FTC Votes to Issue Ban on Non-Compete Agreements

Today the Federal Trade Commission (FTC) held an open meeting during which they voted 3-2 to issue a proposed final rule (Final Rule) to ban almost all post-employment non-compete agreements.

The Final Rule is substantially the same as the initially proposed rule. Key elements of the Final Rule are:

1. Ban on all new post-employment non-compete agreements between employer and employee, regardless of industry or type of worker (e.g., senior executive versus lower level), after the effective date.
2. Allows existing post-employment non-compete agreements to remain in effect for senior executives only. Senior executive is generally defined as an employee “earning more than $151,164 annually who are in a policy-making position.”
3. Formal recission of existing non-compete agreements is not required, however, notice to employees that post-employment non-compete agreements are no longer enforceable is required.
4. Exception for sale of business, regardless of ownership percentage.
5. Does not apply to franchisee/franchisor contracts (though does apply to employees working for a franchisee or franchisor).
6. Rule will be effective 120 days after publication in the Federal Register.

“Non-compete clause” is defined as “a term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from: (i) 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 (ii) operating a business in the United States after the conclusion of the employment that includes the term or condition.”

The Final Rule applies to entities subject to the FTC Act.¹ Notably the FTC Act does not apply to non-profit corporations, which is often the status of health care corporations. However, Commission Slaughter warned that even if an entity registers as a non-profit tax-exempt entity but is in fact organized for the profit of members, then those entities, in her opinion, would fall under the FTC Act.

To be clear, the Final Rule applies only to post-employment non-compete agreements.  It does not apply to in-term non-competes that prohibit an employee from competing against the employer while still employed. In addition, although the Final Rule still does not apply to franchisee/franchisor relationships, Commissioners Slaughter and Bedoya called for more work on this front.

The FTC reasoned that the business justifications that some offered that post-employment non-compete agreements are necessary did not outweigh the harm non-competes caused. The FTC reasoned that company confidential information can be protected through other avenues such as confidentiality agreements and trade secret laws. The FTC also noted that if companies want to keep employees, the company can make “human capital investments” such as entering into defined duration employment contracts and increase pay and/or benefits.

Companies that violate this rule may be subject to civil penalties.

Each Commissioner was able to offer comments when announcing their vote. Commissioners Khan, Slaughter, and Bedoya fully supported the Final Rule for all the reasons that are laid out in the Final Rule explanation. Commissioners Holyoke and Ferguson both opposed the Final Rule on the basis that the FTC does not have the power or authority to promulgate such a rule, pointing to case law that support this position. Both argued that Congress must be the one to issue such a rule or very clearly give the FTC such authority. Commissioner Holyoke also noted that she was “disappointed” the Commission used its scarce resources on this effort. Commissioner Khan, in her comments, disagreed and pointed to conflicting case law that supports the authority of the FTC to promulgate this rule.

The US Chamber of Commerce announced that it will file a lawsuit on Wednesday challenging the FTC’s rule. The Chamber also released a statement that “The Federal Trade Commission’s decision to ban employer noncompete agreements across the economy is not only unlawful but also a blatant power grab that will undermine American businesses’ ability to remain competitive.” Because the Final Rule would not be effective until 120 days after publication in the Federal Register, it is possible that the Rule’s implementation will be stayed until a resolution of the Chamber’s lawsuit.

Buchanan will continue to follow the developments relating to the rule and the anticipated lawsuit. Buchanan attorneys are always available to advise companies on these issues.