by Thomas Spyker, Esq.

On April 23, 2024, the Federal Trade Commission (“FTC”) voted 3-2 approving the final version of a rule banning most workplace non-compete agreements. This final rule is largely identical to a proposed rule that was first published in January 2023.  The rule will go into effect 120 days after it is published in the Federal Register, subject to legal challenges, which have already been filed. Below are the key provisions of the final rule. 

What agreements are banned under the rule?

In short, the rule functionally bans most forms of non-compete agreements upon becoming effective, even applying retroactively in all but a few narrow circumstances. To get here, the FTC determined that non-compete agreements generally constitute an unfair method of competition. In exercising its rule-making authority, the FTC noted that the current “case-by-case and State-by-State approaches to non-competes have proven insufficient to address the tendency of non-competes to harm competitive conditions in labor, product, and service markets.” 

As such, the ban is wide-sweeping and intentionally aimed at effectively eliminating the use of non-competes in the workplace. Three broad definitions contained within the rule illustrate the FTC’s broad intent.

First, the FTC defines a non-compete agreement 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.” It should be noted that this broad definition specifically covers many typical “alternatives” to non-compete agreements, such as clauses that penalize an employee or force some forfeiture for deciding to take other employment. Additionally, the rule bans severance agreements that only provide compensation if an employee agrees not to compete. 

Second, the FTC specifically outlined the rule’s applicability to the broadest categories of workers and employers. The rule covers all types of workers, whether they be employees, contractors, externs, interns, volunteers, and apprentices. Further, the rule covers all manner of employers, regardless of size or structure. The ban applies to all natural persons, corporations, associations, partnerships, or other legal entities within the FTC’s jurisdiction. 

Third, under the FTC’s rule, it will be unfair competition to  “(i) to enter into or attempt to enter into a non-compete clause; (ii) to enforce or attempt to enforce a non-compete clause; or (iii) to represent that the worker is subject to a non-compete clause” unless one of the narrow exceptions applies.

How does the rule impact non-compete agreements signed before the ban?

The rule would essentially ban all pre-existing non-compete agreements upon becoming effective, except for qualifying “Senior Executives.” Under the rule, a Senior Executive is defined as a worker in a “policy-making position” that earns an annualized or actual sum of at least $151,164 through salary, bonus, and/or commission (or some combination thereof). A “policy-making position” is a company’s CEO, president, or any person with “policy-making authority.” The rule defines policy-making authority as a person controlling “significant aspects of a business entity or common enterprise.” Unlike the retroactive enforcement ban for other workers, it will be unfair competition to “enforce or attempt to enforce a non-compete clause entered into after the effective date.”

The rule also requires employers to issue notice to all employees who have non-compete agreements (and who do not fall under the Senior Executive exception) explaining that the non-compete will no longer be in effect and will not be enforced upon the effective date of the rule. The FTC prepared a model notice for employers which can be accessed here.

Other exceptions to the rule.

The rule carves out some additional narrow exceptions. 

  • Active litigation: Despite its retroactivity, the rule specifically carves out an exception for active litigation to enforce a non-compete where the “cause of action related to a non-compete clause accrued prior to the effective date.”
  • Seller of a business: The rule does not ban a non-compete agreement where a person sells their ownership interest in a business or substantially all the businesses operating assets. 
  • In-term non-compete agreements: Agreements to not compete while actively employed are still permissible under the rule.
  • Non-solicitation and non-disclosure agreements: The rule specifically notes that the continued use of these agreements is permissible so long as they are not so restrictive to prevent an employee from working in the same industry.
  • Franchise agreements: The ban does not apply to contracts between franchisor and franchisee entities. 

Penalties for violations. 

The FTC will enforce the ban as it enforces other unfair competition violations under Section 5(b) of the Federal Trade Commission Act. Under the existing framework, the FTC can seek an injunction against any party violating the rule in federal court. However, the FTC is not able to seek monetary damages. But the FTC can seek civil penalties in court if a party is ordered to cease and desist the violations but continues to violate the rule. 

What happens next?

The U.S. Chamber of Commerce (and several private businesses) have already sued, challenging the rule and the FTC’s rule-making authority. In a suit filed in the Eastern District of Texas, the U.S. Chamber of Commerce is seeking an injunction preventing enforcement of the rule pending litigation. The U.S. Chamber of Commerce argues that the FTC lacks the authority to institute a nationwide ban and that it is an issue for Congress to decide. As of this report, the litigation is in its earliest stages, but a ruling on the injunction is anticipated before the effective date of the rule. 

In light of the legal challenges, the next steps are uncertain. Likely, the effective date of the rule will at least be extended in light of the lawsuits. Reminger attorneys are following developments as they break, and we will issue updates to this report as they become available. In the meantime, if you have any specific questions or concerns, contact a member of Reminger's Employment Practices/Civil Rights Defense Practice Group.

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