FTC Bans Noncompetes in the U.S.

The Federal Trade Commission (“FTC”) voted today by a 3-2 margin to issue its final rule[1] imposing a nationwide ban on employers from entering, enforcing, or representing that employees are subject to noncompetes. The broad rule applies to virtually all workers and employers in the U.S. other than to existing, but not future, noncompetes with narrowly defined senior executives. The final rule represents a seismic shift in noncompete law, and employers will have to comply 120 days after publication of the rule in the federal register, including providing notice of the rule to current and former employees subject to noncompetes. Given the sweeping changes in noncompete law, and the position stated by two Commissioners during the vote that the FTC does not have authority to make the rule, prompt legal challenges are likely.

Background
The FTC’s final rule finds its roots in 2016, when President Obama issued a call to action on noncompetes, calling on state policymakers to ban the agreements for most workers. President Biden rekindled the call to action in July 2021 with his Executive Order on Promoting Competition in the American Economy, encouraging the FTC to exercise its statutory rulemaking authority under the FTC Act to curtail the use of noncompetes or other agreements that limit worker mobility. On January 5, 2023, the FTC proposed its rule and subsequently received more than 26,000 comments about the proposed rule.

Today, April 23, 2024, the FTC held a virtual open commission meeting and voted to authorize public disclosure of the final rule, received a staff presentation from the Office of Policy Planning, and voted 3-2 to issue the final rule. FTC Chair Khan and Commissioners Slaughter and Bedoya voted for the final rule and Commissioners Holyoak and Ferguson[2] voted against it.

Content of the Final Rule
The FTC’s final rule is, by its terms, straightforward and broad. It would ban any employer from having a noncompete with a worker, attempting to enforce a noncompete, or representing that a worker is subject to a noncompete. Unlike some federal employment laws, the FTC’s final rule would apply to any employer in the country and would supplant inconsistent state laws. A noncompete is defined broadly as a term or condition of employment which would penalize or prevent a worker from seeking or accepting work with a different employer or operating a business, after conclusion of the worker’s employment.

The FTC’s final rule, as opposed to its January 2023 proposed rule, does not require official rescission of prior noncompetes, only that they not be enforced. The final rule does require that employers provide notice to all current and former employees subject to existing noncompetes that the FTC rule makes it unlawful to enforce a noncompete and that a noncompete will not be enforced against the worker.

The rule contains two exceptions. First, regarding senior executives (an exception not included in the original proposed rule)—which are defined as employees in policy-making positions such as a president or CEO with a total annual compensation of at least $151,164 in the preceding year (estimated to be less than 1% of workers)—existing, but not new, noncompetes remain enforceable. Second, regarding the sale of a business, noncompetes entered as part of a bona fide sale of all or substantially all of a business are not covered by the final rule.

What Next?
Per the final rule, it will be effective for employers 120 days after its publication in the federal register. That publication could occur as early as this week. It is almost certain that prompt legal challenges will follow its publication. Two Commissioners argued during the public meeting that the FTC does not have rulemaking authority to create policy rules under Section 5 of the FTC Act. Even if federal courts conclude the FTC had the authority, there will be challenges to the legality of the rule itself and the FTC’s finding that noncompetes are an unfair method of competition that violates Section 5 of the FTC Act.

While employers should start taking steps for compliance given the short 120-day compliance timeframe and the requirement to provide notice regarding existing noncompetes, employers should also watch closely for legal challenges and the possibility that courts will stay the effective date of the final rule or even modify or invalidate it (just as we saw with the COVID vaccine mandates).


[1] The FTC’s Fact Sheet on the final rule is available at https://www.ftc.gov/news-events/news/press-releases/2024/04/fact-sheet-ftcs-proposed-final-noncompete-rule, and the text of the final rule is available at pages 561-568 at https://www.ftc.gov/system/files/ftc_gov/pdf/noncompete-rule.pdf.

[2] Commissioners Holyoak and Ferguson are the two newest FTC Commission members, both being appointed in the past two months. See https://www.ftc.gov/about-ftc/commissioners-staff/commissioners.