Evidence-Based. Clearly Delivered.
Evidence-Based. Clearly Delivered.
In April 2024, the Federal Trade Commission (“Commission”) issued the Non-Compete Clause Rule (“the final rule”). The final rule provides that it will be a violation of section 5 and 6(g) of the Federal Trade Commission Act for persons to enter into a non-compete clauses (“non-competes”) with workers. The rule was to take effect on September 4, 2024, however due to recent legal rulings, the fate of the Non-Compete Clause Rule remains to be seen (see below).
Non-competes are considered an unfair method of competition. Senior executives would have a different approach under the final rule. “Senior executives” are defined as workers earning more than $151,164 annually who are in a “policy-making position.” It is estimated this will be approximately no more than 1% of workers.
Non-competes have been found to be an unfair method of competition. Non-competes with other workers will not be enforceable after the final rule. However, for senior executives, existing non-competes will remain in force after the effective date. This rule enactment was spurred by over 26,000 public comments and empirical research on how non-competes impact competition. Employers have other alternatives to protect trade secrets and other confidential information. Investments in worker human capital can be protected by fixed duration contracts and other mechanisms. Notably, the Commission declined to adopt an exception to non-competes specifically for the healthcare industry. It found that non-competes pushed up healthcare costs. Many business and trade industry commenters from the healthcare industry sought an exemption. On the other hand, thousands of healthcare workers submitted comments supporting a ban on non-competes.
Not unexpectedly, three lawsuits have been filed to preliminarily enjoin the rule. The most recent one filed in the federal court in the Middle District of Florida granted the plaintiff realtor’s motion for a preliminary injunction and stay of the Commission’s non-compete rule, However, the injunction is limited to the named plaintiff only. The Florida case focuses on whether Congress had unambiguously and clearly conferred the Commission with the power to issue a rule of such extraordinary economic and political significance.
In an earlier case in Pennsylvania, the federal court declined to enjoin the rule because it found that the Commission did have the authority to make such a rule. Therefore, it is expected that in Pennsylvania at least non-competes will be illegal.
Some states such as California, Minnesota, North Dakota and Oklahoma have banned non-competes completely. Therefore, employees and employers alike should look to their respective state laws on the matter.
On August 20, 2024, the federal district court in the Northern District of Texas struck down the ban on non-competes nationwide. It found that the Commission lacks the statutory authority to ban non-competes. The FTC will most certainly appeal.
Because of these divergent court rulings, the matter will probably be left to the Supreme Court of the United States to resolve at a future time.
Fact Sheet on FTC’s Proposed Final Noncompete Rule
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