FTC Votes to Effectively Ban Non-Competes
By Krista Hiner · Wed, Apr 24, 2024 1:43 PM
Earlier this week the Federal Trade Commission (“FTC”) approved its final rule effectively banning employers from imposing and enforcing non-compete clauses on workers.1 The rule will go into effect 120 days after publication in the federal register (which has not yet occurred).
The rule is no surprise. The FTC has proposed restrictions on non-competes since January of 2023, aligning itself with the National Labor Relations Board General Counsel Jennifer Abruzzo who issued a memorandum last year declaring non-compete agreements to be in violation of the National Labor Relations Act.2
During the special Open Commission Meeting on April 23, 2024 during which the FTC voted on the rule, FTC Chair Lina Khan stated: “Noncompete clauses keep wages low, suppress new ideas, and rob the American economy of dynamism, including from the more than 8,500 new startups that would be created a year once noncompetes are banned.. .The FTC’s final rule to ban non[-]competes will ensure Americans have the freedom to pursue a new job, start a new business, or bring a new idea to market.”3 Chair Khan, along with those who voted in favor of the rule (the rule passed following a 3-2 vote) emphasized that non-competes are essentially unfair methods of competition.
In the FTC’s rule, a non-compete clause means: “(1) A term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from: (i) 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 (ii) operating a business in the United States after the conclusion of the employment that includes the term or condition....”
The rule restricts the use of non-compete clauses for both Senior Executives (which generally means someone in a policy-making position whose total compensation rate exceeds $151,164) and other workers. During the meeting (which this author attended), Chair Khan explained that the FTC chose to include senior executives because they are a class of employees best positioned to start new businesses and in turn create jobs for other workers.
The rule restricts the use of non-competes with Senior Executives on a moving forward basis, while still permitting enforcement of preexisting non-compete clauses. For all other workers, however, the non-compete clauses are unenforceable. In addition, employers cannot imply that the worker is subject to a non-compete clause. Employers also have an affirmative obligation to provide written notice to workers that their non-compete will not be enforced. An important exception here though is that the rule does not apply where a cause of action related to a non-compete cause accrued prior to the effective date, which means that ongoing litigation regarding non-competes may continue.
Legal challenges to the ban have already begun. A lawsuit filed in the Northern District of Texas the same day as the vote argues that the FTC lacks authority to promulgate such a rule.4 The U.S. Chamber of Commerce also published a same day press release that the Chamber would sue the FTC to block this rule, citing that the FTC lacks the requisite authority to take such action.5 Both challenges claim that the rule in fact stifles the economy and harms workers. Additional litigation is expected.
Some states, including California,6 and Minnesota,7 previously passed their own legislation restricting the use of non-compete agreements (which they can do even if the FTC rule is overturned) and it would not be surprising to see additional states capitalize on the momentum of the FTC rule and do the same.
1.
FTC Announces Rule Banning Noncompetes, April 23, 2024 Press Release. https://www.ftc.gov/news-events/news/press-releases/2024/04/ftc-announces-rule-banning-noncompetes.
2.
NLRB General Counsel Issues Memo on Non-competes Violation the National Labor Relations Act, May 30, 2023 Memo https://www.nlrb.gov/news-outreach/news-story/nlrb-general-counsel-issues-memo-on-non-competes-violating-the-national.
3.
Id.
4.
Complaint, Ryan, LLC v. Federal Trade Commission,Case 3:24-cv-00986-E, North Dist. Texas.
5.
U.S. Chamber to Sue FTC Over Unlawful Power Grab on Noncompete Agreements Ban, April 23, 2024 Press Release https://www.uschamber.com/finance/antitrust/u-s-chamber-to-sue-ftc-over-unlawful-power-grab-on-noncompete-agreements-ban.
6.
Cal. Bus. & Prof. Code § 16600.5.
7.
Minn. Stat. § 181.988.