FTC’s non-compete ban challenged in court

Photo: designer491/iStock / Getty Images Plus/Getty Images

The Federal Trade Commission’s (FTC’s) recent decision to preempt state laws and prohibit companies from using non-compete agreements appears to be on hold for now.

Less than a day after the FTC voted on April 23 to ban non-compete agreements for nearly all workers, pro-business groups filed lawsuits contesting the decision.

In its decision, the FTC said non-compete agreements are an “unfair method of competition” and violate Section 5 of the Federal Trade Commission Act.

The FTC defines a non-compete agreement as a term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from:

▶ 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

▶ Operating a business in the United States after the conclusion of the employment that includes the term or condition

Workers may be employees, independent contractors, interns, volunteers and apprentices, according to the FTC.

If the ban is upheld, the rule would go into effect on Sept. 4, 2024, which is 120 days after it was published in the Federal Register. If that happens, employers would no longer be allowed to:

▶ Enforce existing non-compete agreements, except those signed by senior executives (the FTC defines a senior executive as an employee who earns more than $151,164 a year and has a “policy-making position”)

▶ Require employees to sign new non-compete agreements

An exception would allow non-compete agreements for the seller and the buyer of a business.

The FTC rule would require employers to notify employees that their non-compete agreements are no longer in effect and will not be enforced. The FTC offers a template on its website that employers can use to notify employees of the change (see sidebar at right).

The U.S. Chamber of Commerce is one of several groups that filed a lawsuit against the FTC in federal court — less than 24 hours after the FTC issued its decision. It alleged the FTC does not have the power to issue and enforce its ban on non-compete agreements.

The FTC ban, if upheld, would permit any worker who signed a non-compete agreement to work for a competitor or start a competing business immediately after their employment ends. Companies could turn to confidentiality, non-disclosure and non-solicitation agreements that meet local, state and federal laws, however.

On Jan. 19, 2023, The FTC issued a proposed rule to ban non-compete agreements. During the 90-day public comment period, it received more than 26,000 comments, of which approximately 25,000 voiced support of the proposed ban. After carefully reviewing each comment, the FTC said it based changes to the proposed rule on the input it received. On April 23, 2024, it issued its final rule and on May 7, published the rule in the Federal Register.

Companies required to notify employees of ban

The Federal Trade Commission’s (FTC’s) final rule regarding its ban of noncompete agreements requires employers to notify any employee who signed one that they can no longer be enforced, providing legal challenges are unsuccessful.

Should the ban be upheld, employers should ensure compliance by:

▶ Updating company policies and handbooks to ensure they comply with the FTC’s final rule

▶ Finding other ways to protect company information, making sure they meet local, state and federal laws

▶ Preparing notices to inform employees their non-compete agreements are no longer in effect

Under the “Model Notices” section of the dedicated webpage FTC.gov/noncompetes is a downloadable notification template for employers to use, available in seven different languages. It says:

A new rule enforced by the Federal Trade Commission makes it unlawful for us to enforce a non-compete clause. As of [DATE EMPLOYER CHOOSES BUT NO LATER THAN EFFECTIVE DATE OF THE FINAL RULE], [EMPLOYER NAME] will not enforce any non-compete clause against you. This means that as of [DATE EMPLOYER CHOOSES BUT NO LATER THAN EFFECTIVE DATE OF THE FINAL RULE]:

• You may seek or accept a job with any company or any person—even if they compete with [EMPLOYER NAME].
• You may run your own business — even if it competes with [EMPLOYER NAME].
• You may compete with [EMPLOYER NAME] following your employment with [EMPLOYER NAME].

The FTC’s new rule does not affect any other terms or conditions of your employment. The FTC encourages employees to report employers that violate the new rule, should it go into effect, by sending an email to its Bureau of Competition at noncompete@ftc.gov.