On Tuesday, April 23, 2024, the U.S. Federal Trade Commission (“FTC”) voted 3-2, along party lines, to approve a final rule essentially banning virtually all new noncompete agreements and clauses in employment contracts—a potential change that would impact millions of U.S. workers. If implemented, the final rule would also invalidate all existing noncompete agreements, except for those agreements pertaining to “senior executives.” As part of this retroactive invalidation, U.S. employers would be required to provide notice to current and former employees informing them that they are no longer subject to an enforceable noncompetition agreement.
How We Got Here: President Biden’s July 2021 Executive Order
The Biden Administration began taking aim at corporate employers’ use of noncompetition agreements back in July 2021, when President Biden signed his Executive Order on Promoting Competition in the American Economy. In the Executive Order, President Biden issued a specific directive to the FTC to utilize its statutory rulemaking authority “to curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.”
The FTC’s Proposed Rule
In early January 2023, the FTC, appearing to meet the President’s challenge, announced a proposed rule that would all but outright ban the use of non-compete agreements by employers in the United States. The FTC’s proposed rule was sweeping. With very limited exception, it would: (1) retroactively invalidate all existing non-compete agreements between employers and employees, and (2) prohibit employers from using such agreements in the future. As written, the FTC’s proposed rule governs non-compete agreements with employees, independent contractors, volunteers, and even interns. It would cover any employer, regardless of entity type or size.
The FTC’s definition of “non-compete” is very broad. It covers not only conventional non-compete agreements—where an employee cannot work for a contractually defined “competitor” for a set period of time after their current employment ends—but also any agreement that “has the effect of prohibiting the worker from seeking or accepting employment with a person or operating a business after the conclusion of the worker’s employment with the employer.” That means other widely used post-employment restrictions, such as non-solicitation agreements and non-disclosure agreements, could be prohibited by the rule if they are written too broadly.
Perhaps the most controversial feature of the proposed rule is its retroactive application—in other words, it would not only bar future non-compete agreements, but also retroactively invalidate any covered agreements that have already been entered into by employers and employees. In addition, the FTC’s proposed rule invalidates any state laws that offer workers less protection than the FTC’s rule.
The FTC’s 3-2 Vote
This brings us to the FTC’s 3-2 vote, adopting virtually all of the proposed rule as its final rule. The “final rule” still has several hurdles it has to overcome before the FTC’s ban carries the rule of law. The FTC must publish the Final Rule in the Federal Register for a period of 120 days. But even before that happens, opponents of the FTC’s proposed rule have promised to challenge it in court. The U.S. Chamber of Commerce, the largest pro-business lobbying group in the country, has said it plans to file suit promptly to block the final rule from becoming law.
In the meantime, employers are encouraged to be proactive and engage their legal counsel to begin planning for potential impacts now. Preparations should include auditing current restrictive covenants employers may have with current and former employees. These should not be limited to those agreements or clauses entitled “noncompetition” agreements—but any that could have the effect of being a noncompetition agreement or clause.
Brunini’s Labor & Employment specialists are monitoring these events and will update you accordingly. In the meantime, feel free to contact any member of Brunini’s Labor & Employment Practice Group if you wish to discuss.