FTC announces rule to ban non-compete agreements

[JohnT]

Announcement here:

FTC Announces Rule Banning Noncompetes

Ruling here (PDF):

noncompete-rule.pdf

Long story, short: Noncompetes are disallowed and will be unenforceable after a certain date (120 days from the posting of this ruling to the Federal Register). However, if you are a “senior executive” or a “franchisee”, non-competes can still be used to prevent you from competing after you left your employment.

Quoting from the opening of the 2nd link (the ruling):

The Commission proposed the Non-Compete Clause Rule on January 19, 2023 pursuant
to sections 5 and 6(g) of the FTC Act.1

Based on the Commission’s expertise and after careful review and consideration of the entire rulemaking record—including empirical research on how non-competes affect competition and over 26,000 public comments—the Commission adopts
this final rule addressing non-competes.

The final rule provides that it is an unfair method of competition—and therefore a
violation of section 5—for employers to, inter alia, enter into non-compete clauses with workers on or after the final rule’s effective date. The Commission thus adopts a comprehensive ban on new non-competes with all workers.

With respect to existing non-competes, i.e., non-competes entered into before the final
rule’s effective date, the Commission adopts a different approach for senior executives
than for other workers. Existing non-competes with senior executives can remain in force; the final rule does not cover such agreements.

The final rule allows existing non-competes with senior executives to remain in force because this subset of workers is less likely to be subject to the kind of acute, ongoing harms currently being suffered by other workers subject to existing noncompetes and because commenters raised credible concerns about the practical impacts of extinguishing existing non-competes for senior executives. For workers who are not senior executives, existing non-competes are no longer enforceable after the final rule’s effective date.

Employers must provide such workers with existing non-competes notice that they are no longer enforceable.

To facilitate compliance and minimize burden, the final rule includes model
language that satisfies this notice requirement. The final rule contains separate provisions defining unfair methods of competition for the two subcategories of workers. Specifically, the final rule provides that, with respect to a worker other than a senior executive, it is an unfair method of competition for a person to enter into or attempt to enter into a non-compete clause; to enforce or attempt to enforce a non-compete clause; or to represent that the worker is subject to a non-compete clause.

The Commission describes the basis for its finding that these practices are unfair methods of competition in Parts IV.B.1 through IV.B.3.

The final rule provides that, with respect to a senior executive, it is an unfair method of
competition for a person to enter into or attempt to enter into a non-compete clause; to enforce or attempt to enforce a non-compete clause entered into after the effective date; or to represent that the senior executive is subject to a non-compete clause, where the non-compete clause was entered into after the effective date.

The Commission describes the basis for its finding that these practices are unfair methods of competition in Part IV.C.2.

The final rule defines “non-compete clause” as “a term or condition of employment that
prohibits a worker from, penalizes a worker for, or functions to prevent a worker from (1) seeking or accepting work in the United States with a different person where such work would begin after the conclusion of the employment that includes the term or condition; or (2) operating a business in the United States after the conclusion of the employment that includes 6 § 910.2(b)(1).7 § 910.2(b)(4).8 § 910.2(a)(1).9 § 910.2(a)(2).4 the term or condition.”

The final rule further provides that, for purposes of the final rule, “term or condition of employment” includes, but is not limited to, a contractual term or workplace policy, whether written or oral.11 The final rule further defines “employment” as “work for a person.”

The final rule defines “worker” as “a natural person who works or who previously
worked, whether paid or unpaid, without regard to the worker’s title or the worker’s status under any other State or Federal laws, including, but not limited to, whether the worker is an employee, independent contractor, extern, intern, volunteer, apprentice, or a sole proprietor who provides a service to a person.”13 The definition further states that the term “worker” includes a natural person who works for a franchisee or franchisor, but does not include a franchisee in the context of a franchisee-franchisor relationship.

The final rule does not apply to non-competes entered into by a person pursuant to a bona fide sale of a business entity. In addition, the final rule does not apply where a cause of action related to a non-compete accrued prior to the effective date. The final rule further provides that it is not an unfair method of competition to enforce or attempt to enforce a non-compete or to make representations about a non-compete where a person has a good-faith basis to believe that the final rule is inapplicable.

Thoughts? Discussions? Good or bad thing? Were you ever impacted by a NC agreement?

