Federal Trade Commission Final Rule Bans All Non-Competes

On April 23, the Federal Trade Commission voted to implement a sweeping new rule that bans all existing and new non-compete agreements for most workers. The Final Rule will take effect 120 days after it is published in the Federal Register. New non-compete agreements for “senior executives” (workers earning more than $151,164 annually and who are in policy-making positions) will also be banned beginning on the effective date of the rule, although existing agreements for senior executives can remain in place.

The Final Rule is already facing legal challenges, and it is likely that a court will issue an order delaying the effective date while litigation proceeds.

Highlights

The Final Rule is broad, in that it:

• Applies a nationwide ban.
• Applies prospectively to all workers, including employees, independent contractors, unpaid workers and senior executives.
• Applies retroactively to most workers — after the effective date, pre-existing non-competes for workers other than senior executives will be unenforceable.
• Requires employers to provide notice by the effective date to workers whose non-competes will become unenforceable, although a “formal rescission” of the non-compete is not required.
• Applies to all employers if they are within the FTC’s jurisdiction. Groups that are not covered by the FTC’s jurisdiction include nonprofits and certain financial institutions, and the rule does not apply to non-competes between franchisors and franchisees.
• Supersedes state laws that may contradict it.

Unfair Method of Competition

The Final Rule provides that it is an unfair method of competition under Section 5 of the FTC Act to (1) enter into or attempt to enter into a non-compete after the effective date; (2) enforce or attempt to enforce a non-compete, except for agreements entered into with senior executives prior to the effective date of the Final Rule; and (3) represent to a worker that the worker is subject to a non-compete, except for senior executives with a non-compete entered into before the effective date.

Definition of Non-Compete

The Final Rule defines a non-compete clause as a term, policy or condition, whether written or oral, that penalizes a worker, 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.

Confidentiality/Non-Solicitation Restrictions

By its express terms, the Final Rule does not affect confidentiality or customer non-solicitation agreements, but such restrictions will need to be reviewed to ensure that they are not so broad that they may be construed as “preventing a worker from seeking or accepting” employment.

Exception for Sale of Business

The Final Rule does not apply to a non-compete that is entered into by a person, pursuant to a “bona fide sale of a business entity,” of the person’s ownership interest in a business entity or all, or substantially all, of a business entity’s operating assets. There is no minimum threshold, unlike the Proposed Rule, which applied only to individuals who previously owned 25% or more of the sold business. As a result, the Final Rule allows parties to agree to a non-compete for a seller of a business regardless of the amount of the seller’s ownership interest.

Dissents

The Commission voted 3-2 on the Final Rule, with Commissioners Holyoak and Ferguson (the two Republican commissioners) dissenting. Both dissenters opined that the FTC does not have constitutional authority under Section 6(g) of the FTC Act to enact the rule. Commissioner Ferguson further suggested that the rule fell within the major questions doctrine — a principle that agencies should not decide questions of vast economic and political significance without clear authorization from Congress. He also suggested that the rule invokes powers that should be left to the states, and that it was arbitrary and capricious. Finally, he stated that 30 million existing contracts would be impacted by the rule.

Legal Challenges

Lawsuits challenging the rule have already been filed in federal court by the U.S. Chamber of Commerce and a business in Texas. The challengers likely will request the issuance of an injunction delaying the effective date of the rule during the course of the litigation.

Next Steps for Employers

While these legal challenges play out (including potential changes to the effective date), employers can:

• Evaluate which agreements may be subject to the ban and whether form agreements require modification.
• Assess quickly (i) whether any additional non-competes with senior executives are needed, and (ii) whether to adjust salary for any employee to meet the definition of senior executive, because non-competes entered into before the Final Rule goes into effect will remain enforceable.
• Consider alternatives to non-competes, such as non-disclosure agreements and customer and employee non-solicitation provisions, to protect confidential information and business relationships. Such restrictions will need to be appropriately tailored and comply with applicable state laws.
• Examine current non-solicitation and confidentiality agreements to ensure that they are not so broad that they may run afoul of the ban on non-competes.
• Continue to enforce trade-secret and intellectual-property laws.
• Maintain restricted access of workers, including through technological safeguards, to sensitive or trade-secret information.
• Include a training-repayment agreement to avoid losses from training workers who leave after a short time.
• Identify who will speak on behalf of the organization in the event that a notice to affected workers is required when the rule goes into effect.
• Stay tuned for further updates on the legal challenges to the rule.

If you have any questions about the FTC’s Final Rule, please contact the authors or any member of Robinson Bradshaw's Employment & Labor Practice Group or Antitrust & Competition Practice Group.