Fed Trade Commission Bans New Non-Competes

April 25, 2024

On Tuesday, April 23, 2024, in a 3-2 partisan line vote, the Federal Trade Commission (FTC) issued a new rule effectively banning new non-compete agreements in all employment contexts. Initially proposed in draft form in January 2023, the highly anticipated rule 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. Highlights of the new rule include:

• An effective date of 120 days following the rule’s publication in the Federal Register;
• Prohibition of for-profit employers from entering into new non-compete agreements with all employees, including executives; and,
• Existing non-competes with senior executives remain enforceable, however, employers must notify all other workers with whom they have non-compete agreements that said agreements are unenforceable by the aforementioned effective date.

Notably, because the FTC’s authority only extends to for-profit businesses, the rule will not affect employment agreements entered into by workers at non-profit organizations.

The U.S. Chamber of Commerce has filed a lawsuit against the FTC ban.

Background

Following a 2021 Biden Administration Executive Order asking agencies to enact a “whole government” approach to encourage competition, 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, FTC Chair Lina Khan said that the “freedom to change jobs is core to economic liberty and to a competitive, thriving economy” and that “{B}y ending this practice, the FTC’s proposed rule would promote greater dynamism, innovation, and healthy competition.”

Those opposed to the rule assert that the FTC does not have the legal authority to regulate competition in this way. The US Chamber of Commerce issued a statement immediately following the vote, vowing to “sue the FTC to block this unnecessary and unlawful rule”. President and CEO Suzanne P. Clark said “{T}he Federal Trade Commission’s decision to ban employer non-compete agreements across the economy is not only unlawful but also a blatant power grab that will undermine American business’ ability to remain competitive.” Clark noted that, in its 100 year history, the FTC “has never been granted the constitutional and statutory authority to write its own competition rules” and by filing suit, the Chamber will “put other agencies on notice that such overreach will not go unchecked.”

Takeaways

As of now, the rule will become effective 120 days following its publication in the Federal Register. Employers covered by the rule have until that effective date to come into compliance with it. Whether the rule ultimately will be enforceable remains to be seen as it most certainly will face challenges from more than just the US Chamber of Commerce. NAHC will continue to monitor developments and will notify members accordingly.