FTC Proposed Rule on Noncompete Clauses

The Vision Council’s Government and Regulatory Affairs team would like to call members’ attention to a Final Rule made by the Federal Trade Commission (FTC) in a 3-2 vote outlawing noncompetition clauses in employment agreements in the U.S., with certain exceptions. The  Final Non-Compete Clause Rule (Final Rule) takes effect 120 days after being published in the Federal Register.

The FTC had concluded that non-compete clauses unlawfully stifled competition and depress wages for U.S. workers, and by banning them, it would encourage competition, innovation, and increased wages. To see what the Final Rule covers please see below:

What does the Final Rule cover?

The Final Rule covers all non-compete clauses for U.S. workers (this includes both independent contractors as well as employees), with limited exceptions. The FTC notes that it has no authority over not-for-profit entities, therefore they are not subject to the Final Rule. There is also an exception for existing agreements with senior executives and for non-compete clauses as part of bona fide sale of a business.

The Final Rule is retroactive, which means the rule bans new non-compete clauses after the effective date also well as invalidating preexisting ones.

The rule also covers non-disclosure clauses that operate as a non-compete, that “function to prevent workers from seeking or accepting other work or starting a business after they leave their job.” The FTC states that for practical purposes it is therefore a non-compete under the Final Rule. Similarly, non-solicitation agreements that “prevent a worker from seeking or accepting other work or starting a business after their employment ends” can also satisfy the definition of non-compete under the Final Rule.

What is the FTCs definition of non-compete?

The final 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 (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.”  Non-disclosure agreements and non-solicitation agreements are not per se non-compete agreements but could be if drafted so they function to prevent workers from seeking or accepting other work.  

What are the exceptions?

The Final Rule sets out exceptions for (1) existing agreements for “senior executives”, (2) non-competes entered into in connection with the bona fide sale of a business, and (3) non-competes being legally enforced where the cause of action related to the non-compete provision accrued prior to the FTC’s new rule’s effective date.

Who qualifies as a senior executive?

Under the Final Rule, a senior executive is a person who (1) is in a policy-making position and (2) receives for employment (i) total annual compensation of at least $151,164 in the preceding year or (ii) total compensation of at least $151,164 when annualized if the worker was employed during only part of the preceding year; or (iii) total compensation of at least $151,164 when annualized in the preceding year prior to the worker’s departure if the worker departed from employment prior to the preceding year and the worker is subject to a non-compete clause.

Does the rule replace State Laws regarding non-compete?

Yes. The Final Rule preempts state laws only where they conflict.

Are non-profits included in the ban?

The FTC only has authority over for-profit enterprises; therefore, it does not apply to non-profit organizations. Other exempt entities include banks, savings and loan institutions, federal credit unions, common carriers, air carriers and foreign air carriers, and persons and businesses subject to the Packers and Stockyards Act.

Types of Employer notices

Employers must provide notice to each worker who is subject to a non-compete in violation of the Final Rule so long as the employer has either a mailing address, email address, or cell phone number for the affected worker. The notice must: (i) identify the person who entered into the non-compete clause with the worker; (ii) be provided via mail, email or text message to the worker.

Final Rule Challenges

The Final Rule has been challenged already in both the North and Eastern District of Texas, with the Eastern District case brought by the Chamber of Commerce and the Business Roundtable. These challenges are largely focused on the lack of statutory authority for the FTC to enact these kinds of substantive rules, and particularly for a sweeping rule that affects millions of agreements nationwide. In both cases, the plaintiffs are asking the court to issue a stay to stop the rule from going into effect, and a preliminary injunction that would prohibit the FTC from enforcing the Final Rule while the case is being litigated.  The Eastern District of Texas issued an order on May 3, 2024, basically saying that the case in the Northern District of Texas should proceed as the lead case, with the Eastern District case stayed until its final resolution. We will continue monitoring this case and share important updates as they occur. 

If you have any questions or would like to speak to a member of the Government and Regulatory Affairs team, please contact Omar Elkhatib, The Vision Council’s Sr. Manager, Government Relations, at oelkhatib@thevisioncouncil.org.