FTC Broadly Bans Non-Compete Agreements- Legal Challenges to New Rule Sure to Follow

April 25, 2024

In a 3 to 2 vote along party lines, the Federal Trade Commission (“FTC”) has issued its Final Rule broadly banning non-competition agreements as an “unfair method of competition” in violation of Section 5 of the Federal Trade Commission Act, 15 U.S.C. § 45. While industry groups, including the U.S. Chamber of Commerce, are running to court to enjoin implementation of the Final Rule, if implemented in its current form the rule:

  • Renders substantially all non-competition agreements as unenforceable;
  • Provides for fines up to $51,774 for employers who enforce, threaten to enforce, or even claim that a non-competition agreement is enforceable;
  • Requires notice to any employee with a non-competition agreement that the document is not enforceable and that the company will take no action to enforce it.

The FTC’s rule defines a non-compete clause as a “term or condition of employment that prohibits a worker from, or penalizes a worker for, or functions to prevent a worker from” seeking or accepting different work or operating a business in the United States after the employment ends.  Non-solicitation, no-hire, non-acceptance of business, non-disclosure, and similar types of restrictive employment clauses are not categorically prohibited under the FTC’s rule. However, such agreements may qualify as a prohibited “non-compete” in some circumstances under the “functions to prevent” prong.  Determining whether a particular agreement qualifies as a functional non-compete will require a fact-specific inquiry.

There are exceptions for certain non-profits (those that the FTC deems to have a true charitable purpose). Also, the FTC rule contains an exception for non-competition agreements that are part of the sale of a business. The rule “shall not apply to a non-compete clause that is 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.”

Additionally, the FTC suggests that a company can avoid the definition of a non-competition agreement by adopting a form of “garden leave,” consisting of continuing to employ an individual at their full salary, but just not assign work or permit them to use the employer’s IT systems or workplace.

The FTC’s rule also allows enforcement of non-competition agreements with senior executives (earning at least $151,164 AND having officer-level authority to implement policy), so long as the agreements are signed prior to the effective date (120 days after the expected publication dates in the Federal Registry later this week).

Whether the FTC’s new rule will survive the legal challenges is difficult to predict, but will certainly become clearer during the 120-day waiting period. The rule contains extensive discussion of the anticipated challenges, and is drafted to make each particular requirement independently enforceable so the final “Final Rule” may well end up in in a substantially different form.

Prince Lobel will provide further updates on the FTC’s new rule as they become available. If you have any questions on what the new rule may mean for you or your company, please contact Christopher Campbell, Justin Engel, or other members of Prince Lobel’s Employment Law Practice Group.

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