In a long-anticipated move that dramatically alters the employment landscape, the Federal Trade Commission (“FTC”) issued its final Non-Compete Clause Rule (“final rule”) effectively banning employee non-compete agreements throughout the United States. After receiving over 26,000 public comments, the FTC determined that the use of non-compete agreements with workers constitutes an “unfair method of competition” in violation of Section 5 of the FTC Act.

The final rule is sweepingly broad and imposes a prospective ban on new non-competes for all workers, while retroactively invalidating all existing non-competes except for those with senior executives. Under the final rule, “senior executives,” whose existing non-compete agreements remain enforceable, are defined as workers in policy-making positions earning more than $151,164 annually. The final rule requires employers to provide notice to affected employees, other than senior executives, that their existing non-compete agreements will not be enforced by the effective date of the rule. 

The FTC’s ban targets non-compete clauses that are “a term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from” seeking or accepting different work in the United States or operating a business in the United States. Other types of non-compete agreements, such as those entered into in connection with the sale of a business, are excluded. The prohibition applies to both contractual terms and workplace policies, whether written or oral, and it preempts conflicting state laws. 

The final rule will become effective 120 days after it is published in the Federal Register. 

Expected Legal Challenges

As we have previously discussed, the final rule will face legal challenges out of the gate, including by entities like the U.S. Chamber of Commerce, which has signaled its intent to challenge the non-compete ban. We anticipate interested parties will challenge the FTC’s authority to engage in such rulemaking, as it is unclear whether the FTC Act empowers the agency to do so. With very few exceptions, the FTC has not historically engaged in this type of purely competition-based rulemaking. It is also likely that if a challenge reaches the U.S. Supreme Court, the final rule will be scrutinized under the “major questions doctrine,” pursuant to which it will not be upheld unless the FTC can show it has acted with clear authorization from Congress, which may be a difficult showing to make. 

Proactive Steps for Employers

Although there may be strong bases to challenge the final rule and its ultimate status is unknown, the recent trend at both the federal and state levels has decidedly been to narrow and restrict the use of employment-based non-compete agreements. Employers should use this opportunity to think about their protectible business interests and take stock of the alternative tools available, including, for example, by implementing or updating non-disclosure and non-solicitation agreements, ensuring systems are in place to safeguard and restrict access to trade secrets and other confidential business information, investing in training and culture to promote retention and reinforce employee duties and implementing robust exit interviews and transition planning.

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