Tuesday, April 23, 2024: In Party-Line Vote, Federal Trade Commission Majority Approved Final Rule Preventing Most Worker Noncompete Agreements
Rule Slated to Take Effect 120 Days From Official Publication Date [Currently Unknown]
Lawsuits Already Filed to Stop Implementation
Voting along party lines, a majority of the five-member Federal Trade Commission (“FTC”) approved a Final Rule to generally prevent most employers from using non-compete clauses in agreements (“NCAs”) with workers. The Rule also requires employers to notify workers whose NCAs are no longer enforceable that their non-competes are no longer in effect and will not be enforced.
In a special open meeting, the Commissioners voted 3-2 in favor of the Final Rule, which, once effective, will ban NCAs as an “unfair method of competition under Section 5 of the FTC Act [15 U.S. Code §45]. The Final Rule will take effect 120 days after its official publication in the Federal Register. As of our WIR deadline, an official publication date had not been set. The unofficial, 570-page pre-publication pdf version of the Final Rule Notice is here. The Preamble section of the Final Rule Notice ends, and the text of the finalized regulations begins, on pdf page 561.
Through the Final Rule, the FTC will amend its regulations to add a new section – Part 910 – to its regulations located at Title 16, Chapter I of the Code of Federal Regulations (“CFR”). Thus, the citation for these new regulations will be 16 CFR Part 910.
Justification for the Rule
“Noncompete clauses keep wages low, suppress new ideas, and rob the American economy of dynamism, including from the more than 8,500 new startups that would be created a year once noncompetes are banned,” said FTC Chair Lina M. Khan (D) in a press statement posted immediately after the Commission’s meeting.
The FTC estimates that the Rule will lead to new business formation growing by 2.7 percent per year, resulting in more than 8,500 additional new businesses created each year. The agency also anticipates that the Rule will result in higher earnings for workers, with estimated earnings increasing for the average worker by an additional $524 per year, and it is expected to lower healthcare costs by up to $194 billion over the next decade. In addition, the Rule is expected to help drive innovation, leading to an estimated average increase of 17,000 to 29,000 more patents each year for the next 10 years, according to the FTC.
Definitions (Part 1910.1)
The new regulation adopts the following definition of “noncompete clause”:
“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.”
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 but does not include a franchisee in the context of a franchisee-franchisor relationship.”
Scope (Part 1910.2)
The Final Rule adopts a comprehensive ban on new NCAs with all workers, including senior executives. However, for existing NCAs, the Final Rule adopts a different approach for senior executives than for other workers. For senior executives, existing NCAs remain in force. Existing NCAs with workers other than senior executives would not be enforceable after the effective date. The Final Rule defines “senior executives” as workers earning more than $151,164 annually and who are in policy-making positions.
Exceptions (Part 1910.3)
The Rule does not apply to NCAs entered into by a person pursuant to a bona fide sale of a business entity. In addition, the final rule does not apply where a cause of action related to a noncompete accrued before the effective date.
Keep in mind that the Rule will only apply to entities over which the FTC has authority. This means that it does not cover banks, insurance companies, non-profits, transportation and communications common carriers, air carriers, and some other entities.
Impact on State Laws (Part 1910.4)
The Final Rule preempts state laws to the extent that they conflict with the FTC Rule.
Opponents of the Final Rule question whether the Commission has the authority under the FTC Act to issue it because, since NCAs are contracts, they have traditionally been the province of state, rather than federal, law.
Alternatives to NCAs
The FTC’s April 23rd press statement noted the Commission’s conclusion that employers have several alternatives to NCAs that still enable firms to protect their investments. According to the FTC:
“Trade secret laws and non-disclosure agreements [“NDAs”] both provide employers with well-established means to protect proprietary and other sensitive information. Researchers estimate that over 95% of workers with a noncompete already have an NDA.
The Commission also finds that instead of using noncompetes to lock in workers, employers that wish to retain employees can compete on the merits for the worker’s labor services by improving wages and working conditions.”
