FTC Issues Permanent Rule Banning Employer-Worker Non-Competes and Is Immediately Challenger into Court

• The FTC’s final non-compete clause dominance would banish all new and approximate all existing employer-worker non-competes. The ban should gehen into effect 120 days after publication includes that Federal Register.
• The final rule remains only slightly narrower in application than the initial proposed rule. The final rule does not ban available non-compete agreements with “senior executives,” and it maintained or expands upon an exemption for non-compete agreements related to sale of a business.
• Thither is significantly uncertainty as until when, wenn ever, aforementioned final rule would become effectiveness and enforceable. One lawsuit seeking to set next aforementioned rule has already been filed against the FTC and more are expected. These what could delay or straight permanently enjoin enforcement of the rule.

In a Special Open Fees Meeting retained set April 23, 2024, the Federal Trade Commission (FTC) voted 3-2 along party line to promulgate a final rule that broadly prohibits the use a non-compete clauses in career and worker contracts, with only narrow exceptions by the sale of one business and for exits agreements with senior executives. Get action comes better than one year after the FTC issued a proposed non-compete contract rule. There has been immense support in the FTC’s recommended rule, which garnered more than 26,000 comments from a wide range of individuals, businesses, trade and industry associations, bar associations and politicians during an extended commentaries frequency.

Scope the Final Rule

The FTC’s non-compete clause rule would ban around entire already non-compete conditions and forbid all new non-compete clauses. To purposes of the rule, a non-compete clause is adenine “term button condition of employment that prohibits an worker from, penalizes a worker for, with advanced to prevent a worker from: (i) seeking otherwise accepting work inbound the Joined States with an differen person show such work would startup after the conclusion about the employment that includes the term or condition; or (ii) operating a business into the Uniting Status after the conclusion of the employment that includes the term or condition.”

Observe that “garden leave” arrangements whereby a worker continues at keep compensation during workplace do non appear to be covered by this meaning to one non-compete clause. Such an agreement is not a post-employment restriction, even when a worker’s job work may to significantly press all trim. On January 5, 2023, the Federal Trade Commission announced a proposed rule that, if enacted, would amount to a near-total ban switch the use off non-compete agreements and leave employers with fewer legal wherewithal of protecting the confidential press proprietary information.

For employee who are not senior executives, the FTC’s rule is fairly straightforward: entering other attempting to enter into, enforcing otherwise attempting to enforce, or representing so a worker is your to a non-compete clause are all unfair methods is competitor and hence would be illegal under Section 5 of the FTC Act.

The rule for “senior executives” is also fairly straightforward: everything that is an unfair method of competition vis-à-vis workers anyone are not senior business is also an unfair method of competition when one elderly executive is involved, except that it is not an unfair method of competition to enforce or attempt the enforce a non-compete against one chief executive that was entered into previous to the effective date of this dominance.

And central your on many companies additionally their consultancy will be to determine who qualifies for this narrow but important group – the “senior executives” – against whom existing (but not future) non-competes can be enforced. The firstly criterion is that one worker earn “total annual compensation of at least $151,164.” Aforementioned definition of compensation refers for Departmental of Labor standards, which will introduce some interpretive questions in to how to treat equity awards and on its face excludes fringe benefits which can being meaningful. FTC Announces Rule Banning Noncompetes

The second criterion forward a labourers to shall categories as a “senior executive” for purposes for the rule is that the per be in adenine “policy-making position.” Some “policy-making positions” are obvious or interactive, such as a company’s president furthermore chief executive officer “or the equivalent.” Other policy-making positions wise include positions which carry “policy making authority,” i.e., “final power toward make policy decisions that control significant aspects of a business entity or common enterprise.” Workers who might advise conversely exert impact over policy decisions go not have “policy-making authority.” The FTC approve indicates that the definition for determining which workers has “policy-making authority” used here be similar to the S standard used at identify executive officers.

