New FTC Rule Bans Non-Compete Agreements in All Employment Contracts

The Federal Trade Commission (FTC) issued a new rule on April 23, 2024, banning new non-compete agreements in all employment contexts. The highly anticipated rule, which was first proposed in draft form in January 2023, is expected to have significant impacts on employers in a wide swath of industries who have traditionally relied on non-competes to protect company secrets and intellectual property, as well as to encourage investment in worker training. It will face certain challenges from the U.S. Chamber of Commerce and other groups, and whether it ultimately is enforced by a court remains to be seen.

Background

The rule comes on the heels of a 2021 executive order from the Biden Administration encouraging agencies to enact a "whole government" approach to encouraging competition. Following the order, the FTC announced its intention to reinvigorate Section 5 of the FTC Act, which authorizes the agency to prevent businesses from using "unfair methods of competition." In a statement in support of the rule, Chair Lina Khan said that "[t]he freedom to change jobs is core to economic liberty and to a competitive, thriving economy" and that "[n]oncompetes block workers from freely switching jobs, depriving them of higher wages and better working conditions, and depriving businesses of a talent pool that they need to build and expand. By ending this practice, the FTC's proposed rule would promote greater dynamism, innovation, and healthy competition." Employers and others have strongly opposed the rule, asserting that the FTC does not have the legal authority to regulate competition in this way and that the rule "opens up a Pandora's box where this commission or future commissions could be literally micromanaging every aspect of the economy."

As passed by the FTC's Commissioners on a 3-2 vote among partisan lines, the rule applies to anyone who works for a for-profit employer, whether paid or unpaid, and to independent contractors. Specifically, the new rule prohibits employers from entering into new non-competes with any employee, including senior executives (which is a change from the proposed rule), or representing to any employee that the employee is subject to a non-compete.

Employers may continue to enforce existing non-competes with senior executives. Employers must notify all other current and former workers that any existing non-competes are no longer enforceable before the rule goes into effect. Employers seeking to provide notice may rely on model language included in the rule to satisfy the notice obligation and those who do are granted a "safe harbor" for compliance.

Because the FTC's authority only extends to for-profit businesses, the rule will not affect employment agreements entered into by workers employed by nonprofit organizations. The rule also permits limited use of non-compete agreements between franchisees and franchisors.

The proposed rule also does not apply to non-competition agreements entered into by a person during the "bona fide sale of a business," of the person's ownership interest in a business entity or of all or substantially all of a business's operating assets.

Conclusion and Takeaways

Employers covered by the rule should expect to face added complexity to the already multifaceted challenge of hiring and retaining talent. Moving forward, employers may be able to look to employment agreements used in states such as California, where non-competes were already unenforceable, for guidance on restructuring their employment agreements to comply with the new rule.

The new rule will become effective 120 days after the FTC publishes it in the Federal Register. Covered employers have until the effective date to come into compliance with the rule. The U.S. Chamber of Commerce has vowed to challenge the rule in court, perhaps as early as April 24, 2024, and thus whether the rule ultimately is enforceable is yet to be determined. There is a strong possibility that the district court that hears the lawsuit will have the ability to issue a temporary restraining order or preliminary injunction of the rule, which would delay the implementation of the rule while the challenge to its validity plays out in the courts.

For more information and guidance on the FTC rule and its impact, contact the authors or another member of Holland & Knight's Labor, Employment and Benefits Group, Antitrust Team or Consumer Protection Defense and Compliance Team.

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