FTC Finalizes Non-Compete Rule

April 29, 2024

On April 24, 2024, the Federal Trade Commission ( “FTC”) published a sweeping ban on non-competes (“Rule”).  The Rule passed by a 3-2 vote, with the FTC’s Democratic commissioners voting in favor, and Republican commissioners against.

The Rule currently is scheduled to go into effect 120 days after its publication in the Federal Register, which is expected shortly.  However, the Rule is already subject to legal challenge, and it may be delayed or vacated.  The Rule also could be reversed or amended by a future administration’s FTC.

The Rule

The following are the key features of the Rule, including as described by its accompanying commentary:

  • The Rule would prospectively ban all “non-competes” with “workers.”
    • The Rule defines a “non-compete” clause as “[a] term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from” seeking or accepting other work or starting a business after their employment ends (emphasis added).
    • “Worker” is defined broadly to include employees, independent contractors, interns, volunteers, apprentices, or a sole proprietor who provides a service to a natural person. Given the breadth of this definition, “workers” is likely to encompass partners and members who provide services.
  • The Rule would also render virtually all existing non-competes with workers unenforceable. Employers would be required to notify workers by the Rule’s effective date that their non-competes are no longer enforceable.  The Rule includes model language that satisfies the notice requirement.
  • The only existing non-competes that would remain enforceable are with “senior executives,” but the exception is very narrow. Very few workers will be deemed senior executives.
    • The Rule defines “senior executive” as a worker in a “policy-making position” who earns a total annualized compensation of at least $151,164.
    • “Policy-making position” refers to a president, CEO, or other officer or natural person with “policy-making authority.”
    • “Policy-making authority,” in turn, means the “final authority to make policy decisions that control significant aspects of a business entity or common enterprise.”
    • “Policy-making authority” does not include “authority limited to advising or exerting influence over such policy decisions or having final authority to make policy decisions for only a subsidiary of or affiliate of a common enterprise.”
  • The FTC, in commentary, states that “forfeiture-for-competition” provisions—whereby an employee is not prohibited from competing but forfeits deferred compensation if they elect to compete—would be prohibited non-competes. This is contrary to the vast majority of developed non-compete law, which subjects forfeiture-for-competition clauses to less scrutiny than traditional non-competes.
  • The Rule would not prohibit appropriately tailored non-disclosure and non-solicitation However, the FTC states that where such provisions are overbroad and “function to prevent” a worker from seeking or accepting other work or starting a business, they will be considered impermissible non-competes.
  • The FTC’s commentary also addresses “garden leave,” which it describes as an arrangement whereby a worker cannot compete because they are “still employed and receiving the same total annual compensation and benefits on a pro rata” The FTC states that garden leave agreements are not covered by the Rule because they are not post-employment restrictions.  This is true even if the worker’s job duties or access to colleagues or the workplace are “significantly or entirely curtailed.”
  • The Rule would not ban sale-of-business non-competes—i.e., non-competes “entered into by a person pursuant to a bona fide sale of a business entity, of the person’s ownership interest in a business entity, or of all or substantially all of a business entity’s operating assets.” There is no ownership threshold for the seller of a business entity, and FTC states in commentary that the exception would cover the sale of a partnership or membership interest.  The sale must be “bona fide,” and not for the purpose of evading the Rule.
  • The Rule would not affect causes of action related to non-compete agreements that accrued prior to the Rule’s effective date. If an employee breaches a non-compete before the effective date, the employer may still have a claim.
  • It would not violate the Rule to enforce or attempt to enforce a non-compete or to make a representation about a non-compete where the enforcing entity has a “good-faith basis” that the Rule is inapplicable.
  • There would be no private right of action under the Rule, and civil penalties would not generally be available for violations.

Legal Challenges

The Rule will not go into effect until August at the earliest and has been challenged already in two lawsuits.  The U.S. Chamber of Commerce and a tax services firm, Ryan, LLC, each sued the FTC in Texas federal court to enjoin the rule and declare it invalid under the Administrative Procedure Act and the U.S. Constitution.

The Chamber of Commerce’s suit asserts that (i) the FTC does not have the statutory authority to promulgate the Rule, (ii) the FTC’s interpretation of “unfair methods of competition” to categorically ban all non-compete agreements is not in accordance with the law, (iii) the FTC’s promulgation of the Rule violates the Constitution’s nondelegation doctrine, (iv) the Rule is impermissibly retroactive, and (v) the FTC’s promulgation of the Rule is arbitrary and capricious.

Ryan, LLC’s complaint asserts that (i) the FTC exceeded its statutory authority in issuing the Rule, (ii) the Rule violates the Constitution’s nondelegation doctrine, and (iii) the FTC Act unconstitutionally restricts the President’s power to remove the commissioners by granting them fixed terms and providing that they can be removed only for “inefficiency, neglect of duty, or malfeasance in office.”

Even if the FTC ultimately prevails, the Rule’s implementation may be delayed beyond August.  We will be monitoring these cases closely.

What Should Employers Do?

If the Rule becomes effective, the only pressing task would be to inventory all active, invalid non-competes and notify those “workers” that their non-competes are no longer enforceable.

That said, forward-looking employers who want to prepare for the possibility of a sweeping non-compete ban might consider alternatives.  Feasible alternatives will vary from employer to employer and from worker to worker, but may include:

  • Enhancing non-solicit, non-disclosure and other provisions;
  • Enhancing audit procedures for outgoing employees to ensure they have not retained confidential or proprietary information;
  • Where possible, using non-competes that are contingent on the sale of a partnership or membership interest;
  • Utilizing “garden leave” provisions in lieu of non-competes—keeping in mind that those provisions can be subject to challenge on grounds unrelated to the Rule and, when enforced, tend to be for shorter durations than non-competes; and/or
  • Offering incentives, rather than requiring forfeiture, for workers not to compete after they leave their role.

If you have any questions regarding the Rule or your current agreements more generally, please contact David Baron, Anne Patin or your relationship partner at the Firm.


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