FTC Votes to Ban Non-Competition Agreements

On April 23, 2024, the Federal Trade Commission (FTC) voted along partisan lines to adopt its proposed “Non-Compete Clause Rule” banning outright virtually all non-competition agreements. Unless enjoined by a federal court, the Rule will take effect 120 days after official publication, likely in late summer.

The Rule includes a requirement that employers rescind all existing non-competition agreements and provide notice of recission by individualized communication to affected employees. The Rule was originally proposed in January 2023, pursuant to a Notice of Proposed Rulemaking (NPRM), which can be found in the Federal Register, on pages 3535 and 3536 of Vol. 88, No.12, the 55th and 56th pages of the NPRM.

The purported ban applies broadly, to include agreements between employers and employees, independent contractors, externs, interns, volunteers, apprentices, or anyone else “who provides a service to a client or customer.” It defines non-competition agreements to include contractual terms that are deemed to be “de facto” non-competition agreements, such as non-solicitation and non-disclosure agreements, if they have the effect of prohibiting a worker from seeking or accepting employment with another employer. This provision should be fodder for litigation.

The Rule contains several exceptions:

• It allows the continued use of non-competes in transactions involving the sale of a business
• It allows employers to continue to use non-competes with "senior executives" (defined as corporate officers and employees in policy-making positions who earned at least $151,164 in the preceding year) who have signed such agreements before the effective date of the Rule - in effect, grandfathering existing non-competes for a small group of highly compensated employees. However, employers may not enter into agreements with senior executives after the effective date of the Rule.

The FTC’s majority argues that non-competition agreements constitute unfair competition because they reduce competition in labor markets. The minority’s dissent argues that the adoption of a blanket rule is contrary to a decision of the Seventh Circuit Court of Appeals expressly holding that such agreements are legal under the FTC Act unless they are unreasonable as to time or geographic scope, necessitating a case-by-case, fact-specific inquiry, as the law provides in most states.

The U.S. Chamber of Commerce has vowed to file an immediate legal challenge to the FTC’s authority to issue the rule. It is possible a court will issue an injunction blocking enforcement of the Rule pending a final determination, but it is equally possible that there will be no injunction, and the effective date will arrive before a court issues a decision as to its legality. In any event, it is highly unlikely the issue will reach the Supreme Court before next year at the earliest, with a final decision well into 2025 or even 2026. Therefore, employers should expect an extended period of uncertainty.

Note that because the FTC’s jurisdiction is limited under the commerce clause of the U.S. Constitution, the Rule will apply only to employers engaged in interstate commerce. While in today’s economy, most employers will be subject to the rule, we can help you determine whether your business may be exempt from the ban. 

We will cover this issue in more detail at our May 30 program in Haverhill, MA, and we’ll also keep you apprised of developments in the months ahead. For more information about non-competes, or any employment law question or concern, please contact Jim Erwin, Pete Hale, Suzanne King, Katy Rand, or Daniel Strader.