Federal Trade Commission's Final Rule on Non-Compete Agreements

FTC’s Reasoning Behind Its Final Rule

Before issuing its Final Rule, FTC issued a proposed rule to ban the non-compete clause, by allowing a 90-day public comment period. Throughout the public comment period, the FTC stated that it had received 26,000 comments and 25,000 of them were in favor of banning the use of non-compete clauses.  

Although Commissioner Wilson dissented from the Proposed Rule suggesting that it “represents a radical departure from hundreds of years of legal precedent that employs a fact-specific inquiry” and that such a rule would “lead to protracted litigation” , after reviewing the comments and despite Wilson’s dissent, FTC issued the Final Rule where it banned non-competes nationwide, only with an exception for use of existing non-competes for senior executive. 

FTC stated that non-competes often force workers to stay in their jobs, switch to a lower-paying field, be forced to relocate, or leave the workforce altogether, or be forced to defend against expensive litigation. FTC also suggested that there was evidence that proved that non-compete clauses hindered innovation and business dynamism, preventing entrepreneurs from forming competing businesses, and ultimately harming consumers. 

The FTC also mentioned that employers had many alternatives other than the use of non-compete clauses in order to protect their investments. It is stated in the Final Rule that non-disclosure agreements (“NDA”) and the protection offered by various trade secret laws could be utilized to protect sensitive information of employers, instead of use of non-competes.

The Final Rule 

Under the Final Rule, the FTC decided that non-compete agreements amounted to an unfair method of competition and therefore a violation of Section 5 of the FTC Act. To that end, it banned employers from entering into and/or enforcing existing non-competes with their employees. 

Having said that, the Final Rule contains an exception to non-competes executed with senior executives, who are defined as employees earning more than $151,164 and are in a policy-making position. According to the FTC’s Final Rule, 

1. Non-Competes for Senior Executives: Existing non-competes for senior executives can remain in force. However, the employers are prohibited from entering into or enforcing new non-competes with senior executives.
2. Non-Competes for Other Employees: Existing non-competes are not enforceable after the effective date and the employers are prohibited from entering into or enforcing new non-competes.

Following the ruling, the employers will now have to provide notice to their employees that the non-compete agreement will not be enforced against them in the future.

According to the FTC, banning non-competes will result in reduced health care costs, a 2.7% increase in the rate of new firm formation, resulting in an additional 8,500 new businesses created each year, a rise in innovation and higher worker earnings: $400-$488 billion in increased wages for workers over the next decade. 

The final rule is set to go into effect on September 4, 2024. Having said that, a lawsuit has been filed to set aside the Final Rule by Ryan LLC, a global tax services firm whose principal place of business is in the Northern District of Texas because that the FTC lacks statutory authority to issue the rule since all legislative powers vest in Congress and that the Congress did not invest the Commission with authority to decide whether non-compete agreements are categorically unfair and anti-competitive. 

The US Chamber of Commerce also filed a lawsuit in US District Court for the Eastern District of Texas arguing that the non-competes have never been regulated at the federal level and without authorizing legislation, federal agencies have not previously sought to play a role in regulating non-compete agreements on a nationwide basis.  They continued to suggest that by invalidating existing noncompete agreements and prohibiting businesses and their workers from ever entering into such agreements going forward, nondisclosure agreements and trade-secret lawsuits would be highly inadequate and expensive alternatives for employers to be able to protect their confidential information. Having said that, the judge suspended the Chamber of Commerce’s lawsuit citing a rule that allows a district court to transfer, stay, or dismiss an action when a similar complaint has already been filed in another federal court. The judge also allowed the Chamber to intervene in Ryan’s case which was filed earlier in a separate Texas court. 

Conclusion

In light of the lawsuits that have been filed, whether US courts will uphold the Final Rule and ban the use of non-compete agreements between employers and employees in the United States remains a mystery. Similarly regardless of the outcome of the US lawsuits, whether competition authorities and most importantly the TCA will adopt the same approach with the FTC regarding the use of non-compete clauses and agreements remains a mystery. Having said that, FTC clearly states on its website that market participants may report information about a suspected violation of the rule to the Bureau of Competition by emailing noncompete@ftc.gov once the rule becomes effective.