Federal Trade Commission Bans Non-Compete Agreements

On April 23, 2024, the Federal Trade Commission (“FTC”) voted 3-2 to approve final regulations (“Rule”) that would ban most non-compete agreements nationwide.

Non-compete agreements bar a company’s workers from taking jobs with competitors or starting new competing businesses after they leave their employment with the company. According to the FTC, roughly 18% of U.S. workers are covered by non-competes—around 30 million people.

The Rule would prohibit entering into non-compete agreements with employees and independent contractors. Additionally, the Rule invalidates all existing non-competes except for existing agreements with “senior executives.” A “senior executive” is an employee who earns at least $151,164 of annual compensation in the preceding year and has broad authority to make overall policy decisions for the entity. Non-compete agreements between sellers and purchasers of businesses would be exempt from the Rule. Further, well-drafted confidentiality agreements, covenants against soliciting customers and employees, and training repayment agreements may continue to be permissible so long as they are not overly broad such that they essentially prohibit, prevent, or penalize a worker for working for, or engaging in, a competing business.

The Rule goes into effect on September 4, 2024. Further the implementation of the Rule may be delayed or suspended due to legal challenges. Multiple business groups, including the U.S. Chamber of Commerce, have issued statements indicating their intent to challenge the Rule, and lawsuits already have been filed, arguing the FTC exceeded its authority by enacting the Rule. One likely argument will be that such sweeping regulations violate the Constitution under the Major Questions Doctrine, which bars federal agencies from resolving questions of significant economic and political importance without clear statutory authorization. This doctrine was strengthened recently by the U.S. Supreme Court’s 2022 decision in West Virginia v. EPA.

Overall, the Rule would be a significant departure from decades of existing employment law and common practice, and, if upheld, would have far-reaching effects for businesses and workers. Montgomery Purdue will post a more detailed blog post about the Rule shortly.

If you have questions about what this means for your business, contact one of Montgomery Purdue’s business or employment attorneys.

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