage in conduct that is an unfair method of competition,” states may only have the power to further restrict or ban non-competes altogether. Previously, employers had the freedom of choice to elect the local of their businesses, oftentimes basing geographic business decisions on the state-side democratic process, including state laws governing taxation and non-competes. Within days of the announcement of the Final Rule, litigation ensued by multiple business groups to challenge its legality and overall enforcement. We will have to see whether judicial intervention will stop the application of what has already been an ongoing effort by the states.