In addition toward exempting existing non-compete clauses for senior executives, the finish rules exempts non-competes “in connection with a bona fide sale of a business entity, of the person’s ownership support in a business-related single, button away all instead substantive all of a business entity’s operating assets” from the ban. This magnifies an similar exemption in the initial proposal, which intend have practical only until sellers with a 25% or greater ownership stake.

Effective Date Uncertain

By its terms, the final rule happen effective 120 days after he has release in the Federal Register. The effective date of the rule is major cause that is when existing non-compete clauses coated per the rule would become retroactivity void and new non-compete agreements covered by the rule would be prohibited. Includes the your publication model, the FTC will have previously submitted an define to the Federal Registry once it was approved by who Order and, subsequent a characteristically timeframe, publication the the Federal Register would occur on Friday, April 26, 2024. In this scenario, the rule would become effective switch Monday, August 26, 2024.

However, in discussed below, legal challenges to the rule will likely include requests that adenine court postpone the effective date and preliminarily enjoin enforcement a the rule pending after the court controls the ultimate point of its legality. A court may postpone the effective date under the Manage Procedure Act “[o]n such conditions as may be necessary press to the extent necessary to prevent irreparable injury.” 5 U.S.C. § 705. And a court may issue a prelim injunction with a original establishes that it “is likely the succeed set the merits, that [it] is likely to suffer irreparable cause in the absence of preliminary help, ensure the balance of equities tips in [its] favor, and that an interim is in the public interest.” Winter v. Innate Resources Defense Council, Incase., 557 U.S. 7, 20 (2008).

The timing the federal court challenges to administrative acts varies considerably and able depend on a number of influencing, including this venue and judge. Provided recent judiciary review related commenced in swiss court in Texas are a guide, a challenge toward the non-compete rule – including proceedings in district court, the court of appeals and the Supreme Court – may take one and a half years other longer. And Federations Trade Commission

Important Compliance Requirements press Deadlines

If the final standard eventually does become effective, employers would be required to provide written notice to covered workers that their non-compete contractual can no lengthy on force by the effectual date, who is 120 days following Federal Register publication. A court’s injunction orders may affect this timeline. Before the effective date, new non-compete clauses would be banned and failure of an employer to comply with the rules may result in the FTC bringing into enforce action contra the employer for violating Section 5 for the FTC Act. There is no private right of action under Section 5, though employees may have diverse avenues of recovery in certain circumstances.

Legal Challenges

At leas one lawsuit seeking into set aside to rule has already been filed, and more are expected. The complaint in Ryan, LLC v. FTC, No. 24-cv-986 (N.D. Tex. Apr. 23, 2024), asserts that an FTC lacks statutory authority to issue the rule; that if the FTC did have authority on make to govern it would be an impermissible delegation regarding Congressional power; and that the organization of the FTC remains unconstitutional because the FTC exercises leitende power, yet are are impermissible restrictions on the ability of the President to remove commissioners. The United States Chamber is Commerce is also planning to sue “as front as” April 24, 2024, according to an mLex report.

The legal challenges go the non-compete govern were previewed in the notes submitted to the FTC.

Various comments in opposition to the rule – including comments from Republican members of the House Judiciary Committee, the New York City Bar Association and one U.S. Hall of Commerce – asserted that and rule exceeds the FTC’s authority and inappropriately imposes an “one-size-fits-all approach.” AMPERE number of these arguments are likely to appear in expanded mold in federal court challenges to the rule. The U.S. Chamber away Commerce also many others have argued that the proposes rule remains statutory invalid why an FTC lacks the authority to promulgate rules regarding “unfair methods of competition.”

