BREAKING NEWS: Federal Trade Commission issues regulation imposing a near total ban on employment non-compete clauses, and business groups sue to invalidate it.

By Greg Care

In a highly anticipated move, the Federal Trade Commission (FTC) has voted 3-2 to impose a near total ban on non-competition (or non-compete) clauses in the United States. The breadth of the final regulation is quite expansive and will affect many workers across the country if it survives the legal challenges that are being filed against it.

It has been a busy year or so for legislative and administrative reforms of whether and how non-compete clauses can be lawfully be used by employers to limit their former employees from working for or owning a business that is engaged in essentially the same work they did for the employer. As discussed in prior blogs: the National Labor Relations Board’s general counsel has opined that, except in limited circumstances, non-compete agreements violate the National Labor Relations Act and Maryland expanded the group of workers who cannot be subject to non-competes (by raising the wage ceiling on a prior non-compete ban and curtailing non-competes for health care worker and veterinarians).

Now, the FTC has followed through on its January 2023 proposal to severely limit the instances where non-competes are permitted. The final rule, issued by the FTC on April 23, 2024, is largely the same as what was proposed last year. Put simply, the rule states that “it is an unfair method of competition [under the Federal Trade Commission Act] for a person to enter into or attempt to enter into a non-compete clause; to enforce or attempt to enforce a non-compete clause; or to represent that the worker is subject to a non-compete clause.”

Here are some quick, key takeaways from the final rule:

  • It applies to employees and independent contractors alike.
  • It applies to all industries, contrary to some state laws that limit or ban non-competes for certain professions such as healthcare.
  • There is no income ceiling on who is covered, unlike some state laws that prohibit non-competes only for workers making less than a given amount.
  • The rule can apply to employers who are for-profit or non-profit. This had been a point of contention among commentators, some of whom claim that the FTC does not have regulatory authority over non-profits.
  • The rule is retroactive, meaning that it would apply to even current non-competes with one exception: “senior executives” (those earning more than $151,164 annually who are in a “policy-making position”) can still be subject to previously agreed-to non-competes.
  • It does not affect state laws that do not conflict with the final rule, but preempts state laws that do.
  • It does not apply to non-competes entered into as part of a bona fide sale of a business.
  • The rule notes that properly drafted (i.e., not overbroad) non-disclosure agreements (NDAs), non-solicitation agreements, and training-repayment agreement provisions (TRAPs) are permissible ways for employers to safeguard protectible interests.
  • Instead of requiring rescission/modification of existing non-competes, the final rule prohibits enforcement of existing non-competes after the rule’s effective date and requires the employer to give the worker, by the effective date, notice that the worker’s non-compete will not be, and cannot legally be, enforced.
  • The final rule becomes effective 120 days after date of publication in the Federal Register

While the effective date of the final rule is just months away, it is likely that legal challenges will delay that even further. On the same day the final rule was issued, Ryan, LLC, a global tax services firm, sued the FTC in the Northern District of Texas seeking to invalidate the regulation. The next day, the U.S. Chamber of Commerce and other business groups sued in the Eastern District of Texas to obtain the same result. Many agree that these fora were specifically chosen as being perceived (with some basis) as skeptical or even hostile to such regulatory efforts. With a few differences, both plaintiff groups have essentially challenged the FTC’s authority to regulate non-competes, claimed that non-competes cannot be “unfair” under the law given their ubiquity, and that retroactive application of the rule is impermissible.

Only time will tell the outcome of those and potentially other similar suits, but it is almost certain that they will at least delay the implementation of the final rule. So, it remains important to follow local and state developments and obtain competent counsel on whether and how a non-compete may be enforced in a case-specific situation.

If you have questions regarding non-competes in your situation, please contact us today to see if we can assist with your particular circumstances.

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Authored by

Gregory Care Partner