The Federal Trade Commission’s Comprehensive Ban on Non-Competes

On April 23, 2024, the Federal Trade Commission (the “Commission”) voted to adopt a final rule (the “Rule”) banning nearly all non-competes on the grounds that the underlying restrictions imposed on workers constitute unfair methods of competition and thus are in violation of the Federal Trade Commission Act (the “Act”).  The Rule is scheduled to be published in the Federal Register in the coming weeks and will become effective 120 days after its publication. Two lawsuits have already been filed against the FTC pertaining to the Rule, however, so there is a distinct possibility that the Rule may never go into effect or that it may be temporarily enjoined. Once effective, the Rule implements a categorical ban on all future non-competes except in the context of the sale of a business. The Rule also bans and makes unenforceable almost all existing non-compete agreements with a limited exception for “Senior Executives.” Notably for in-house IP counsel, the rule defines non-compete clauses broadly. So, IP counsel may want to review any “claw back” provisions in existing agreements with employees pertaining to post-employment inventions to ensure they do not run afoul of the Rule. To the extent non-compete agreements are being used to protect IP, IP counsel may also want to consider alternative provisions to achieve this goal that comport with the Rule.

Immediate Impact of Rule

The Rule prohibits employers from enforcing any existing non-compete clauses against all workers, except those workers that are Senior Executives. Workers include current and existing employees and independent contractors, regardless of a worker’s title or status under other applicable law.  Employers are required to provide individualized notice to their former and existing employees (except senior executives) that such employees are no longer subject to non-compete obligations and any non-compete clauses entered into by such employees will not, and cannot be, legally enforced. Employers must comply with this notice requirement by the Rule’s effective date.   

Senior Executives will remain subject to non-compete obligations existing as of the Rule’s effective date. Under the Rule, Senior Executives are those workers that earn more than $151,164 annually and are in a policy-making position (i.e., a position in the organization in which the worker has final authority to make decisions controlling significant aspects of the organization). However, all noncompete clauses that take effect on or after the effective date are categorically banned. On or after the effective date, employers will be prohibited from entering or attempting to enter into a non-compete agreement with any worker, including any worker considered a Senior Executive. 

Notably, two lawsuits have already been filed against the FTC challenging its authority to promulgate the rule.  It is expected that these lawsuits will seek an injunction barring the rule from going into effect.

Scope of Non-Compete Clauses

The Rule prohibits all future non-compete clauses. In a detailed summary announcing the Rule, the Commission clarified that the prohibited  “non-compete clauses” are not only those included in written employment contracts. A non-compete clause is any term or condition of employment, written or unwritten, including any term or condition in an employee handbook or part of workplace policies that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from seeking or accepting work or operating a business in the United States post-employment.  

Terms or conditions containing express prohibitions are easily identifiable as non-compete clauses. Other terms and conditions are not as easily recognizable. Terms or conditions requiring a worker to make a payment to a former employer if the worker seeks or accepts certain other work or starts a business are considered non-compete clauses because such payments are effectively penalties imposed on the worker. Even payments categorized as liquidated damages under an employment agreement fall in this category. Terms or conditions imposing broad restraints on a worker’s post-employment activities may also constitute non-compete clauses if they prevent a worker from seeking or accepting other work or starting a business. As such, various types of restrictive employment agreements beyond the traditional non-compete may be impermissible under the Rule if their terms ultimately serve to refrain or restrict the mobility of workers. IP Counsel may need to carefully review their intellectual property policies, employee handbooks, and employment agreements to ensure that any provisions regarding post-employment inventions do not run afoul of the Rule.

The Commission declined to expressly specify the employment agreements that would fall under the scope of the Rule on the grounds that this determination is fact-specific and could not be made at this time.[1] However, in response to comments submitted during the rulemaking process by various stakeholders, the Commission provided a number of helpful examples, discussed below. 

• A non-disclosure agreement that restricts a worker from disclosing certain confidential information to a competitor would not be a non-compete under the Rule, but a non-disclosure agreement that restricts a worker from disclosing in a future job any usable information that relates to the industry in which they work or information that is publicly available would be a non-compete.
• Similarly, a non-solicitation agreement would not be considered a non-compete if it merely restricts who a worker may contact after they leave their job but would fall under the definition of a non-compete if the restrictions are so broad they effectively prohibit seeking or accepting any other work.
• A training repayment agreement requiring workers to work for three years or else repay earnings plus the company’s future profits, attorneys’ fees, and arbitration costs are functionally a non-compete because workers, when faced with significant out-of-pocket costs for leaving employment, are forced to remain at their current jobs and are effectively prevented from seeking or accepting other work or starting a business.
• A bonus repayment agreement is not a non-compete if it simply requires repayment of a bonus when the worker leaves but would be considered a non-compete if the amount to be repaid is more than the bonus that was received and repayment is tied to who the worker can work for or their ability to start a business.
• A severance agreement that imposes no restrictions on where a worker may work following the employment associated with the severance would not be a non-compete but would be a non-compete if one of the conditions for paying out the severance is a requirement that the worker refrain from competing with their prior employer.

Exceptions, Defenses, and State Law

There are limited exceptions to the applicability of the ban. Specifically, in addition to existing non-compete clauses between employers and senior executives, non-compete clauses are permissible in agreements between buyers and sellers for the sale of a business.  The ban on non-competes also does not apply where a cause of action under a non-compete clause accrued prior to the promulgation of the Rule. Further, employers are still permitted to enter into non-compete agreements as they apply to an employee’s concurrent employment. The ban also does not apply to non-competes between businesses nor does the ban apply to a franchisor-franchisee relationship. 

The Rule also has a limited territorial reach. The Rule does not impact non-compete clauses that that restrict only work outside the United States or starting a business outside the United States. The Rule also does not invalidate non-competes entered into by foreign workers with foreign companies unless the non-compete restricts a worker’s ability to work or start a business inside the United States. 

The Rule provides a good faith defense to employers that enforce or attempt to enforce a non-compete clause because they believe that the non-compete clause is not subject to the Rule’s ban. 

Finally, the Rule does not supersede existing state law or alter, limit, or affect the authority of a state’s attorney general or other regulatory or enforcement agency to bring a claim or regulatory action under state law except and only to the extent such state law permits or authorizes non-compete agreements or conflicts with the Rule’s notice requirement.

The Rule’s Notice Requirement.

Importantly, the Rule also requires employers to notify any current and former employees (excluding Senior Executives) still subject to a non-compete that their non-compete is no longer enforceable. The Rule provides optional model language for such notice and permits service on the employee by traditional (mail) and electronic (email or text message) means. This could impose a significant administrative burden on employers particularly as it pertains to former employees.

Future Considerations

While adopted by the Commission just a few days ago and intended to be effective after publication, the Rule has already been challenged in federal court by at least two parties and may be subject to additional lawsuits prior to and after implementation—opening the door to the possibility of a delay in implementation. If the Rule does go into effect, careful review of existing employment agreements, intellectual property policies, and employee IP and invention assignment agreements may be necessary.

Endnotes

[1] The Commission also noted that irrespective of whether these agreements are covered by the Rule, all such agreements are still subject to the Act’s prohibition of unfair methods of competition.