FTC Issues New Rule to Abolish Non-Compete Agreements

On Tuesday, April 23, 2024, the Federal Trade Commission (FTC), issued a final rule designed to promote competition and new business formation that, when effective, will impose a nationwide ban on non-compete agreements across all industries.

Existing non-compete agreements for employees will become unenforceable. Existing non-competes for senior executives can remain in force, but employers will be banned from entering or attempting to enforce new non-competes, even if they involve senior executives. Employers will be required to provide notice to workers, other than senior executives, who are bound by an existing non-compete agreement that they will not be enforcing them.

The FTC’s position is that non-compete agreements restrain competition, new business formation and innovation. The FTC also asserts that non-competes lead to increased market concentration and higher prices for consumers, and therefore, these restrictions amount to a violation of Section 5 of the FTC Act, which authorizes the FTC to prevent businesses from using “unfair methods of competition.”[1]

According to the FTC’s press release on this issue, FTC Chair Lina M. Khan said, “[n]on-compete clauses keep wages low, suppress new ideas, and rob the American economy of dynamism, including from the more than 8,500 new startups that would be created a year once non-competes are banned.” She added that this new rule “will ensure Americans have the freedom to pursue a new job, start a new business, or bring a new idea to market.”

The final rule does not affect state laws that restrict non-competes that do not conflict with the final rule. However, according to the FTC, it preempts state laws that conflict with the final rule.

The FTC has carved out three exceptions to the ban. The bona fide sales of business exception establishes that the ban “shall not apply to a non-compete clause 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 of all or substantially all of a business entity’s operating assets.”[2] The existing causes of action exception limits application of the ban “where a cause of action related to a non-compete clause accrued prior to the effective date.”[3] Finally, the good faith exception provides that “it is not an unfair method of competition to enforce or attempt to enforce a non-compete clause or to make representations about a non-compete clause where a person has a good-faith basis to believe that this ban is inapplicable.”[4] Additionally, under the FTC Act, a corporation is defined as an entity “organized to carry on business for its own profit…”[5] Accordingly, the ban does not encompass nonprofit entities.

The ban is earmarked to become effective 120 days after publication in the Federal Register. The rule has already been challenged, however. For instance, in a complaint filed in the Eastern District of Texas, the U.S. Chamber of Commerce alleges that the rule violates the Administrative Procedure Act and will harm employees, employers, and the economy, rather than promote growth.[6] Challenges such as this one could impact the rule’s effective date.

— Nancy Del Pizzo ([email protected]) and Timothy Gonzalez ([email protected]).

[1] 15 U.S.C.A. § 45

[2] Proposed Rule § 910.3(a).

[3] Proposed Rule § 910.3(b).

[4] Proposed Rule § 910.3(c).

[5] 15 U.S.C.A. § 44

[6] Case Number 6:24-cv-00148, United State District Court for the Eastern District of Texas, Tyler Division https://assets.bwbx.io/documents/users/iqjWHBFdfxIU/rO9qh4eXEJxo/v0