FIRM NEWS
FIRM NEWS
FTC Issues Final Non-Compete Clause Rule Banning Noncompete Agreements Nationwide

On Tuesday, April 23, 2024, the Federal Trade Commission (FTC) voted, in a 3-2 decision along party lines, to approve a final rule to promote competition by banning noncompete agreements nationwide (the “Non-Compete Clause Rule”). The effective date of this final rule will be 120 days after the date of its publication in the Federal Register. 

The Non-Compete Clause Rule was first proposed in January 2023 and drew over 26,000 public comments. Section 5 of the Federal Trade Commission Act of 1914 (the FTC Act), 15 U.S.C. § 45(a)(1), authorizes the FTC to regulate “unfair methods of competition” in or affecting commerce. The new final rule provides that it is an unfair method of competition and a violation of section 5 of the FTC Act to enter into “non-compete clauses”  with “workers.” As defined, a “worker” goes beyond just employees and may include an independent contractor, extern, intern, volunteer, apprentice, or sole proprietor who provides a service to a person. This effectively creates a comprehensive ban on all new non-competes with all workers. The Non-Compete Clause Rule is retrospective in nature, applying, with limited exceptions, to existing non-competes entered into before the effective date of the final rule.  

Non-compete clauses under the final rule include “a term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from (1) 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 (2) operating a business in the United States after the conclusion of the employment that includes the term or condition.” A “term or condition of employment” also includes a contractual term or workplace policy, whether written or oral. Therefore, clauses or policies that similarly restrict workers may be subject to the final rule.  

Notably, the final rule exempts existing non-competes for “senior executives,” who are defined as workers earning more than $151,164 and in a “policy-making position.” In the FTC’s view, senior executives are less likely to be subject to the kind of harms allegedly suffered by other workers subject to existing non-competes.  

PRACTICAL CONSIDERATIONS 

Employers who have existing non-competes in place with workers will be required to provide specific notice that they are no longer enforceable. The final rule provides model language that satisfies the notice requirement to facilitate compliance and minimize burden.  

There are several areas where the Non-Compete Clause Rule may not apply:  

  • First, the final rule does not apply to non-competes entered into by a person pursuant to a bona fide sale of a business entity. Noncompete provisions are commonly used as part of a business transaction with seller owners as consideration for the agreed sale price. Many have feared that unenforceability could lead to lower transaction sale amounts.  
  • Second, the final rule does not apply to a cause of action related to a non-compete that accrued prior to the effective date. In short, the final rule will not serve as grounds for a stay or dismissal of litigation involving enforceability of a non-compete provision that has already been filed. 
  • Third, the final rule may not apply to non-profit entities because of how the FTC Act ’s definition of “corporation” constrains the FTC’s regulatory power. That limitation, all but certain to be judicially challenged, may affect the status of various noncompete agreements that are commonly used throughout the healthcare industry.  

JUDICIAL CHALLENGES LOOM 

Whether the Non-Compete Clause Rule goes into effect and becomes enforceable will be the subject of significant judicial challenges. When the FTC announced its notice of proposed rulemaking for the Non-Compete Clause Rule on January 5, 2023, then-Commissioner Christine S. Wilson issued a Dissenting Statement that outlined various grounds upon which she believed that the proposed rule would trigger legal challenge that, in her view, would ultimately prevail. In cases filed within twenty-four hours after the final rule was issued, parties have already raised some of the grounds espoused by Commissioner Wilson.  

Two of the early-filed cases are notable. First out of the gate, Ryan, LLC filed suit on Tuesday, April 23, 2024, against the FTC in the United States District Court for the Northern District of Texas. Ryan challenges the final rule under the Administrative Procedure Act and the Declaratory Judgment Act. As eagerly anticipated, the U.S. Chamber of Commerce, Business Roundtable, Texas Association of Business, and Longview Chamber of Commerce filed suit on Wednesday, April 24, 2024, in the Eastern District of Texas on similar grounds seeking declaratory judgment that the final rule is arbitrary and capricious, an order vacating the final rule, an order preventing the FTC from enforcing the final rule as-applied, and an order delaying the effective date of the final rule. Among other things, both suits lean upon the “major questions doctrine”—announced by the United States Supreme Court in West Virginia v. Environmental Protection Agency, 597 U.S. 697 (2022)—for the position that Congress failed to clearly give the FTC the power to make “decisions of vast economic and political significance” regarding whether all noncompete agreements are categorically unfair and anticompetitive so as to be unenforceable.   

These cases—and others that will follow—may result in a preliminary injunction of the final rule that delays enforceability while courts address the issue.  

WHAT YOU CAN DO 

While legal challenges are likely to affect the rule’s effective date and ultimate enforceability, employers nevertheless should begin to assess their use of restrictive covenants within the workplace. Employers should consider other reasonable means to immediately safeguard their intellectual property and other confidential and proprietary information. Employers should also examine their use of any clauses or policies that may fit within the final rule’s definition of a “non-compete clause” with any “worker,” as the required notice will be required should the final rule actually take effect.   

Gordon Arata attorneys are prepared to assist our clients with navigating this evolving issue. For more information, please contact Adam Russ (aruss@gamb.com) and Jess Waltman (jwaltman@gamb.com) with questions about how best to protect your business. 

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