[fedman1]

long time coming! I remember reading some years ago a Jimmy John employee was threatened by one. Really?? Trade secrets from a deli restaurant chain?

[What_Exit]

Non competes are basicaly bullshit with the excessive way they become so common.

Then insult to injury, some minimum wage jobs include this BS.

This is only the first step, a lot of corporations are going to fight this and claim the FTC doesn’t have this authority.

[Omar_Little]

For many years, many of these so-called non-competes were deemed unenforceable by many courts. The FTC is just codifying this court perspective finally.

[puzzlegal]

About damn time. I hope the courts don’t over-rule that.

[flurb]

The challenge to the rule was filed in the Eastern District of Texas, one of the most conservative district courts in the country. From there it goes to the Fifth Circuit, the most conservative appeals court in the country. And from there it goes to a Supreme Court that seems to have a particular zeal for dismantling the administrative state and the Chevron doctrine that courts should defer to an agency’s reasonable interpretation of a statute.

So . . . not holding my breath.

[Voyager]

@puzzlegal

About damn time. I hope the courts don’t over-rule that.

Ditto. In California, they are either banned or unenforceable. That has a lot to do with the rise of Silicon Valley. Imagine the situation if the people who left Fairchild were not allowed to found Intel. Repeat for thousands of situations.

[Hari_Seldon]

SCOTUS won’t allow it.

[Odesio]

@JohnT

Thoughts? Discussions? Good or bad thing? Were you ever impacted by a NC agreement?

When I started with my current employer back in 2015 I had to sign a non-compete agreement. Not too long after I started, the company stopped requiring anyone but executives to sign it. For the most part, non-compete agreements weren’t worth the paper they were written on. We had a turnover of around 10% meaning we were losing about 300 people each year. Who the hell was even going to keep track even if we could enforce it?

Most states here in the US have at will employment laws meaning the company can fire you at any time. It strikes me that if they can fire an employee at any time then you should be able to find work elsewhere at any time.

[Saint_Cad]

I have a friend that was a customer service manager for WalMart. She says she had to sign a NCA to not work at any other general goods retailer if she left or they fired her. Can anyone confirm or deny if that’s a thing?

[puzzlegal]

@Voyager

@puzzlegal

About damn time. I hope the courts don’t over-rule that.

Ditto. In California, they are either banned or unenforceable. That has a lot to do with the rise of Silicon Valley. Imagine the situation if the people who left Fairchild were not allowed to found Intel. Repeat for thousands of situations.

Yes, i read a pretty good analysis linking the outlawing of non-compete clauses in CA to the strength of the CA tech industry.

Non-compete rules were never popular in my field.

[doreen]

@JohnT

However, if you are a “senior executive” or a “franchisee”, non-competes can still be used to prevent you from competing after you left your employment.

Minor correction - for the senior executives, non-competes that existed before the effective date can still be enforced but no new ones are allowed , not even for senior executives.

This rule is a good thing - it’s only non-competes that will be banned , other restrictive covenants will still be permitted (non-disclosure , non-solicitation and non-recruitment agreements). As with so many other things, employers ( as a group ) did it to themselves - if they hadn’t started having waitresses and sandwich artists signing non-competes , they might still be able to have doctors sign them.

[SeaSun]

I think it’s a good thing too. I used to work in sales, and I always had to sign a non-compete agreement. They wanted to prevent sales employees from taking their clients elsewhere. I get why that could be harmful to the company, especially if you had some really big clients, but when I left the company due to management changes that I was not in favor of, it really sucked that I couldn’t work in the same industry and take my clients with me (they all would have gone with me where ever I landed). I had to pick an entirely different industry that I didn’t enjoy as much as what I was doing, and I wasn’t making as much either.

[Cervaise]

I live in a region where broad non-competes have been explicitly prohibited for years (there are a handful of very narrow exceptions; more here). And yet, somehow, business continues to be conducted, and profits remain healthy.

The US Chamber of Commerce can go fuck itself.

[puzzlegal]

@doreen

it’s only non-competes that will be banned , other restrictive covenants will still be permitted (non-disclosure , non-solicitation and non-recruitment agreements)

Those others are far less toxic, and rarely have much impact on employee mobility.