The FTC’s Bold Move: The Final Rule Banning Non-Competes

Final Rule banning non-competes to go into effect on September 4, 2024.

On April 23, 2024, the Federal Trade Commission (FTC) issued a controversial Final Rule banning non-compete agreements with limited exceptions (hereinafter “Final Rule”). By a vote of 3-2, the FTC approved the Final Rule after receiving over 26,000 public comments on this contentious issue.¹ The Final Rule will go into effect September 4, 2024.

The Final Rule

What type of non-competes are covered under the Final Rule?

In the Final Rule, the FTC determined that non-compete agreements (or “non-compete clauses,” as referred to in the Final Rule) constitute an unfair method of competition and thus violate Section 5 of the FTC Act.² The Final Rule defines “non-compete clause(s)” as a term or condition of employment that prohibits a “worker” from, penalizes them for, or functions to prevent them from seeking or accepting work or operating a business.³ A non-compete clause includes any provision contained in a contract, agreement or policy, whether written or oral.⁴

The Final Rule bans any “person” from (i) “enter[ing] into or attempt[ing] to enter into a non-compete clause” with a “worker,” (ii) “enforc[ing] or attempt[ing] to enforce a non-compete clause” with a “worker,” or (iii) “represent[ing] that the worker is subject to a non-compete clause.”⁵ The FTC broadly defines “worker” to include any natural person in a paid and unpaid position, including “employee[s], independent contractor[s], extern[s], intern[s], volunteer[s], apprentice[s],  or . . . sole proprietor[s] who provide[] a service to a [client or customer]” (hereinafter “Worker”).⁶ A Worker “does not include a franchisee in the context of a franchisee-franchisor relationship,” but does “include[] a…person who works for a franchisee or franchisor.”⁷ The Final Rule also defines “person” broadly, including any “natural person, partnership, corporation, association, or [any] legal entity” within the FTC’s jurisdiction.⁸ It is important to note that the FTC lacks jurisdiction over certain entities, such as certain banks, insurance companies, non-profits, transportation and communications carriers, and air carriers.⁹

The Final Rule permits pre-existing non-compete clauses with “senior executives” so long as the “non-compete clause” was entered into before the effective date of the Final Rule.¹⁰ A “senior executive” is defined as someone who (1) is in a “policy-making position” and (2) earning an actual or annualized total annual compensation of at least $151,164.00 in the preceding year (including “salary, commissions, nondiscretionary bonuses and other nondiscretionary compensation,” but excluding payments for medical insurance, life insurance, contributions to retirement plans and other similar fringe benefits).¹¹

A “senior executive” is in a “policy-making position” if they have final authority to make policy decisions that control significant aspects of the business entity or common enterprise (i.e., President, CEO, etc.). It does not include those whose authority is limited to advising or exerting influence over policy-making decisions.¹² However, any non-compete clause entered into by a “senior executive” after the effective date of the Final Rule is unenforceable under the Final Rule.¹³

It is important to note that the Final Rule does not extend to restraints on concurrent employment (i.e., moonlighting with a competitor), and is limited to post-termination non-competes.¹⁴ The FTC noted that the Final Rule would generally not apply to non-competes between businesses, “but…decline[d] to opine on specific factual circumstances.”¹⁵

Are there any notice requirements?

By the effective date of the Final Rule, employers must provide “clear and conspicuous notice” to Workers that their non-compete clause will not be, and cannot legally be, enforced against them.¹⁶ The Final Rule provides model language and requirements regarding how the notices are to be distributed to the Workers.¹⁷ The Final Rule also provides a safe harbor provision for employers who utilize the model language.¹⁸

Are there any exceptions?

There are three exceptions to the Final Rule:

• Non-compete clauses related to a bona fide sale of business are not subject to the Final Rule’s requirements.¹⁹
• It does not affect pending litigation where a cause of action related to a non-compete clause accrued prior to the effective date.²⁰
• It states that it is not an unfair method of competition for an employer to enforce, attempt to enforce, or make representations about a non-compete clause if the employer has a good-faith basis to believe the Final Rule is inapplicable.²¹ This good-faith exception will likely be a high bar to meet.

What about other types of restrictive covenants?

The FTC indicated that the Final Rule does not categorically prevent other types of restrictive covenant agreements, such as non-solicitation agreements.²² However, the FTC stated that non-solicitation agreements can fall under the definition of a “non-compete clause” if the non-solicitation agreement “function[s] to prevent a [W]orker from seeking or accepting other work or starting a business after their employment ends,” and that such a determination is a “fact-specific inquiry.”²³

How does the Final Rule affect state laws governing non-compete agreements?

