FTC Issues Final Rule Banning Non-Competes

What Happened?

On April 23, 2024, the Federal Trade Commission (the “Commission”) voted to issue its final rule (the “Final Rule”) barring non-competes for most workers in the United States, with exceptions for non-competes entered into in the context of a sale of business. The Final Rule will go into effect 120 days after its publication in the Federal Register. While we continue to digest the over 570 pages of the Final Rule, here are some initial observations.

How Did We Get Here?

The Commission’s Final Rule comes on the heels of several years of failed attempts to pass federal law barring non-compete agreements. In 2019 and then again in 2021, Congress introduced and failed to pass the Workforce Mobility Act, which would have prohibited “any persons from entering into, enforcing, or threatening to enforce a noncompete agreement with any individual who performs work for the person and who in any workweek is engaged in commerce or is employed in an enterprise engaged in commerce.”[1] On July 9, 2021, President Biden issued his Executive Order on Promoting Competition in the American Economy that invited the Federal Trade Commission (the “Commission”) to consider rule-making in a variety of areas, including “agreements that may unduly limit workers’ ability to change jobs.”

On January 5, 2023, the Federal Trade Commission (the “Commission”) announced and made public its Notice of Proposed Rulemaking (the “NPRM”) regarding non-competes, including its request for public comment on all aspects of the proposed rule. The NPRM was subsequently published in the Federal Register on January 19, 2023, with a March 20, 2023 deadline for the submission of public comments. On April 6, 2023, the Commission extended the public comment period to April 19, 2023. By the conclusion of the public comment period, the Commission received over 26,000 comments.

Following the publication of the NPRM, Congress again saw several attempts to renew legislative efforts to pass federal law barring non-compete agreements. On February 1, 2023, Congress sought to pass an updated version of the Workforce Mobility Act; this bill was referred to the Senate Commission on Health, Education, Labor, and Pensions (the “Senate Commission”). On February 9, 2023, Congress sought to pass a separate bill, the Freedom to Compete Act of 2023, which would amend the Fair Labor Standards Act to prevent employers from using non-compete agreements in employment contracts for certain non-exempt employees. This bill was also referred to the Senate Commission. To date, Congress has yet to enact any legislation prohibiting non-competes in the workplace. Additionally, on May 30, 2023, the National Labor Relations Board’s general counsel issued guidance announcing that non-compete provisions violate the National Labor Relations Act, unless narrowly tailored to special circumstances justifying the restrictions. This NLRB guidance instructed NLRB Regional offices to proactively look for unfair labor practice charges to pursue against overboard non-competes.

On April 16, 2024, the Commission Chair Lina M. Khan announced that the Commission would hold a special Open Commission Meeting (the “Meeting”) on April 23, 2024 to vote on the Final Rule. Today, the Commission voted 3–2[2] in favor of issuing the Final Rule. In issuing the Final Rule, the Commission argues that banning non-competes will result in (1) reduced healthcare costs, (2) new business formation, (3) a rise in innovation, and (4) higher worker earnings.

What Does the Final Rule Say?

The Final Rule will make it a violation of the Act for an employer to:

• “Enter into or attempt to enter into” a non-compete clause with any worker.
• “Non-compete clause” is defined as a term or condition of employment that either prohibits a worker from, penalizes a worker for, or functions to prevent a worker from seeking or accepting work after the conclusion of their employment.
• “Worker” is defined as any person who works for an employer, including employees, independent contractors, interns, volunteers, apprentices, sole proprietors, and any person who provides services to a person. The term includes persons who work for a franchisee or franchisor; however, it does not include a franchisee in the “context of a franchisee-franchisor relationship.”

• With regards to senior executives:
• “Enforce or attempt to enforce a non-compete clause" that is entered into after the effective date of the Final Rule.
• “Represent that the senior executive is subject to a non-compete clause, where the non-compete clause was entered into after the effective date.”
• “Senior executive” is defined as a worker who (1) is in a policy-making position; and (2) received total annual compensation of at least $151,164 in the preceding year.

• With regards to workers other than senior executives:
• “Enforce or attempt to enforce a non-compete clause.”
• “Represent that the worker is subject to a non-compete clause.”

Once the Final Rule is effective, employers and engaging entities that have non-competes that are banned under this Final Rule will be required to provide “clear and conspicuous” notice, for which the Commission has provided model language in the Final Rule, to all workers (other than senior executives) that their non-competes will not enforced.

Are There Any Exceptions?

The Final Rule exempts non-competes entered into in connection with a bona fide sale of business. The Final Rule provides that the non-compete restrictions do not apply to any non-compete clause 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.”

The Final Rule also does not categorically prohibit other types of restrictive covenants, such as nondisclosure agreements, non-solicits, or fixed-term agreements. But the Rule indicates that covered non-compete clauses will include any other restrictive covenants that “function[] to prevent” a worker from seeking or accepting other work or starting a business after their employment ends. The Final Rule provides some examples of restrictive covenants that may be considered banned non-competes under the “functions to prevent” prong: a nondisclosure agreement that bars a worker from disclosing, in a future job, any information that is “usable in” or “relates to” the industry in which they work or a nondisclosure agreement that bars a worker from disclosing any information or knowledge the worker may obtain during their employment whatsoever, including publicly available information. The extent of other potential exceptions, such as training repayment agreements, is also fact-specific. We will address this in greater detail in a separate post.

