Federal Trade Commission Votes to Ban Non-Compete Agreements

On April 23, 2024, the Federal Trade Commission (FTC) held a public hearing where members voted 3-2 to adopt a final rule effectively banning employers from enforcing non-compete clauses against employees with very limited exceptions.  This rule, which is largely similar to the proposed rule first announced by the Commission in January of 2023, imposes a “comprehensive ban on new non-competes with all workers.”  The new final rule will go into effect 120 days after the rule is published in the Federal Register.

The rule states that new non-competes are banned for all employees, regardless of title or income level, as of the effective date.  The rule is also mostly, but not completely, retroactive—meaning non-competes executed before the effective date will be unenforceable as applied to all workers other than “senior executives” (workers earning more than $151,164 in total compensation who are in a “policy-making position”).  Employers will be required to inform any employee (other than senior executives) that had executed a non-compete prior to the implementation of the rule, that their non-compete will be unenforceable.

During the public hearing outlining the final rule, the Commission claimed that its research found non-competes lower employee wages, suppress the formation of new businesses, stifle innovation and force employees to remain in jobs with poor working conditions.  The Commission estimates that the final rule will increase workers’ total earnings by an estimated $400 billion to $488 billion over ten years, at the ten-year present discounted value.

The FTC’s rule will apply to all employees of for-profit companies in the United States.  The FTC’s jurisdiction does not expand to employees of nonprofit corporations, and the rules regarding non-competes applied to employees of those entities will not change as a result of the FTC’s rule.  The rule does not prohibit the use of other restrictive covenants commonly used in addition to, or instead of, non-competes, such as non-solicitation agreements or agreements to protect confidential information.  There is also an exception in the rule for non-compete agreements entered into with a person as part of the bona fide sale of the person’s ownership interest in a business.  Additionally, while the rule prohibits enforcing non-compete agreements after the effective date, it will not apply where a cause of action related to a non-compete clause had accrued prior to the effective date.

The Commission passed the final rule along party lines.  The two Republican members of the Commission who voted against the final rule each gave statements arguing that the Commission lacks the legal authority to implement the new rule.  It is expected that numerous interest groups will file legal actions in the coming weeks challenging the FTC’s authority to implement the rule, and the legal landscape surrounding non-competes will likely be significantly impacted by ongoing litigation in the next several months.

Given the FTC’s passage of its final rule and the promised upheaval in non-compete law in the months to come, employers are advised to look closely at their existing restrictive covenant agreements with employees to ensure their compliance with the shifting legal landscape.

If you have questions about your existing restrictive covenants or how to best protect your legitimate business interests moving forward, contact your Dinsmore employment attorney.