FTC FINAL Rule on Non-competes
A non-compete by any other name…
…that prohibits, penalizes, or functions to prevent a worker from seeking or accepting work or operating a business, may soon be a thing of the past in the U.S.
On April 23, 2024, in a 3-2 vote, the Federal Trade Commission (FTC) voted to approve a final rule that will act to ban most non-compete agreements, including those currently in existence. In certain industries, including healthcare, where employment contracts and non-compete provisions are fairly common, this final rule could have far-reaching effects.
Businesses argue that restrictive covenants, including non-competes, are necessary to protect the significant investment that is often involved in recruiting and training employees and developing goodwill within a community. They argue that a reasonable restriction on competition after the termination of the employment relationship is required to protect the legitimate business interests of the employer. Conversely, employees argue that non-competes shift too much power to employers, who often retain the right to make changes to compensation or other conditions of employment and employees are put in the position to accept these changes, move out of the area, or wait out the months or years of a non-compete.
In some instances, a liquidated damages clause may be included to allow employees to “buy-out” their restrictive covenants or employees will agree to forego benefits otherwise due if the employee chooses to compete. Most of these non-competes, including buy-out provisions or terms penalizing a worker for competing with a former employer, will be unenforceable if the FTC final rule goes into effect as written.
The final rule is broad in its applicability but does include limited exclusions for non-competes entered into in connection with the sale of a business, some current non-competes for certain executives in policy making positions, and will not affect causes of action that have accrued prior to the effective date of the final rule.
The FTC estimates that the final rule on non-competes will affect over 3 million workers in Virginia and result in a nearly $2 billion increase in total annual worker earnings in Virginia, an estimated $630 increase in annual earnings per affected Virginia worker.
Not surprisingly, litigation challenging the final rule and its implementation was expected and the first suits filed less than 24 hours after the FTC’s announcement. The U.S. Chamber of Commerce filed a declaratory judgment action seeking injunctive relief in the US District Court in the Eastern District of Texas, arguing that the FTC is not authorized to take the action outlined in the final rule, that the FTC taking such action would be unconstitutional, that the final rule is impermissibly retroactive, and as written the final rule with a blanket prohibition on non-compete agreements is an arbitrary and capricious exercise of the FTC’s powers.
The final rule will go into effect 120 days after publication in the Federal Register, barring court action to delay or prevent its implementation.