The Final Rule states that it will supersede any state statute, regulation, order or law that is inconsistent with the Final Rule.²⁴ However, states are permitted to impose laws or regulations affording Workers greater protections than that of the Final Rule.²⁵

When will the Final Rule go into effect?

As stated above, the Final Rule becomes effective 120 days after publication in the Federal Register. The Final Rule is scheduled to be published on May 7, 2024, thereby rendering it effective on September 4, 2024.²⁶

Legal Challenges

On the day after the Final Rule was released, the Chamber of Commerce of the United States of America, Business Roundtable, Texas Association of Business and Longview Chamber of Commerce jointly filed a lawsuit in the Eastern District of Texas challenging the validity of the rule and seeks declaratory and injunctive relief — in particular an order to vacate and set aside the Final Rule in its entirety.²⁷ This challenge is no surprise after the Chamber promised it would sue the FTC to block the rule.²⁸

The Chamber of Commerce alleges that (i) the Commission lacks the authority to issue regulations that prohibit “unfair methods of competition”, (ii) non-compete clauses are not categorically unlawful and require a fact-based inquiry, (iii) the Final Rule’s retroactive effect makes it unlawful, and (iv) the Commission’s actions are arbitrary and capricious pursuant to the Administrative Procedure Act, 5 U.S.C. § 706.²⁹ The Chamber of Commerce argues that the FTC’s complete ban on non-competes leave businesses unable to protect their investments in research and development and will subject them to significant legal costs to safeguard their proprietary information.³⁰ The lawsuit alleges that workers will suffer from decreased training opportunities and bargaining power in negotiating salaries.³¹ Further, startups and small businesses may face threats from larger companies that are capable of targeting their workforce and, as a result, obtain access to confidential information.³²

On the day the complaint was filed, the Chamber of Commerce also filed a motion to stay the effective date of the rule and for a preliminary injunction, after which the court set a scheduling order.³³ On April 30, 2024, the FTC filed a motion to limit the plaintiffs’ relief to “only those members whom they have specifically identified and who have given them authority to do so,” and to transfer to the Northern District of Texas under the first-to-file doctrine, citing another case that was previously filed there with similar legal issues and type of relief sought.³⁴ Following this, on May 3, 2024 the court sided with the government, and issued an opinion and order staying the case pursuant to the first-to-file doctrine, as the two cases filed in Texas raise similar legal theories and are proceeding at a similar pace.³⁵

Now Ryan, LLC v. Federal Trade Commission, a lawsuit filed in the Northern District of Texas on the day the rule was released by the Texas-based global tax services firm, Ryan, LLC, will proceed first.³⁶ The lawsuit alleges the rule will cause “serious and irreparable injuries” to Ryan, LLC and, like the Chamber of Commerce’s suit, asks for declaratory relief and that the Final Rule be vacated and set aside. It also argues that the FTC has no statutory authority to issue the rule.³⁷ Ryan, LLC further argues that the FTC’s actions constitute a violation of the vesting clause of Article II of the Constitution.³⁸ Ryan has filed an amended complaint seeking a preliminary injunction and requested the court stay the Final Rule’s effective date pending the outcome of the lawsuit.³⁹

ATS Tree Services, LLC, a Pennsylvania tree trimming company, filed the latest legal challenge to the Final Rule on April 26, 2024, in the Eastern District of Pennsylvania.⁴⁰ The company is represented by the Pacific Legal Foundation and claims that the Final Rule “treats employers as behaving coercively and exploitatively,” “usurps the authority of states,” and “will harm both small businesses who need skilled workers and workers who need skill development”⁴¹

If any court in a legal challenge grants a stay, temporary restraining order, or preliminary injunction, the enforcement of the Final Rule would be postponed pending the resolution of the legal challenge to its validity.

Recommendations Moving Forward

• Employers should take an account of their existing non-compete agreements, conduct assessments with counsel for compliance with the Final Rule, and understand when action may be necessary as it relates to the effective date – including compliance notice requirements.
• When examining existing agreements, employers should evaluate whether their commercial interests may be safeguarded by other agreements or provisions covering nondisclosure and confidentiality of employer information, non-interference and non-solicitation of customers and employees, and whether such agreements are subject to the Final Rule.
• Employers should review the policies and procedures in place to protect confidential information and company trade secrets, and audit such policies to confirm (i) only necessary employees and/or independent contractors retain such information, and (ii) that it is properly secured.
• It is also recommended that any employee manual be included in a policy review to the extent it contains a non-compete policy and, if so, whether amendments are required to comply with the Final Rule.

Additional Assistance

For further assistance, please contact a member of our Corporate and Business Law Practice Team, Labor and Employment Practice Team, or the Phillips Lytle attorney with whom you have a relationship.