iIn a long-anticipated move that dramatically alters the employment landscape, the Federal Trade Commission (“FTC”) issued its final Non-Compete Clause Rule (“final rule”) effectively banning employee non-compete agreements throughout the United States. After receiving over 26,000 public comments, the FTC determined that the use of non-compete agreements with workers constitutes an “unfair method of competition” in violation of Section 5 of the FTC Act.
The final rule is sweepingly broad and imposes a prospective ban on new non-competes for all workers, while retroactively invalidating all existing non-competes except for those with senior executives. Under the final rule, “senior executives,” whose existing non-compete agreements remain enforceable, are defined as workers in policy-making positions earning more than $151,164 annually. The final rule requires employers to provide notice to affected employees, other than senior executives, that their existing non-compete agreements will not be enforced by the effective date of the rule.
The FTC’s ban targets non-compete clauses that are “a term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from” seeking or accepting different work in the United States or operating a business in the United States. Other types of non-compete agreements, such as those entered into in connection with the sale of a business, are excluded. The prohibition applies to both contractual terms and workplace policies, whether written or oral, and it preempts conflicting state laws.
The final rule will become effective 120 days after it is published in the Federal Register.
Legal Challenges Underway and More Expected
As anticipated, the final rule is facing legal challenges out of the gate. Earlier today, less than 24 hours after the FTC announced the final rule, the U.S. Chamber of Commerce filed a lawsuit challenging the non-compete ban, arguing that the FTC does not have authority under the FTC Act to make rules regulating unfair methods of competition, and that under the U.S. Supreme Court’s “major questions doctrine,” the final rule must be vacated because the FTC acted without clear Congressional authorization. Given the Supreme Court’s increasingly skeptical view of administrative rulemaking of late, these arguments may find favor should they reach the Supreme Court. The Chamber also challenges the final rule on other grounds, including that it is an unconstitutional delegation of legislative power, that it impermissibly applies retroactively to existing non-compete agreements, and that it is arbitrary and capricious, as the FTC issued the final rule based on limited and flawed studies without sufficient consideration of the concerns and alternatives raised during the public comment period. We expect that other interested parties will raise similar challenges and that status of the final rule will remain in flux while legal battles unfold.
Proactive Steps for Employers
Although there may be strong bases to challenge the final rule and its ultimate fate is unknown, the recent trend at both the federal and state levels has decidedly been to narrow and restrict the use of employment-based non-compete agreements. Employers should use this opportunity to think about their protectible business interests and take stock of the alternative tools available, including, for example, by implementing or updating non-disclosure and non-solicitation agreements, ensuring systems are in place to safeguard and restrict access to trade secrets and other confidential business information, investing in training and culture to promote retention and reinforce employee duties and implementing robust exit interviews and transition planning.
