On April 23, 2024, the Federal Trade Commission (FTC), in a highly anticipated vote, passed the Non-Compete Clause Rule, 16 CFR § 910 (the Rule), which purports to bar all non-competes in the United States, subject to limited exceptions. Unless enjoined by a court, the Rule is set to become effective 120 days from publication in the Federal Register. The expansive Rule, accompanied by over 550 pages of FTC introductory commentary, provides that it is an unfair method of competition for a person to enter into a non-compete.
Set forth below is a summary of the Rule and the legal challenges to it that have already been filed. Given the Rule’s breadth and the litigation it has spurred, we plan to provide updates on the Rule, including a more in-depth review of its intricacies.
The Ban on Non-Compete Clauses
The Rule prohibits:
- Entering, or attempting to enter, into a non-compete clause with any worker;
- Enforcing, or attempting to enforce, a non-compete clause; and
- Representing that a worker is subject to a non-compete clause.
The Rule also requires that—no later than the effective date of the Rule—employers notify all workers (which term includes independent contractors, volunteers and sole proprietors) who have entered into a non-compete that the non-compete is no longer effective. Of note, this notice obligation applies to not only current but also former workers.
Exceptions to the Rule
While the Rule is sweeping in scope, it does include limited exceptions1 for:
- A non-compete entered into by a person pursuant to a bona fide 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;2 and
- A non-compete entered into with a “senior executive” (a worker who is in a “policy-making position” and received at least $151,164 in total compensation the preceding year) before the Rule comes into effect.
Legal Challenges
It is possible the Rule could become effective as soon as August 2024, but litigation to invalidate the Rule—and, in the interim, prevent it from becoming effective—is underway. Litigants are arguing that the FTC has exceeded its administrative authority. Already the U.S. Chamber of Commerce3 and Ryan, LLC4 have sued in federal district court in Texas, challenging the Rule principally on the basis that the FTC lacks competition rulemaking authority under the FTC Act, and that any question of the FTC’s authority is resolved by the major-questions doctrine.5 Under the major-questions doctrine, the FTC would need to have clear and unmistakable congressional authorization to promulgate the Rule, which plaintiffs argue the FTC does not have. Plaintiffs also argue that the rulemaking represents an unconstitutional delegation of legislative power to the executive branch, is impermissibly retroactive, and reflects an arbitrary and capricious exercise of the FTC’s powers.6
Adding fuel to the fire, FTC Commissioners Andrew Ferguson and Melissa Holyoak dissented from the majority in the recent 3-2 vote, stating that the Rule is unlawful.7 While the fate of the Rule is currently unclear, the recent FTC vote is evidence that the attack on non-competes shows no sign of abating.
Looking Ahead
Given the breadth of the Rule and the legal challenges underway, companies are encouraged to contact counsel to start discussing changes they may need to make to their form agreements and notices they might need to send should challenges to the Rule be unsuccessful. Companies should also stay alert for further guidance concerning implementation of the Rule.
Footnotes
