Federal Trade Commission Adopts Final Rule Imposing Near-Total Ban On Employee Non-Compete Agreements – Contract of Employment

After more than a year of considering tens of thousands of
public comments, the Federal Trade Commission (“FTC”) has
voted 3-to-2 to adopt a Final Rule (the “Rule”) that
would effectively ban almost all employee non-compete agreements in
the United States. The Rule purports to preempt all state and local
laws that are in conflict. The Rule is slated to go into effect
around the end of August 2024 (120 days after publication in the
Federal Register), but the FTC is already facing
litigation that could delay and ultimately bar implementation of
the Rule. Two FTC Commissioners voted against the Rule in part
because they believed it exceeds the FTC’s authority.

Application of the Rule and Timing

After the Rule’s effective date, the text of the Rule states
that a for-profit employer may not enter into a “non-compete
clause” with a worker, including a “senior
executive.” The text of the Rule further states that,
non-competes entered into prior to the effective date will be
deemed void and unenforceable unless the employee bound by the
agreement is a “senior executive.” A senior executive is
defined in the Rule as an employee who earns more than $151,164
annually and is in a “policy-making position.” Salary,
bonuses, and commissions, but not fringe benefits, retirement
contributions and medical/life insurance premium payments, count
toward the $151,164 threshold. The Rule defines “policy-making
position” as “a business entity’s president, chief
executive officer or the equivalent, any other officer of a
business entity who has policy-making authority, or any other
natural person who has policy-making authority for the business
entity similar to an officer with policy-making authority.”
“Policy-making authority” is defined to mean “final
authority to make policy decisions that control significant aspects
of a business entity or common enterprise and does not include
authority limited to advising or exerting influence over such
policy decisions or having final authority to make policy decisions
for only a subsidiary of or affiliate of a common
enterprise.”

The Rule sets forth specific definitions of “non-compete
clause,” “employment” and “worker.” A
non-compete clause covered by the Rule is “a term or condition
of employment that prohibits a worker from, penalizes a worker for,
or functions to prevent a worker from (1) seeking or accepting work
in the United States with a different person where such work would
begin after the conclusion of the employment that includes the term
or condition; or (2) operating a business in the United States
after the conclusion of the employment.” The Rule further
defines “employment” as “work for a person” and
a “worker” as “a natural person who works or who
previously worked, whether paid or unpaid, without regard to the
worker’s title or the worker’s status under any other State
or Federal laws, including, but not limited to, whether the worker
is an employee, independent contractor, extern, intern, volunteer,
apprentice, or a sole proprietor who provides a service to a
person.”

The FTC’s commentary to the Rule specifically states that
“forfeiture for competition” clauses, liquidated damages
provisions, and agreements that make the payment of severance
contingent on non-competition are all prohibited agreements that
“penalize” employees for engaging in competition. The FTC
comments, however, that the Rule does not “categorically
prohibit other types of restrictive employment agreements, for
example, NDAs, TRAPs [“training repayment agreement
provisions”], and non-solicitation agreements,” so long
as such an agreement is not “so broad or onerous that it has
the same functional effect as a term or condition prohibiting or
penalizing a worker from seeking or accepting other work or
starting a business after their employment ends.” Whether such
an agreement “functions to prevent” an employee from
working will, among many other aspects of the Rule, be a
“fact-specific inquiry.”

Exceptions

The Rule contains an exception for non-competes entered into
pursuant to “a bona fide sale of a business entity, of the
person’s ownership interest in a business entity, or of all or
substantially all of a business entity’s operating
assets.” The FTC also stated that it would view a “garden
leave” clause “whereby the worker is still employed and
receiving the same total annual compensation and benefits on a pro
rata basis” as not subject to the Rule, because such an
agreement is not a post-employment restriction. The FTC noted that
this view would continue to apply even “where a worker does
not meet a condition to earn a particular aspect of their expected
compensation, like a prerequisite for a bonus [and] the employer
did not pay the bonus or other expected compensation” as a
result of the garden leave.

The Rule does not apply where a cause of action related to a
non-compete agreement “accrued” prior to the Rule’s
effective date. Also, it is not unlawful for an employer to enforce
or attempt to enforce a non-compete or to make representations
about a non-compete if the employer has a good-faith basis to
believe that the agreement is not prohibited or banned by the
Rule.

Notification Requirements

Employers are required to notify employees who are subject to
existing agreements that are voided by the Rule no later than the
effective date. Such notice may be provided by hand delivery, mail
to the worker’s last known personal street address, email to an
email address belonging to the worker (including the worker’s
current work email address or last known personal email address),
or text message to a mobile telephone number belonging to the
worker. The Rule includes sample notice language to be provided to
employees.

Looking Ahead to Challenges to FTC’s
Authority

Challenges to the Rule have already been filed, including a
lawsuit by the U.S. Chamber of Commerce and others challenging the
FTC’s authority to implement a nationwide ban on employee
non-competes and otherwise seeking to invalidate the Rule. These
lawsuits could delay and/or ultimately block implementation of the
Rule. Indeed, the two dissenting FTC Commissioners voted against
the Rule in part because they believed it exceeds the scope of the
FTC’s rule-making authority under the FTC Act and is invalid
under the “non-delegation” and “major question”
doctrines. If the Rule does become effective in its current form,
applying the provisions of the Rule to specific facts and
circumstances will likely result in various potential disputes,
disagreements and related litigation, including as to the
applicability of key definitions and the prohibitions purportedly
instituted under the Rule. Dechert will continue to monitor and
provide further updates concerning this rapidly evolving
development.

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