Non-Compete No More: The FTC (Almost) Kills the Non-Compete

The Federal Trade Commission has (almost) killed the non-compete.[1] In a 3-2 vote on April 23, 2024, the FTC issued its long-anticipated Non-Compete Clause Rule (the “Non-Compete Ban”). The Non-Compete Ban provides that it is an unfair method of competition—and therefore a violation of section 5 of the Federal Trade Commission Act—for employers to enter into non-compete clauses with workers on or after the Non-Compete Ban’s effective date.[2] The effective date is to occur 120 days after the Non-Compete Ban’s publication in the Federal Register.[3]

Technically the Non-Compete Ban does not apply to every worker – senior executives are exempted but, for workers who are not senior executives, existing non-competes will no longer be enforceable after the Non-Compete Ban’s effective date.[4] Under the Non-Compete Ban, a “non-compete clause” is defined as a term or condition of employment that prohibits a worker from, penalizes a worker for, 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.[5] Beyond banning non-competes, the FTC is also compelling employers to provide notice to workers with existing non-competes notice that their non-competes are no longer enforceable.[6] In an effort to facilitate compliance and minimize burden, the Non-Compete Ban includes model language that satisfies this notice requirement.[7]

            While the Non-Compete Ban effectively eliminates non-compete clauses, there are some notable exceptions and inapplicable situations to be aware of. With respect to existing non-competes, i.e., non-competes entered into before the Non-Compete Ban’s effective date, the FTC adopts a different approach for senior executives than for other workers.[8] The Non-Compete Ban exempts “senior executives,” defined as workers earning more than $151,164 who are in a “policy-making position.”[9] The FTC reasoned that the Non-Compete Ban permits existing non-competes with senior executives to remain in force because such a subset of workers is less likely to be subject to the kind of acute, ongoing harms currently being suffered by other workers subject to existing non-competes and because commenters raised credible concerns about the practical impacts of extinguishing existing non-competes for senior executives.[10] It is estimated that senior executives represent less than 0.75% of the current workforce, so this exception is exceedingly narrow.[11]

In addition to senior executives, the Non-Compete Ban does not apply to non-competes entered into by a person pursuant to a bona fide sale of a business entity.[12] Further, the Non-Compete Ban does not apply where a cause of action related to a non-compete accrued prior to the effective date.[13] The Non-Compete Ban also provides that it is not an unfair method of competition to enforce or attempt to enforce a non-compete or to make representations about a non-compete where a person has a good-faith basis to believe that the Non-Compete Ban is inapplicable.[14]

Unsurprisingly, the reaction to the Non-Compete Ban has supporters and detractors. While many workers see this as a win, detractors argue it could lead to businesses being less willing to hire in fields that involve sensitive business information such as factors, importers, or financial institutions. It could also extinguish the practice of businesses paying for employees’ advanced education in exchange for limitations on them leaving the business. Additionally, it could result in lower wages now that businesses have less guarantee that the worker will not leave (it could also result in the opposite, as businesses increase wages to stop workers from leaving or to qualify them as senior executives).

Regardless, the Non-Compete Ban will be challenged in courts before it becomes effective. This will likely take the form of direct Administrative Procedures Act challenges (with a strong Contract Clause angle given the government’s interference with currently existing contracts), although it could also be used as an affirmative defense by workers who are being sued for violating non-competes. And, even if the Non-Compete Ban is ruled legal, and not overturned by a new administration, there will be endless litigation over whether an employee qualifies as a “senior executive.”

If you believe you or your business may be impacted by the Non-Compete Ban or if you are interested in challenging the Non-Compete Ban, please contact the experienced Employment and Business Law attorneys at Eckland & Blando today to understand your rights and obligations.