Federal Trade Commission Declares Non-Compete Agreements to be Unenforceable Unfair Competition
On April 24, 2024, the Federal Trade Commission issued its “Non-Compete Clause Final Rule” (the “Rule”).[1] The Rule declares that non-compete agreements will be a form of unfair competition in all states. A non-compete agreement is defined as a term of an agreement or policy of employment that would interfere with an employee’s seeking or accepting work with any other employer, or operating any kind of business in the U.S., even one in direct competition with the former employer.
The Rule covers all “workers” (which is defined to include employees, independent contractors, and consultants), including CEOs and other top executives, with only two exceptions: non-compete agreements entered by the seller of a business, and the agreements of “Senior Executives” that pre-date the effective date of the Rule. Senior Executives are those who earn at least $151,164 and are in policy-making positions. But upon expiration, the employer cannot ask for a successor non-compete even for this class of employee.
It is important that employers know that they must act before the Rule becomes effective. Employers who have non-compete Agreements with non-Senior Executives “must provide clear and conspicuous notice to the worker by the effective date that the worker’s non-compete clause will not be, and cannot legally be, enforced against the worker.” The notice must “be on paper delivered by hand or by mail” or by email to the worker’s email, or by text message to the worker’s telephone number.” The Rule provides a sample of what such a notice should say.
Given that the FTC projects that the Rule will void about 30 million private non-compete agreements, it is certain that trade groups and businesses will challenge the law, claiming, among other things, that the FTC does not have jurisdiction to sweep away over a century of state-level laws and court opinions concerning private contracts. When discussing its jurisdiction to act, FTC Commissioner Khan declared that the FTC was given authority over “unfair competition” and the agency may define “unfair” any way it wants. That opinion disregards the U.S. Supreme Court’s case law which says that administrative agencies must have express authorization from Congress for significant rules. There will be future developments, likely within the next 120 days.
By Ellen O’Connell
Of Counsel
To contact Ellen, click here
[1] https://www.ftc.gov/system/files/ftc_gov/pdf/noncompete-rule.pdf which will become effective 120 days from issuance in the Federal Register.
