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FTC Issues Ban on Non-Compete Clauses

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On April 24, the Federal Trade Commission (FTC) issued a final rule that is designed to prohibit the use of most non-compete clauses in employment agreements. The controversial and highly-publicized regulation was approved following a 3-2 vote of the commissioners.

The Non-Compete Clause Rule is similar in many ways to the initial proposal unveiled by the FTC in January 2023. Most notably, after its effective date, it will ban the use of any new employment agreement term or condition that prohibits, penalizes, or functions to prevent a worker from seeking or accepting employment with a different person or starting a business after leaving a job. This rule applies to employees and also to independent contractors, interns, volunteers, apprentices, sole proprietors who provide services to others, and other types of workers.

The Big "I" staff continues to review the text of the 570-page release, but below are some of the most notable elements that we have discovered so far:

  • Treatment of Other Types of Employment Agreements – As with the draft proposal, the final regulation does not prevent the use of all types of restrictive employment covenants. Non-solicitation, non-disclosure, no-business, and other types of employment agreements are unaffected by the rule if they do not prohibit or function to prevent a worker from switching jobs or starting a new business.
  • Sale-of-a-Business Exemption – The draft rule unveiled last year included an exemption for certain non-compete clauses between the buyer of a business and a seller, but the usefulness of this otherwise helpful exclusion was diminished because it only applied to sellers holding at least a 25% ownership interest in the entity. The Big “I” argued at length in its April 2023 comment letter and in a separate FTC-hosted forum that this ownership stake restriction should be eliminated, and we are pleased to report that the FTC has done so in the final rule. The regulation now does not restrict one’s ability to enter into or enforce a non-compete agreement with a person “pursuant to a bona fide sale of a business entity, of the person’s ownership interest in [the] entity, or of all or substantially all of a business entity’s operating assets.”
  • Effect on Existing Non-Compete Clauses – The FTC’s initial proposal would have nullified any non-compete agreement entered into before the final rule’s effective date. The final regulation takes a different approach and allows non-compete clauses with “senior executives” in place on the effective date to remain in force. The measure defines a “senior executive” as someone who earns at least $151,164 and serves as a business’s CEO, president, or other senior-level officer with significant decision-making authority. Any non-compete agreements that apply to workers who are not senior executives will not be enforceable after the final rule’s effective date, and the regulation requires the person who entered into the non-compete clause with the worker to provide notice before the effective date indicating that the restriction will no longer be enforceable.
  • Effect on State Law – The final regulation is intended to preempt any state law that conflicts with its terms to the extent of any such conflict.
  • Effective Date – The final rule is scheduled to become effective 120 days after it is formally published in the Federal Register, but the expected legal challenges discussed below could mean that this regulation never takes effect.

Despite the FTC’s action this afternoon, the ultimate fate of the non-compete agreement regulation remains in serious question. The FTC maintains that it possesses the legal authority to prohibit the use of non-compete agreements (and to ban other business practices and forms of contracts) as a result of a 1914 statute, but this novel assertion will soon be challenged in federal court. In fact, the U.S. Chamber of Commerce has already announced that it will initiate its legal challenge tomorrow.

The Big “I” will review the final rule in closer detail in the coming days, and anyone with questions is welcome to contact Wes Bissett in the meantime at [email protected] or 202-302-1607.