The Final Rule also does not apply to causes of action related to non-competes that have already accrued before the effective date of the final rule.

How Does the Final Rule Interact with Other Laws?

The Final Rule is also intended to supersede any state statute, regulation, order, or interpretation that is “inconsistent” with the Final Rule. However, any such statute, regulation, order, or interpretation that affords workers greater protections than the Final Rule will not be superseded.

Will There Be Legal Challenges Against the Final Rule?

Now that the proposed rule has been issued as a Final Rule, we anticipate stakeholders impacted by such Rule to challenge the rule in court. Of particular interest, the U.S. Chamber of Commerce (the “Chamber”) announced yesterday that it will sue the Commission as early as today once the Commission voted on and published the Final Rule. The Chamber’s executive vice president and chief counsel, Daryl Joseffer, said the Commission’s issuance of the Final Rule was a “remarkable administrative power grab” because the Act does not allow the Commission to promulgate antitrust rulemaking. He went further to say, “in terms of their rulemaking authority, in terms of the scope of their Section 5 authority, from [the Chamber’s] standpoint, under just traditional statutory interpretation, you read the statutes and the authority is not there.”  Regarding the Chamber’s legal challenge against the Final Rule, the Chamber indicated that “this is less about precedent on constitutional law and more about the written statute, [to] see what it says and what it doesn’t say. And then there also may well be other arbitrary and capricious challenges coming down the pike.”

Indeed, we can expect the Chamber’s challenge to not be the only one, as the Commission’s purported rule-making authority has been questioned for some time, on the basis of at least the following four key arguments:

• The Commission has exceeded its statutory authority by issued this Rule – When Congress created the Commission, Congress considered it to be “an investigative body” and the rulemaking grant was merely “an adjunct to the Commission’s investigative powers.”[3] In National Petroleum Refiners, the D.C. Circuit’s reasoning reversing the district court’s decision is inconsistent with contemporary approaches to statutory interpretation, which now disfavor the then-popular “judicial trend favoring rule-making over adjudication for [the] development of new agency policy.”[4] In its own opinion, the D.C. Circuit even acknowledged that the legislative history behind the creation of the Commission was ambiguous and that substantive rulemaking was inconsistent with longstanding Commission practices.[5] During the Meeting, Commissioners Holyoak and Ferguson both emphasized that Section 6(g) of the Act did not confer rulemaking authority on the Commission and the issuance of the Final Rule would go beyond the Commission’s authority.
• The Commission has gone beyond the scope of Congress’s intent when it extended rulemaking authority to the Commission – This argument centers around the “major questions” doctrine, which was most recently addressed by the Supreme Court in West Virginia v. Environmental Protection Administration, where the Court held that the Court should not defer to agencies (as it has done over the last four decades) if and when an agency appears to do something novel, and if that action might have “vast economic and political significance.”[6] Here, the argument would be that the Commission lacks clear legislative authorization to issue the Rule.

• The Commission has exercised an abuse of discretion by arbitrarily and capriciously issuing this Rule – Stakeholders are expected to argue that the statutory provisions surrounding Section 6 of the Act make it clear that Section 6(g) does not grant the Commission rulemaking power. This argument is bolstered by the fact that Congress lumped Section 6(g) with a far less impactful authority of “classify[ing] corporations,”[7] which suggests that there was no legislative intent to grant any significant authority and the Commission’s issuance of this Rule is arbitrary and capricious and an abuse of its discretion.

• The Act does not provide the Commission with the means of enforcing competition rules – Therefore, Congress did not intend to give the Commission competition rulemaking authority. Of particular note, we contrast this with Section 205(a) of 15 U.S.C. § 45(m), which amended Section 5 of the Act to give the Commission the express authority to initiate a civil trial to obtain a penalty against any party that knowingly violates an Unfair, Deceptive and Abusive Practices regulation.

What Should Employers Do Now?

Consider what to do with senior executives who currently are not subject to non-compete agreements.

Review their existing agreements with workers and assess the extent to which these agreements would be deemed non-competes under the Final Rule.

Assess and review plans to protect trade secrets and other sensitive business information in light of the Final Rule.

The Morrison Foerster team will be convening meetings across the country to help clients navigate the implications of the Final Rule.

[1] https://www.congress.gov/bill/116th-congress/senate-bill/2614; https://www.young.senate.gov/newsroom/press-releases/young-murphy-cramer-kaine-introduce-bill-giving-workers-freedom-to-leave/.

[2] Commissioners Khan, Slaughter, and Bedoya voted in favor of the Final Rule and Commissioners Holyoak and Ferguson voted against the Final Rule.

[3] Nat’l Petroleum Refiners Ass’n v. FTC, 340 F. Supp. 1343, 1345 (D.D.C. 1972), overturned, 482 F.2d 672, 698 (D.C. Cir. 1973).

[4] Nat’l Petroleum Refiners, 482 F.2d at 676.

[5] Id.¸ at 686.

[6] West Virginia v. EPA, 597 U.S. 697, 716 (2022).

[7] Whitman v. Am. Trucking Ass’ns, Inc. 531 U.S. 457, 468 (2001).