CSG Law Alert: No More Noncompete Agreements? What You Need to Know About the FTC’s New Rule

On April 23, 2024, the Federal Trade Commission, by a 3-2 vote, enacted a sweeping change that effectively bars covenants not to compete nationwide, with limited exceptions. In a change from the proposed Rule, which was announced by the FTC on January 5, 2023, the new Rule as actually adopted by the FTC generally bars all non-competes but treats future enforcement of this bar differently for most workers and a narrowly defined group of so-called “Senior Executives.” Immediate appeals are expected, and the appellate process is likely to delay the Effective Date (defined as 120 days after the Rule is published in the CFR) by months, if not years. As a result, we urge employers to use caution when addressing the issues identified in this Alert.

Assuming appeals are unsuccessful, for non-Senior Executives, the bar is effective upon the Effective Date and existing covenants cannot be enforced:

(1) Workers other than senior executives. With respect to a worker other than a senior executive, it is an unfair method of competition for a person: (i) To enter into or attempt to enter into a non-compete clause; (ii) To enforce or attempt to enforce a non-compete clause; or (iii) To represent that the worker is subject to a non-compete clause.1

For Senior Executives, existing covenants not to compete may be enforced, but no new such clauses may be entered into in the future:

(2) Senior executives. With respect to a senior executive, it is an unfair method of competition for a person: (i) To enter into or attempt to enter into a non-compete clause; (ii) To enforce or attempt to enforce a non-compete clause entered into after the effective date; or (iii) To represent that the senior executive is subject to a non-compete clause, where the non-compete clause was entered into after the effective date.2

A Senior Executive is defined as:

Senior executive means a worker who: (1) Was in a policy-making position; and (2) Received from a person for the employment: (i) Total annual compensation of at least $151,164 in the preceding year; or (ii) Total compensation of at least $151,164 when annualized if the worker was employed during only part of the preceding year; or (iii) Total compensation of at least $151,164 when annualized in the preceding year prior to the worker’s departure if the worker departed from employment prior to the preceding year and the worker is subject to a non-compete clause.3

For this purpose, total compensation is defined as:

Total annual compensation is based on the worker’s earnings over the preceding year. Total annual compensation may include salary, commissions, nondiscretionary bonuses and other nondiscretionary compensation earned during that 52-week period. Total annual compensation does not include board, lodging and other facilities as defined in 29 CFR 541.606, and does not include payments for medical insurance, payments for life insurance, contributions to retirement plans and the cost of other similar fringe benefits.”4

If the FTC action survives appeal, the effect would be a sweeping change in the employer/employee relationship, especially in the types of positions where such clauses are often considered essential by employers—senior management, sales, research/technology, marketing, financial management, and other areas where an employee could harm an employer merely by working for a competitor.  However, multiple appeals are almost assured.  The United States Chamber of Commerce and other groups are expected to challenge the new Rule before the United States Court of Appeals for the District of Columbia Circuit (where appeals of federal regulations are generally heard).

Possible challenges could be premised on the following:

  • The “major questions doctrine,” which is an argument that the new Rule should be voided because only Congress, and not administrative agencies, may decide issues of major political or economic significance.
  • The “non-delegation doctrine,” in which those seeking to overturn the new Rule would argue even if Congress did delegate the authority for the FTC to enact the sweeping new rules, it is unconstitutional for Congress to do so.
  • An argument that the new rules are arbitrary and capricious, meaning that the new Rule is not supported by any valid policies or purposes.
  • The Fifth Amendment Takings Clause bars the new Rule because it would effectively usurp an employer’s contractual rights without compensation.

Such challenges were raised by the two dissenting FTC commissioners, who voted against the new Rule during the public meeting.  Another important part of any appeal is expected to be the so-called “Chevron Deference,” in which courts are currently required by a prior Supreme Court Decision to presume the validity of an administrative agency’s actions because of that agency’s purported expertise in the area. Several legal commentators—particularly those aligned with the current Supreme Court’s conservative block—have called for the end of Chevron Deference, and the expected appeal of the FTC’s actions could be the avenue that the Supreme Court—which will hear the case on appeal from the D.C. Circuit—to overturn Chevron Deference.

Assuming the new Rule withstands appeal and goes into effect, the Rule adopted today broadly defines 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 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.5

Notably, however, the rule explicitly permits a covenant not to compete in the context of the sale of a business.6 The FTC also expressly carved out franchisor-franchisee relationships from the new rule, but not the relationship between worker and franchisee or franchisor.

Importantly, employers are still permitted to protect their interests through non-solicitation and confidentiality clauses. However, if such provisions fall within the criteria established by the rule and have the effect of restricting a worker’s future employment, such contractual language may be barred.

For employers, the effect of the new FTC rule—barring overturn on appeal—is immediate once it goes into effect.  The new rule specifically requires that an employer rescind an existing non-compete clause entered into between an employer and worker.  In order to comply, an employer must provide individualized notice to the current or former employee that the non-compete clause is no longer in effect and may not be enforced against the worker.7  The new rule provides model language for employers to use for such a notice, but employers are free to use different language so long as the employer effectively communicates that the worker’s non-compete clause (a) is no longer effective and (b) may not be enforced by the employer.8  The new rule contains a safe harbor, whereby an employer will be deemed to have complied with the recission requirements if the employer provides individualized and adequate notice to the worker.9

Best practices for employers if the new Rule goes into effect:

  • Review and amend contractual agreements with non-Senior Executive workers (as defined in the rule) containing non-compete clauses;
  • Prepare individualized, particularized and timely notice for each non-Senior Executive worker (either current or former) advising that the non-compete clause is no longer in effect and may not be enforced;
  • Revisit strategy concerning future restrictions on Senior Executive workers, given that existing covenants not to compete may be enforced, but no new such clauses may be entered into in the future; and
  • Review and revise non-solicitation provisions to ensure that such provisions do not have the effect of preventing or restricting a worker from competing against the employer.

Contact your CSG Law counsel for consultation regarding the new Rule. CSG Law will continue to track this Rule and provide updates. If you have any questions about taking steps relating to this Rule and/or responding to employee concerns, please feel free to reach out to your CSG Law attorney or the authors of this alert.

1 The FTC’s new Rule shall be published in the Code of Federal Regulations (“CFR”). See 16 CFR 910.2(a)(1).

2 16 CFR 910.2(a)(2).

3 16 CFR 910.1.

4 16 CFR 910.1.

5 16 CFR 910.1.

6 16 CFR 910.3.

7 16 CFR 910.2(b).

8 16 CFR 910.2(b).

9 16 CFR 910.2(b).