How We Got Here
In January 2023, the FTC published its proposed version of the Rule (see our story here). The public comment period for the proposal closed on April 19, 2023. While the Regulations.gov website shows approximately 21,112 comments submitted, the FTC reported that it received more than 26,000 comments. See also our related content here, here, here, and here.
The Fall 2023 Regulatory Agenda did not include a target date for the FTC’s Final Rule. Instead, it indicated that the FTC staff was, as of December 2023, still reviewing public comments and conducting a policy analysis.
Changes from Proposed Version
The final rule differs from the proposed rule in several respects, including:
- The rule does not ban existing noncompetes with senior executives;
- The rule simplifies the notice and compliance requirements for employers. The FTC eliminated a provision in the proposed rule that would have required employers to legally modify existing NCAs by formally rescinding them. Instead, under the Final Rule, employers will simply have to provide notice to workers bound to an existing noncompete agreement that the NCA will not be enforced against them in the future. To aid employers’ compliance with this requirement, the Commission has included model language in the Final Rule that employers can use to communicate with workers; and
- The rule expands the sale of business exception.
Model Notice Language
The following is the text of the Model Notice:
“A new rule enforced by the Federal Trade Commission makes it unlawful for us to enforce a noncompete clause. As of [DATE EMPLOYER CHOOSES BUT NO LATER THAN EFFECTIVE DATE OF THE FINAL RULE], [EMPLOYER NAME] will not enforce any noncompete clause against you. This means that as of [DATE EMPLOYER CHOOSES BUT NO LATER THAN EFFECTIVE DATE OF THE FINAL RULE]:
- You may seek or accept a job with any company or any person—even if they compete with [EMPLOYER NAME].
- You may run your own business—even if it competes with [EMPLOYER NAME].
- You may compete with [EMPLOYER NAME] following your employment with [EMPLOYER NAME].
The FTC’s new rule does not affect any other terms or conditions of your employment. For more information about the rule, visit ftc.gov/noncompetes. Complete and accurate translations of the notice in certain languages other than English, including Spanish, Chinese, Arabic, Vietnamese, Tagalog, and Korean, are available at ftc.gov/noncompetes.”
Landing Page & Other Resources
The FTC posted a landing page with a summary of the Final Rule and Model Notices in seven different languages. That page also contains links to other resources including:
FTC Meeting & Commissioner Statements
The FTC posted a video and transcript of Tuesday’s meeting. Following the meeting, Commissioners Rebecca Kelly Slaughter (D), Alvaro Bedoya (D), Melissa Holyoak (R), and Andrew N. Ferguson (R) each issued separate statements explaining their positions. Chair Lina M. Khan also indicated that she would issue a separate statement.
It was the first Commission meeting with its two new Republican Commissioners – Commissioner Holyoak, who was sworn in on March 25, 2024, and Commissioner Ferguson, who was sworn in on April 2, 2024.
The Democratic majority and the Republicans disagreed as to whether the Commission had the authority to issue the Rule under Sections 5 [15 U.S. Code §45] and 6(g) [15 U.S. Code §46] of the FTC Act. The Democrats said they had the authority under existing case precedent, but the Republicans argued that courts would rule differently today.
The Republicans also argued the Final Rule would trample on states’ rights, while the Democrats said NCAs reduce competition in the marketplace. They also disagreed on whether handling NCAs that reduce competition should be done via regulations or one-off adjudication/enforcement actions.
Business Groups Filed Lawsuits to Stop Implementation
Wasting no time, the same day as the FTC vote, the US Chamber of Commerce announced it would file a lawsuit to challenge the rules. The following day, the Chamber filed its complaint, on behalf of a coalition of business groups, in the U.S. District Court for the Eastern District of Texas, Tyler Division (Case No. 6:24-cv-00148).
Dallas, Texas-based Ryan, a global tax services and software provider, also announced its similar lawsuit filed in the U.S. District Court for the Northern District of Texas.