On April 23, 2024, the Federal Trade Commission (“FTC”) issued the Non-Compete Clause Rule (“Final Rule”).^[1] Under the Final Rule, after the effective date (120 days from publication in the Federal Register), almost all post-employment non-compete clauses covering workers will be considered an “unfair method of competition” that violates the FTC Act. These clauses effectively will be banned on a nationwide basis. “Non-compete clause” is broadly defined in the Final Rule to cover not only traditional non-compete agreements, but any agreement that “prohibits,” “penalizes” or “functions to prevent” a worker from seeking work with a different employer or starting a business following employment. “Worker” is also broadly defined to include employees, independent contractors and even unpaid volunteers.

With limited exceptions, the Final Rule applies to all workers and all non-compete clauses irrespective of when the clause was agreed to. The FTC adopted a narrow exception for non-compete clauses covering “senior executives” existing as of the effective date. “Senior executives” are defined as workers in a “policy-making position” whose annual compensation exceeds $151,164 during the preceding year.^[2] The FTC indicated that it exempted these agreements because senior executives are less likely to have been exploited or coerced in connection with agreeing to a non-compete and because of practical difficulties with extinguishing such agreements, including that compensation or other consideration may have been given in exchange for the non-compete. The Final Rule will, however, apply to all post‑employment non-compete agreements with workers, including senior executives, entered into after the effective date. The Final Rule purports to preempt any less-restrictive state laws governing non-competes, but does not preempt state laws that are more restrictive of non-competes.

In addition to the senior executive exception for non-competes entered into prior to the effective date, the Final Rule will not apply to the following types of non-competes:

• Non-competes precluding employees from competing with their employers during the term of their employment (which could include periods of “garden leave”);
• Non-competes entered into as part of a “bona fide sale[ ] of business” where the non-compete agreement is entered into by a person pursuant to a sale of a business entity, of the person’s interests in a business entity, or of substantially all of a business entity’s operating assets^[3]; and
• Non-competes involving employers outside of the FTC’s jurisdiction, including banks, credit unions, non-profits, companies subject to the Packers and Stockyards Act and potentially other companies.

The FTC contends that by eliminating virtually all post-employment non-compete agreements, worker compensation will increase between $400 to $488 billion dollars over a ten-year period and the rate of business formation and innovation will increase.^[4] The FTC downplayed any concerns that eliminating non-competes would have on a company’s ability to protect its confidential information by pointing to other less restrictive alternatives that remain available to employers, such as “garden variety” non-disclosure agreements and trade secret litigation.

To comply with the Final Rule, employers need not formally rescind existing non-compete agreements. Employers will, however, have to notify workers currently bound by non-competes in writing that their non-compete agreement will not be enforced. The Final Rule includes model language for this notice.^[5]

As noted, the Final Rule will take effect 120 days from the date it is published in the Federal Register unless courts intervene and enjoin enforcement of the Final Rule. The first lawsuit challenging the Final Rule and requesting a nationwide injunction was filed by global tax services and software provider Ryan on April 23, 2024 in the Northern District of Texas, and the U.S. Chamber of Commerce also filed suit on April 24, 2024 in the Eastern District of Texas. These lawsuits, as well as the statements issued by the two dissenting Republican Commissioners, assert that the FTC does not have general rulemaking authority to issue rules governing unfair methods of competition. The lawsuits and dissenting Commissioners also argue that even if Section 6(g) of the FTC Act grants the FTC rulemaking authority, such a broad grant of rulemaking authority violates the separation of powers as set forth in Article I of the Constitution. Given the timeline for the Final Rule to become effective, we expect these litigations —and others that are likely to be filed— will move quickly, and may ultimately be resolved by the Supreme Court.

Footnotes

[1] FTC Announces Rule Banning Noncompetes | Federal Trade Commission

[2] The $151,164 threshold may be met based on annualized compensation in certain circumstances even if the worker’s total compensation did not meet that threshold.

[3] 16 CFR § 910.3(a)

[4] Non-Compete Clause Rule (Apr. 23, 2024), Part X.F.6

[5] 16 CFR § 910.2(b)(4)

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