FTC Issues Rule Banning Non-CompetesMay 15, 2024

Last week, the Federal Trade Commission’s “Non-Compete Clause Rule” was published in the Federal Register. This rule, which was issued last month and is set to come into effect on September 4, 2024, will have significant implications in terms of non-compete clauses and corresponding contracts if adopted.

At their most basic level, non-compete clauses are contractual obligations wherein an employee agrees, as the name suggests, not to compete with an employer after the employment period is over. The FTC more specifically characterizes such a clause as “a contractual term between an employer and a worker that blocks the worker from working for a competing employer, or starting a competing business, typically within a certain geographic area and period of time after the worker’s employment ends.” While the Non-Compete Clause Rule applies specifically to non-competes, it also covers restrictive covenants that have the same functional effects (e.g. non-disclosure clauses that “span such a large scope of information that they function to prevent workers from seeking or accepting other work or starting a business after they leave their job” or non-solicitation provisions that “function to prevent a worker from seeking or accepting other work or starting a business after their employment ends”).

Such contractual conditions have long been controversial on account of their potentially stifling effects. For instance, an individual subject to a non-compete clause, in order to remain in the workforce and avoid the potential of litigation, may be forced to take a job in a new, lower paying field or relocate to a new location entirely. The FTC’s Non-Compete Clause Rule issued last week is designed to address such concerns.

Throughout the 570-page rule, the FTC generally divides its discussion between non-compete agreements existing as of the date the rule comes into effect and non-compete agreements entered into after that date. Regarding the latter, the FTC rule states “that it is an unfair method of competition” and thus violation of Section 5 of the FTC Act “for persons to, among other things, enter into non-compete clauses . . . with workers on or after the final rule’s effective date.”

For preexisting non-compete agreements, the FTC’s rule distinguishes between “senior executives,” who it defines as “workers earning more than $151,164 who are in a ‘policy-making position,’” and “other workers.” In particular, the rule states that, “[f]or senior executives, existing non-competes can remain in force, while existing non-competes with other workers are not enforceable after the effective date.” The FTC explains that the rule does not cover existing non-competes with senior executives in part “because this subset of workers is less likely to be subject to the kind of acute, ongoing harms currently being suffered by other workers subject to existing non-competes[.]” 

In other words, the FTC has “adopt[ed] a comprehensive ban on new non-competes with all workers” as well as existing non-competes with non-senior executives (for which “[e]mployers must provide such workers with existing non-competes notice that they are no longer enforceable”). Under the FTC’s rule, only existing non-competes with senior executives may remain in force. The FTC believes this will reduce health care costs, increase new business formation, incentivize innovation, and result in higher worker earnings. 

Notably, the FTC’s rule is not currently in effect and will not be, if at all, until September 4th of this year. During this time, there are likely to be many challenges to the rule seeking to prevent its enforcement. Already, the US Chamber of Commerce and the Business Roundtable have filed a lawsuit against the FTC regarding this rule in the Eastern District of Texas and business tax services firm Ryan has likewise filed suit in the Northern District of Texas. Based on the outcomes of these, or any subsequent, challenges, enforcement of the rule may be significantly delayed or prohibited entirely.

The full rule is available here.

Nicholas J. Krob is Senior Counsel, practicing in the Trademark, Licensing, and Litigation Practice Groups at McKee, Voorhees & Sease. For additional information, please visit www.ipmvs.com or contact Nicholas directly via email at nicholas.krob@ipmvs.com.

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