Clifford Chance

On April 23, 2024, the U.S. Federal Trade Commission ("FTC") voted 3-2 to approve a rule that, with limited exceptions, prohibits employers from entering into or enforcing existing non-compete provisions with employees.

Background

For years, non-compete agreements have largely been legal under federal U.S. law and many state laws. Some states like California have long had total prohibitions on non-compete provisions, while other jurisdictions have issued more narrowly-tailored prohibitions, such as the District of Columbia's ban on non-compete provisions for workers earning less than $150,000 per year.

Final Rule

On April 23, 2024, the U.S. Federal Trade Commission, after a notice-and-comment period of more than a year and after reviewing more than 26,000 comments, voted 3-2 to approve a rule (the "Final Rule") that would consider most non-compete provisions to be an unfair method of competition in violation of Section 5 of the FTC Act. Once the Final Rule goes into effect (expected in late August or early September):

• No employer can enter into a new non-compete agreement with a worker;
• Except for non-competes with "senior executives," no existing non-compete agreements will be enforceable; and
• Employers are obligated to provide notice to workers subject to non-compete agreements that such provisions are unlawful and will not be enforced against them.

The Final Rule adopts a broad definition of "worker" to include paid and unpaid employees, independent contractors, interns and externs, volunteers, and apprentices.

To help businesses comply with the Final Rule's notice requirement, the FTC has published model notices on its website in seven languages.

The Final Rule provides two narrow exceptions: (1) existing non-compete provisions covering "senior executives" and (2) non-compete agreements entered into as part of the sale of a business, the sale of a person's ownership in a business, or in the sale of substantially all of a business' operating assets. The FTC defines "senior executives" as those workers who are or were in a "policy-making position" and receiving a total annualized compensation of at least $151,164 in the preceding year. The "policy-making positions" that qualify as "senior executives" include a business' President, CEO or equivalent, or any other officer with "policy-making authority," such as a company secretary, treasurer, principal financial officer, principal accounting officer, or another individual carrying out similar functions.

Challenges

The FTC's two Republican commissioners voted against the rule. One of them, Commissioner Andrew Ferguson, issued a dissenting statement that argued that the FTC did not have the constitutional authority to "legislate" such a rule. Commissioner Ferguson also warned that the FTC's rulemaking ran afoul of the major questions doctrine, which the Supreme Court has used in recent years to determine that an agency has overstepped the limits of its authority when it regulates an area of "tremendous economic and political significance" without clear congressional authorization to do so.

Several lawsuits have already been filed to challenge the FTC's Final Rule on constitutional grounds, including one by the U.S. Chamber of Commerce, and more challenges are expected in the coming days and weeks.

Next Steps

Businesses should start working with their HR teams to identify the scope of their non-compete agreements and to prepare the appropriate notices before the Final Rule goes into effect.

Existing employee contracts and separation agreements should be reviewed to remove references to non-compete provisions where prohibited under the Final Rule. Other contract provisions around confidentiality, trade secrets, and non-solicitation should also be reviewed to ensure greater protections.

Despite the breadth of the Final Rule, businesses should also remain mindful of applicable state laws with greater protections, especially in states with total bans on non-compete agreements like California and Minnesota. The Final Rule does not supersede state laws with greater protections for workers regarding non-compete provisions.