The New FTC Non-Compete Clause Rule
Understanding the Implications of the FTC's Final Rule on Non-Compete Agreements
In a significant move on April 23, 2024, the Federal Trade Commission voted 3-2 to pass the "Non-Compete Clause Rule," signaling a major change in the landscape of non-compete agreements in the United States. This Final Rule, enacted during a special public session, has far-reaching implications for employers, employees, and the broader business community. It aims to limit the widespread use of non-compete agreements, while providing exceptions for certain employee categories, particularly senior executives.
The Final Rule retroactively prohibits the majority of employee non-compete agreements, making them unenforceable. It also prohibits the creation of new non-compete agreements, with limited exceptions. However, the enforcement of the rule is delayed by a 120-day waiting period after its publication in the Federal Register. Employers must comply by the effective date, which could be as early as August. The FTC estimates that up to one-fifth of the American workforce could be affected by this ban, representing a significant shift in labor practices across industries.
Following the finalization of the rule, legal challenges emerged quickly. Business groups, led by the U.S. Chamber of Commerce, filed a lawsuit in a Texas federal court to contest the non-compete ban. They argue that the FTC lacks the statutory authority to regulate these "unfair methods of competition" through rulemaking. While the Federal Trade Commission Act grants the agency the power to challenge specific practices, opponents argue that it does not extend to rulemaking on "unfair methods of competition." These legal disputes could potentially delay or impede the rule's enforcement, adding uncertainty for businesses and employees.
The dissenting Republican commissioners, Melissa Holyoak and Andrew N. Ferguson, raised significant concerns about the FTC's authority to enact the rule during the public hearing. They questioned whether the Final Rule undermines the constitutional principle of separation of powers and the FTC's legislative authority. Holyoak echoed arguments made by former Commissioner Christine S. Wilson, expressing concerns about the FTC overstepping its regulatory bounds. Ferguson further argued that the Final Rule is legally unsound, arbitrary, and capricious, highlighting potential economic and political consequences.
Given these legal uncertainties, companies are advised to adhere closely to state and local laws on non-compete agreements, as regulations primarily operate at the state level. Collaboration with legal counsel specializing in antitrust, labor, or trade secrets is recommended to navigate the evolving regulatory landscape and protect interests.
The Final Rule includes key provisions and definitions. It prohibits all new non-compete agreements, including those for senior executives, upon enforcement. However, existing non-compete agreements with senior executives are grandfathered in and subject to specific criteria. The rule exempts non-compete agreements made in connection with business sales which recognizes these unique circumstances.
Employers must provide written notices to affected employees by the rule's effective date, informing them of unenforceable non-compete agreements. The rule preempts conflicting state laws, banning employee non-compete clauses in 46 states permitting them.
Key definitions are crucial for understanding the rule's scope. "Non-compete" provisions restrict workers from seeking similar employment after termination. The rule clarifies that other restrictive covenants, like non-disclosure or non-solicitation agreements, do not automatically constitute non-compete clauses. However, any agreement functioning as a non-compete falls within the ban.
"Worker" encompasses various individuals providing services, including employees, contractors, interns, volunteers, or sole proprietors. "Senior executives" are defined as high-ranking officers with policymaking authority or earning above a specified threshold.
In summary, the FTC's Final Rule represents a significant regulatory intervention addressing concerns about non-compete agreement abuse. Its implications for employers, employees, and the business community are substantial. Compliance amidst legal challenges and uncertainties requires adherence to state laws, collaboration with legal counsel, and proactive engagement with stakeholders.
If you know a business owner contemplating a sale and who could benefit from a complimentary consultation on exit strategy and valuation, encourage them to contact me at JamesKnox@tworld.com or 561.329.0384.
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Sources: NY Times, Forbes, CBS News, FTC.gov