After a year-long wait and review of over 26,000 comments from the public, on April 23, 2024, the Federal Trade Commission (“FTC”) held an open meeting to vote on whether to issue a final rule that would prohibit the making and enforcement of non-compete provisions for most employees. During the meeting, the FTC enacted the final rule by a vote of 3 to 2 along party lines, with the three Democratic Commissioners voting in favor of the final rule, and the two Republican Commissioners voting against it.
The final rule provides that it is an unfair method of competition – and therefore a violation of Section 5 of the Federal Trade Commission Act (“FTCA”) – for employers to enter into non-competition provisions with workers after the effective date of the final rule (on or about August 21, 2024). The final rule defines a “non-compete clause” as “a term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from (1) seeking or accepting work in the United States with a different person where such work would begin after the conclusion of the employment that includes the term or condition; or (2) operating a business in the United States after the conclusion of the employment that includes the term or condition.”
According to the FTC, non-competition provisions exploit workers and threaten workers’ ability to earn a living. The FTC further observed that non-competition provisions are generally the product of unequal bargaining power, and empirical research demonstrates that such provisions harm competitive conditions in labor, product, and service markets. During its presentation in support of the final rule, Ben Cady of the Office of Policy Planning observed that of the 26,000 public comments received, over 25,000 were in favor of the proposed rule prohibiting non-competition provisions.
Here are the key takeaways for employers regarding the final rule:
- New non-competes: On or after the effective date of the final rule, employers are prohibited from entering into non-competition agreements with all workers, including senior executives.
- Existing non-competes: With the exception of senior executives, existing non-competition provisions are unenforceable after the effective date of the final rule. Existing non-competition provisions with senior executives may remain in force.
- Notification requirement: Employers must notify all current and former workers with non-competition provisions that the provisions are no longer enforceable.
- Sale of business exception: The prohibition does not apply to non-competes entered into in connection with the bona fide sale of a business entity.
The final rule does not include other types of restrictions on post-employment activity, including non-disclosure/confidentiality agreements and customer non-solicitation agreements. However, the FTC has previously warned that other post-employment restrictions could be considered non-competes if they are so broad in scope that they function as non-competes.
When the proposed rule was published in January 2023, the FTC observed that pursuant to Section 5 of the Federal Trade Commission Act, “unfair methods of competition” are unlawful. Section 5 further directs the FTC “to prevent persons, partnerships, or corporations . . . from using unfair methods of competition in or affection commerce.” The Commission further observed that Section 6(g) of the FTCA authorizes the FTC to “make rules and regulations for the purpose of carrying out the provisions of” the Act, including its prohibition of unfair methods of competition.
Despite this language, there has been considerable public debate as to whether the Commission has the authority to ban non-competition agreements. The two Commissioners that voted to reject the final rule generally did so on the basis that the FTCA does not vest the FTC with legislative authority notwithstanding the language of Sections 5 and 6. On Monday, April 22, 2024, the U.S. Chamber of Commerce announced that it would immediately challenge the anticipated final rule. In any event, the final rule is not effective until 120 days from the date of its publication in the Federal Register – on or about August 21, 2024.
If you have any questions relating to this final rule, please contact Kirsten McCaw Grossman, the NFC Attorney with whom you typically work or call us at 973.665.9100.