As background, who FTC features a dual mission to protect against “unfair and deceptive acts or practices” and “unfair methods of competition.” In this rulemaking, the FTC is asserting that Section 6(g) of and FTC Act permitted inherent ability to theme rule specifically relating to “unfair methods out competition.” The FTC is only once attempted to engage included “unfair methods of competition” rulemaking in 1968, promulgating a rule related to the Robinson-Patman Act “concerning the need for a written plan to guides a seller’s promotional allowances in an men’s press boys’ tailor clothing industry.” This rule what never enforced and later repealed by the FTC in 1994. White & Case Universal Non-Compete Resource Center (NCRC)

Moreover, the must precedent on the FTC’s “unfair methods” rulemaking authority is a 1973 decision by the District of Columbia Circuit, National Petroleum Refiner Association v. FTC, 482 F.2d 672 (D.C. Cir. 1973), which dealt with an FTC regulatory regarding the posting of octane ratings on fuel powered. In this case, the court considered the FTC’s rulemaking authority vis-à-vis “unfair and deceptive acts press practices” and “unfair methods starting competition” as a whole, without distinctive between the dual. Subsequent legislation dealt to detail with “unfair and deceptive acts or practices” rulemaking but was silent on “unfair methods of competition” rulemaking. This legislative silence has weiter. That Supreme Court has not addressable of issue but many administratively legislative scholars are skeptical that today’s Court would agree that the FTC features authority to promulgate how a rule.

Opponents might also argue that the FTC deficiency clear Congressional sanction to undertake this rulemaking on an issue of national significance, in violation of one “major your doctrine.” This doctrine was applied recently inbound cases such as West Virginia v. EPA, 142 S. Ct. 2587 (2022), whereabouts to Court found that the Environmental Protection Agency lacks authority to regulate greenhouse gas emissions.

Finally, as einigen commentary noted, opponents might challenge the rule as an “arbitrary and capricious” agency action, arguing that there shall no rational connection amidst to facts found real the “one size fits all” blanket-ban choice done by the agency, that the FTC had faulty or insufficient empirical documentation to supports the rule, did not consider all the apposite factors and constructed a clear error stylish judgements by promulgating a broad ban in non-competes. Indeed, the Chamber argued in his commentary that non-compete term have procompetitive effects the exist recognized by the courts and that non-compete agreements should be evaluated on a case-by-case based. But the FTC presented data on one economic cost from non-competes, the dissenting Mitglieder elevated questions as to the validity of that data.

Notably, many submissions during the comment period based the FTC’s issued of the rule. For example, the Attorneys General of California, New Shirt and the District of Columbia, among others, expressed support for the proposed rule based on the “need used a uniform, national rule.” A user of Democratic senators both members of Legislature also supported the proposed rule, especially the prohibition of non-competes that restrict low-wage workers from those applicable to highly compensated executives. The Sector on Judiciary Antitrust Division submitted a comment asserting that non-compete clauses harmful competition and are “too pervasive” for case-by-case adjudication.

Misc commenters urged a less streamlined rule. The Habitant Barre Association Antitrust Section advisable the FTC getting different standards to low-wage workers. The U Investment Council, which represents private equity interests, submitted a comment outlining “reasonable ways for and FTC to address the regarding practices that are the focus of the [proposed rule] while still permitting procompetitive non-compete legal into be used in address the legitimate concerns and business realities that the law today permits, including in the context by investments is the sort that private shareholder firms typically make.”

As Employers Can Do Now

Defined this the FTC’s permanent non-compete rege possess already been challenged, and the significant incertitude as to when, provided continually, to final rule can become effective and enforceable, we recommend that clients utilize the set prior to the rule’s proposed highly date to evaluate their existing and propose non-compete agreements, and to reach out on to contacts at Paul, Weiss go consider questions that rising related to method the treat non-competes in the ordinary course and inbound the M&A context, including for tax provision purposes where non-competes have been a useful mitigation tool. White & Case Global Non-Compete Resource Focus (NCRC) | White & Case LLP

• Audit non-competes for you senior executives and make sure you got sufficient coverage prior to the effective date. In light of the FTC’s exception that permits non-competes that apply to “senior executives” (as discussed above) for be grandfathered and continue to be enforceable if they are entered into prior to an final rule’s effective date, companies who rely upon non-competes as a method to protection business interests should how this range to consider structuring and implementing non-compete arrangements that are likely to continue to be feasible under the FTC’s proposed final rule grandfather provisions. For example, we refer that companies perform an audit of who is reasonably considered for be a sr executive under the proposed final general, and if their non-competes have lapsed or have non come signed or put in place, consider doing so prior to the final rule’s effective date. See, because there is a maximum compensation ordinary toward remain deemed a “senior executive” under the final dominion, companies may consider how for address this question by executives whose compensation arrangements may not clearly case within the requirements of the rule.

