FTC Rule Purporting to Ban Employee Noncompete Agreements

Companies and their executives face significant legal uncertainties and risks as a result of the Federal Trade Commission’s (FTC) groundbreaking final rule purporting to ban nearly all employee noncompete agreements across the United States.

Since the FTC first provided notice of the proposed rulemaking in January 2023, ArentFox Schiff has been tracking this topic and providing periodic updates. This guide explores the FTC’s final rule, legal challenges to the rule, and key considerations and insights from ArentFox Schiff, which we will continue to update in real time.

FTC Rule Stayed by the Northern District of Texas

On July 3, 2024, the Northern District of Texas issued an injunction staying the FTC’s final noncompete rule. The injunction is limited to the named plaintiffs in the case. The district court’s decision holds that the plaintiffs are likely to prevail on their objections that the FTC’s rule exceeds the FTC’s statutory authority and is arbitrary and capricious. This decision is the expected outcome of the suit. The court indicated its intent to issue a final decision on the merits by August 30, which is days before the rule’s September 4 effective date. Even if the FTC rule ultimately fails to survive judicial scrutiny, the rule and 500+ page adopting release included with the rule will remain relevant for years to come.

Webinar: Navigating the Federal Trade Commission’s Noncompete Ban

On April 30, 2024, ArentFox Schiff hosted a webinar titled “Navigating the Federal Trade Commission’s Noncompete Ban.” Watch the complete webinar:

The Rule: An Unprecedented Shift

In January 2023, the FTC issued a Notice of Proposed Rulemaking (NPRM) that would essentially ban noncompete agreements for employees, independent contractors, and unpaid workers across the United States. On April 23, 2024, the FTC voted 3-2 to adopt its final rule, which:

Prohibits employers from entering into noncompete agreements with workers;
Renders prior noncompetes unenforceable except for “senior executives;”
Mandates individualized notice to workers that noncompetes are unenforceable; and
Applies broadly to employees, independent contractors, paid, and unpaid workers.

The 570-page adopting release and final rule is available here. The text of the final rule begins on page 561.

In broad terms, the final rule provides that it is an unfair method of competition (and therefore a violation of Section 5 of the FTC Act) for persons to enter into noncompete agreements with workers after the final rule’s effective date (120 days after publication in the Federal Register). This prospective ban applies to all workers, regardless of income or seniority.
The final rule also retroactively renders unenforceable noncompetes entered into before the final rule’s effective date for all workers other than “senior executives,” defined as workers that both earned at least $151,164 and were in a policy-making position.
The final rule does contain a carveout permitting noncompetes in the sale of a business context, provided that certain criteria are satisfied. As we will address in greater detail in a forthcoming alert, the text of the rule’s carveout is much broader than the accompanying commentary explaining the intent and purported scope of the carveout, presaging a potential battlefield for future litigation.
The final rule also requires employers to provide clear and conspicuous notice, prior to the effective date, that existing noncompetes are unenforceable.
The final rule does not ban nonsolicitation or confidentiality covenants, except to the extent that those covenants are so broadly written that, for practical purposes, they function to prevent workers from working for another employer in the same field. The FTC’s adopting release notes that this is a fact-specific inquiry.

Legal Challenges to the Proposed Rule

The FTC’s final rule faces significant legal challenges, including whether the FTC exceeded its authority under the major questions doctrine, as we have detailed here. Three lawsuits have been filed challenging the FTC’s rule: (1) Ryan, LLC v. FTC, 24-cv-986 (N.D. Tex.); (2) Chamber of Commerce v. FTC, 24-cv-148 (E.D. Tex.); and (3) ATS Tree Services, LLC v. FTC, 24-cv-1743 (E.D. Pa.). The Chamber of Commerce’s suit against the FTC was stayed in favor of the first filed Ryan, LLC v. FTC, and the Chamber of Commerce was granted leave to intervene as a plaintiff in Ryan, LLC v. FTC. Ryan, LLC and the Chamber of Commerce moved for a preliminary injunction, and the motion is fully briefed. The Northern District of Texas stayed the FTC’s rule on July 3, 2024, but only for the named plaintiffs.

The Chamber of Commerce’s complaint largely tracks comments the Chamber made in response to the prior notice of proposed rulemaking. The Chamber alleges that (1) the FTC lacks substantive rulemaking authority, (2) the FTC unlawfully interpreted the phrase “unfair methods of competition” in Section 5 of the FTC Act, (3) to the extent the FTC had authority to adopt the noncompete rule, that there was an unconstitutional delegation of legislative authority, (4) the FTC lacks authority to issue retroactive regulations and raises serious questions under the Fifth Amendment, (5) the FTC failed to engage in reasoned decisionmaking under the Administrative Procedure Act, and (6) the FTC failed to meaningfully engage with alternative proposals in violation of the Administrative Procedure Act. The Chamber’s first and second issues invoke the major-questions doctrine under West Virginia v. Environmental Protection Agency, 142 S. Ct. 2587 (2022). Ryan, LLC’s and ATS Tree Services, LLC’s complaints raise similar arguments.

The Rule’s Application to Certain Industries is Unclear

The FTC Act has been interpreted to mean that the FTC lacks jurisdiction to prevent Section 5 violations by nonprofit organizations, including healthcare nonprofits. Comments by Commissioner Slaughter at today’s open meeting, however, suggest that the FTC may seek to apply the final rule to nonprofit businesses if those businesses are actually being run for profit. Furthermore, the FTC’s adopting release notes that US Congress has removed certain enumerated industries, e.g., banks, savings and loan institutions, and certain common carriers, from the FTC’s jurisdiction. But the Federal Deposit Insurance Corporation (FDIC) can enforce the FTC Act against banks, so it is uncertain whether the banks will be subject to the final rule.

The Final Rule Does Not Apply to Franchise Agreements

The FTC had previously requested comments on whether it should ban noncompetes in franchise agreements between franchisors and franchisees. The FTC expressly chose not to extend the ban to franchise agreements. During today’s open meeting, however, two separate commissioners made comments to suggest that franchise-related noncompetes remain a focus of the FTC.

Preparing for Uncertainty: Employer Considerations

While legal battles play out, employers should prepare for uncertainty and difficult questions from employees on noncompete enforceability. Even if the FTC rule fails to survive judicial scrutiny, the rule and 500+ page adopting release included with the rule will remain relevant for years to come.

Evaluate Alternative Protective Measures

Narrowly tailored nondisclosure and non-solicitation agreements
Robust confidentiality and data security protocols and trade secret protections
Contractual provisions safeguarding proprietary information and client relationships

Monitor Legal Developments

Stay updated by visiting this page frequently for legal challenges, commentary, and court decisions
Log in for our webinar scheduled for April 30, when we will review developments in the first week following the FTC’s adoption of the final rule

Consult Legal Counsel

Assess existing noncompete agreements and potential impacts, including compliance with the rule’s notice requirements
Ensure compliance with evolving regulations and state laws
Develop strategies to protect legitimate business interests