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FTC Seeks to Impose Ban On Noncompete Restrictions on Employees

Wednesday, April 24th, 2024

On April 23, 2024, the Federal Trade Commission (“FTC”) issued a Final Rule which provides that it is an “unfair method of competition” for employers to enter into non-compete clauses with their workers after August 21, 2024—or 120 days after the Final Rule is published in the Federal Register.  The Final Rule is available here.  The Final Rule was issued after the FTC received more than 26,000 public comments in response to its Notice of Proposed Rulemaking issued in January 2023.

While the ban is scheduled to take effect 120 days after the Final Rule is published in the Federal Register, there will be attempts to prevent the new rule from becoming effective. Notably, the U.S. Chamber of Commerce (a business advocacy group that is not affiliated with the Federal government), has already announced plans to file a lawsuit challenging the Constitutionality of the ban.  Thus, it is foreseeable that the ban could be enjoined from taking effect, even if it is ultimately upheld (or struck down).

Nonetheless, it is worth highlighting some of the key aspects of the Final Rule.

The Final Rule defines “non-compete clause” as “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 that includes the term or condition.”  16 CFR § 910.1.  The final rule further provides that, for purposes of the final rule, “term or condition of employment” includes, but is not limited to, a contractual term or workplace policy, whether written or oral.  Id.  The Final Rule further defines “employment” as “work for a person.”  Id.

The Final Rule defines “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.”  Id.  The definition further states that the term “worker” includes a natural person who works for a franchisee or franchisor, but does not include a franchisee in the context of a franchisee-franchisor relationship.  Id.

The Final Rule does not apply to non-competes entered into by a person pursuant to a bona fide sale of a business entity.  16 C.F.R. § 910.3(a).  In addition, as an important distinction, the Final Rule does not apply to business-to-business non-compete clauses (for example, a non-compete that restricts two companies from selling goods within overlapping territories).  Instead, the Final Rule only bans the use of non-competes by an employer to restrict competition by its employees.

The broad ban contained in the Final Rule would supersede Virginia’s ban on non-compete for “low wage employees” which voids non-competes between an employer and any employee making less than $73,320.  See this previous Gentry Locke article to learn more on non-competes for “low wage employees.”  In addition, the Final Rule could bar the use of non-disclosure agreements that are so overbroad as to function to prevent a worker from seeking or accepting employment or operating a business, as well as agreements for deferred compensation and other structured payments that fall within the definition of non-compete clause in § 910.1.

This story is developing, and for those interested, you may want to check out our firm’s initial reports on this new noncompete ban and enforcement actions that occurred last year. Read more on these topics below.

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