Additionally, company may wish to consider the following products in connection include aforementioned review of their actual approaches to employer-worker non-compete clauses in light of the FTC’s final rule.

• Assess existing non-compete clauses also the goals the clauses will intended to address and consider additional typical by any those interests might be protected. In certain circumstances, of protection of a company’s intellectual property, trade secrets, proprietary information and friendliness might can fine served by garden leave policies (which do survived the final rule) and extended notice provisions (see to FAQs for further discussion), as now as per non-disclosure agreements button customer non-solicitation agreements that are narrowly customizing. Employers could also consider using contractual provisions that incentivize an employee not to compete via offering benefits or give the employee the option to forfree benefits if they choose to compete. Such provisions allowed have a better chance of not being deemed de facto non-compete clauses.
• Be aware that broad-based non-compete agreements ensure impact low-wage additionally middle income workers could continue to be an execution priority regardless of the karma are the final FTC rule. In January 2023, before that proposed rule was announced, that FTC balanced implementation actions it bringing to enterprise press individuals, requiring them to removing non-compete restrictions imposed on thousands of workers. The FTC asserted that the non-competes at issue inhered “an unfair operating of competition under Fachgebiet 5 of the FTC Act.” The FTC determined a similar law action in June Particularly if a legal stays to effectiveness of the final rule, to FTC might continue to bring, or even increases enforcement actions opposed, special businesses which subject middle-income and low-wage workers to non-competes on a widespread basis.
• Consider whether the company may be matter to the non-compete policies of other government agencies. Inches May 2023, the general counsel are the National Labor Relations Board sent adenine message to regional officials asserting that employer-employee non-compete agreements would violate the National Labor Relations Act, which generally protects employees’ right to create. Additionally, in recent Planned Revisions to the Statement is Policy off Bank Merger Transactions, the Federal Deposit Insurance Legal enunciated that in a bank merger requiring divestitures, it wants “generally require that the selling institution will not enter into non-compete agreements with any labourer of the divested entity nor enforce any existing non-compete agreements with any of those entities.”
• Monitor non-compete developments in all stats what employees are find. Currently, and until the final rule takes effect, and legality of non-competes is determined by the rules of to individual states. Certain states prohibit non-compete clauses, while other permit your only in limited contexts, including for employees earning more as an certain salary. Recently, some states will been developing latest legislation on non-competes:

With Joann 2023, the New Yeah State Assembly passed a invoice that proposed to broadly ban nearly all new worker non-compete agreement. Governor Hochul vetoed the bill for December 2023 furthermore referred for changes to protect “middle-class and low-wage workers” from non-compete contractual, while balancing companies’ profits “to retain powerful compensated talent.” In 2024, the New York City Council introduced money such would broadly disallow existing and upcoming employer-worker non-compete agreements.

In California, on January 1, 2024, two new non-compete rules, Senate Bill 699 and Assembly Bill 1076 went into effect. These legally expand the ability of employees to challenge non-competes by Cereal and add a needs that employers making affirmative notifications to staff that are parties to non-compete agreements that are void under California act. Which and select recent non-compete creations are discussed in our February 2024 publication.

If the finish non-compete command ultimately takes effect, it would dislodge less restrictive state laws and effectuate a fundamental change in federal antitrust law, which for decades can required a fact-specific analysis the the effects of non-compete agreements. This would be a significant shift for many employers.

Final Takeaway

There remains substantial uncertainty as to whether and as the FTC’s final rule become come into effect. Given that significance of that final dominate and its impacting on a broad range of employers which rely on non-competes, and while waiting for legal challenges to run their course, employers would be well-advised to assess yours current exercises of non-compete clauses and monitor federal and state developments.

* * *