On April 23, 2024, the United States Federal Trade Commission (“FTC”) proposed its rule which would ban all new non-compete agreements with virtually all workers. As the FTC explains, about one in five American workers (about thirty million people) are bound by a non-compete clause and are restricted from pursuing certain employment opportunities. A non-compete clause is a contractual term between an employer and a worker that prevents the worker from working for a competing employer, or starting a competing business, typically within a certain geographic area and period of time after the worker’s employment ends.
The Far-Reaching Implications of the FTC’s Non-Compete Rule
The FTC’s decision is consistent with legislative trends in some states to ban the enforcement of both non-compete and non-solicitation agreements. The proposed new rule would overrule any state laws that permit the enforcement of non-compete agreements. Under the FTC’s proposed rule, all new non-compete agreements with employees, senior executives, independent contractors, interns and sole proprietors would be banned after the rule’s effective date.
Treatment of Existing Non-Compete Agreements and Special Cases
The FTC has taken a slightly different approach with certain existing non-compete agreements. Under the proposed rule, existing non-compete agreements for senior executives earning more than $151,164 annually, and in a “policy making position,” would remain in force, but employers would be banned from entering into or attempting to enforce any new non-compete agreement. The proposed rule would also require companies to rescind any existing non-compete agreements at the time of the rule’s effective compliance date.
Understanding the Scope and Exceptions of the Proposed Rule
The proposed rule is broad and would apply to all businesses, professions and industries, including those that rely heavily on the use of non-compete agreements, such as the healthcare and pharmaceutical industries. We note that the rule does create an exception for certain mergers and acquisitions under the sale-of-a-business exception. The sale-of-a-business exception would permit non-compete clauses to ensure that the integrity and value of the acquired business would remain unaffected. While the proposed rule initially had a 25% substantial ownership threshold requirement to qualify for the sale-of-business exception, the proposed rule eliminated that threshold requirement to disincentivize businesses from restructuring their existing business into several smaller entities to fall within the exception.
The Regulatory Process and Potential for Legal Contest
The FTC will soon publish the proposed rule in the Federal Register, triggering a 60-day public comment period where individuals, businesses and trade organizations can submit comments to the FTC concerning the potential impacts and effects of the proposed rule. Once the 60-day comment period ends, the FTC will review those comments and publish its final rule. Once the final rule is published, it becomes effective 60 days after publication with compliance being mandatory 180 days after publication.
Conclusion
As anticipated, the proposed final rule is already being challenged along constitutional grounds. Assuming for a moment that the proposed final rule survives the legal challenges it currently faces, we anticipate additional legal challenges to the scope of the final rule when/if it is eventually published. If you are curious how the FTC’s proposed rule might affect you or your business, contact a member of our team today.
Contributions to this blog by Chris Mtanos.
