FTC Strikes Down Noncompete Agreements

FTC Issues Final Rule Banning Noncompete Agreements But Faces Legal Challenges

3 min

On April 23, 2024, the Federal Trade Commission (FTC) greenlit a sweeping prohibition on the use of noncompete agreements by for-profit employers nationwide. In a party-line vote, the FTC voted 3–2 to approve a final rule that bans the use of most noncompete agreements with employees. The FTC's two Republican Commissioners voted against the final rule, primarily on grounds that they believe the rule exceeds the FTC's congressional authorization and therefore will likely not survive legal challenge. Although the rule is set to take effect 120 days after its publication in the Federal Register—which will likely occur within several days—the rule is expected to face significant court challenges concerning the FTC's rulemaking authority as well as the legality of the rule itself. Even if unsuccessful, such legal challenges could potentially delay the rule's effective date. As such, the effective date of the rule is uncertain at best.

The rule, which was first proposed in January 2023, follows a 2021 Biden administration executive order urging a "whole-of-government effort" to prioritize competition policy and enforcement, particularly in labor markets. The final rule establishes that almost all noncompete agreements are illegal as an unfair method of competition under Section 5 of the FTC Act. Subject to certain narrow limitations explained below, the rule broadly defines noncompete agreements to include any written or oral employment term, including contractual terms or workplace policies, that prevents a worker from seeking or accepting work with a different employer or operating a business after the employment ends. Key aspects of the rule are:

  • Employers are prohibited from entering into new noncompete agreements after the effective date with any worker, which includes "an employee, independent contractor, extern, intern, volunteer, apprentice, or a sole proprietor who provides a service to a person," regardless of whether the workers are paid.
  • Existing noncompete clauses are permitted to remain in force if they were entered into with a "senior executive," which is defined as an employee who is in a "policy-making position" and earns more than $151,164 annually. A "policy-making position" includes a business entity's president, chief executive officer, or any other officer or person who has policy-making authority.
  • Employers are prohibited from enforcing any existing noncompete agreements with workers other than senior executives after the effective date.
  • Prior to the effective date, which is uncertain at this point, employers who entered into any noncompete agreement with a current or former worker other than senior executives must provide notice to the worker that the noncompete will not, and cannot, be enforced against the worker.

The rule includes several important limitations and exceptions. First, the rule only extends to agreements entered into by workers employed by for-profit employers. Moreover, the rule does not apply to noncompete agreements entered into by a person pursuant to a bona fide sale of a business or cases where a legal claim related to a noncompete agreement arose before the effective date. Franchisors will also be allowed to include noncompete clauses in agreements entered into with their franchisees.

The first lawsuit challenging the rule was filed in a federal court in Texas on the same day the FTC approved the rule, and less than 24 hours later, the U.S. Chamber of Commerce also filed suit seeking to have the rule vacated. Other parties are expected to file similar lawsuits in the weeks ahead. Accordingly, it remains to be seen whether and when exactly the final rule will ultimately take effect. Despite this uncertainty, employers that use noncompete agreements should engage counsel as soon as possible to assist with navigating the implications of the rule moving forward.

For more information and assistance, contact Lisa Jose Fales or Paul Feinstein in Venable's Antitrust Practice Group.