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On April 23, 2024, the Federal Trade Commission (FTC) voted to issue a rule prohibiting noncompete agreements with very few exceptions.[1] The issuance of the rule, which was expected, follows the FTC’s prior release of a draft of the proposed rule back in January 2023. Nevertheless, the rule will have a far-reaching effect once, and if, it is fully implemented 120 days after it is published in the Federal Register. Whether that will happen is as yet slightly unclear, as the rule’s issuance has already generated legal challenges.

In essence, the new rule would ban employers from entering into and enforcing noncompete agreements with all employees, as well as independent contractors, interns, volunteers, and apprentices. A noncompete agreement is defined under the rule 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.”[2]

The FTC’s rule, as presently constituted, contains few exceptions. Some of the notable exceptions are set forth below:

• The application of the rule would be limited only to “for-profit” employers. However, claiming tax-exempt status may not be enough fall outside the rules scope. The FTC “applies a two-part test to determine whether a corporation is organized for profit” and a corporation’s tax-exempt status is just one factor to be considered.[3]
• The rule would exempt already existing noncompete agreements with senior executives, defined as “workers earning more than $151,164 who are in a “’policy-making position.’”[4] This exemption for preexisting agreements would remain in place even after the rule comes into effect. However, new noncompete agreements with senior executives created after the rule becomes operative would not be exempt.
• The rule has a sale-of-business exemption for non-competes “entered into by a person 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.”[5]
• The rule also would not apply where a cause of action related to the breach of a non-compete accrued prior to the effective date.

While the new rule is expansive, it does not limit other restrictive employment agreements, such as non-disclosure agreements, non-recruitment agreements, and non-solicitation agreements. But businesses should be careful that such agreements do not contain terms that have the same practical effect as a noncompete.[6] That is, the agreement should not effectively prohibit, or penalize, efforts to seek or obtain post-employment work for another employer.

Companies should be prepared for the new rule to take effect, but should also continue to monitor further legal developments. The rule is already being challenged in court so there is a possibility it does not see the light of day. For example, the Chamber of Commerce, along with a few other business associations, has already brought a high-profile action against the FTC asking the court to prevent the rule from taking effect.[7] One of the plaintiffs’ main arguments, which echoes former FTC Commissioner Christine Wilson’s dissent to the FTC’s 2022 “Policy Statement Regarding the Scope of Unfair Methods of Competition Under Section 5 of the Federal Trade Commission Act,”[8] is that the FTC does not have substantive rulemaking authority over unfair methods of competition. Specifically, the plaintiffs argue that Section 6(g) of the same Act authorizes the FTC “only to develop internal rules to govern how it conducts investigations and carries out its functions, not to promulgate substantive rules that bind private parties and declare common business practices categorically unlawful.”[9] A separately filed case in the Northern District of Texas mirrors the plaintiffs’ arguments above.[10]

Wiggin and Dana has extensive experience counseling clients regarding issues related to matters involving the Federal Trade Commission, including unfair methods of competition. We also routinely advise on specific non-compete issues arising in connection with potential transactions or employment matters.

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[1] The text of the FTC’s new “Non-Compete Clause Final Rule” can be seen here.

[2] Fed. Trade Comm’n, RIN 3084-AB74, “Non-Compete Clause Final Rule,” 3 (2024), https://www.ftc.gov/system/files/ftc_gov/pdf/noncompete-rule.pdf.

[3] Id. at 52 (“The not-for profit jurisdictional exemption under Section 4 requires both that there be an adequate nexus between an organization’s activities and its alleged public purposes and that its net proceeds be properly devoted to recognized public, rather than private, interests. Alternatively stated, the Commission looks to both the source of the income, i.e., to whether the corporation is organized for and actually engaged in business for only charitable purposes, and to the destination of the income, i.e., to whether either the corporation or its members derive a profit.” (internal quotation marks omitted)).

[4] Id. at 219. A policy-making position is “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.” Id. at 267-68.

[5] Id. at 567.

[6] For example, an NDA “that bars a worker from disclosing, in a future job, any information that is ‘usable in’ or ‘relates to’ the industry in which they work” could be viewed potentially as functioning similarly to a noncompete, according to the FTC. Id. at 80-81. “A second example would be an NDA that bars a worker from disclosing any information or knowledge the worker may obtain during their employment whatsoever, including publicly available information.” Id. at 81.

[7] The text of that complaint can be seen here (hereinafter “Chamber of Commerce Complaint”).

[8] See Fed. Trade Comm’n, Dissenting Statement of Commissioner Christine S. Wilson Regarding the “Policy Statement Regarding the Scope of Unfair Methods of Competition Under Section 5 of the Federal Trade Commission Act,” FTC File No. P221202 (Nov. 10, 2022), https://www.ftc.gov/system/files/ftc_gov/pdf/P221202Section5PolicyWilsonDissentStmt.pdf.

[9] Chamber of Commerce Complaint ¶ 91.

[10] The text of that complaint can be seen here.