Federal Trade Commission Crackdown on Non-Compete Agreements

The Federal Trade Commission has fired a major shot across the bow of employers that rely on non-compete agreements. Back in January of 2023, the FTC proposed a new regulation limiting the majority of non-compete agreements in the United States. After a period of receiving and reviewing comments, the FTC approved a revised version of that rule.

Under the rule released April 23, 2024, it would be considered an “unfair method of competition” for employers to enter into or attempt to enforce non-compete clauses with their workers, including employees, independent contractors, externs, interns, volunteers, and even some franchise owners.

Near-Total Ban for Most Workers
For all but a narrow exception, the rule outright prohibits employers from using non-compete clauses. More specifically, the rule finds that it is an “unfair method of competition” to enter into, attempt to enforce, or even represent that a worker is subject to a non-compete agreement.

Notice Requirement for Existing Non-Competes
For any existing non-compete agreements that become prohibited, employers must provide notice to impacted workers that the clause will not be enforced against them within 120 days after the rule goes into effect, likely towards the end of August 2024. Specific model language is provided, and the rule provides “safe harbor” to those that use the model language.

Exception for “Senior Executives” in Existing Agreements
The proposed rule does allow some non-compete agreements to remain enforceable for highly-compensated senior executives, but only for contracts entered into before the regulation’s effective date. Those qualifying as a “senior executive” must have been in a top policy-making leadership role and earned over $151,000 in total compensation the preceding year.

Non-Competes Still Allowed in Business Sales
There is also an exception carved out that allows for legitimately negotiated non-compete clauses when a business owner sells their ownership interest or operating assets.

Preserves Stricter State Laws
While setting a new federal floor, the FTC rule would not preempt any state laws that are even more restrictive of non-compete agreements. While Louisiana law does allow some non-compete clauses, there are some peculiarities to Louisiana’s regulation of non-competes. For the non-compete agreements that are allowed by the FTC, Louisiana businesses must still follow Louisiana’s rules.

Reasoning
The proposed regulation represents a seismic shift in the FTC’s view of non-compete clauses. The FTC touts this new rule as being “good for workers, businesses, and the economy” because it will allow approximately 30 million American employees who are currently bound to non-compete agreements to find new employment in their industry or to start their own businesses. The FTC estimates that this rule will result in 17,000-29,000 more patents each year, 8,500 new businesses per year, and higher earnings for typical workers. According to an FTC estimate, nearly one in five American workers – or around 30 million people – are bound by a non-compete.

Enforcement of Rule
The primary means of enforcement of this rule are enforcement actions brought by the Federal Trade Commission, who will likely seek to enforce the rule against large corporations first. Because the rule is implemented pursuant to Section 5 of the Federal Trade Commission Act, there is no private right of action. That means that individual employees can’t sue. However, employers who want to enforce non-compete agreements will be forced to sue their former employees in the face of a federal agency having determined that non-compete agreements are unlawful and unfair methods of competition. My guess is that, if the new FTC rule stays in effect, Louisiana courts will be asked to consider the impact of the FTC rule, which makes non-competes an unlawful “unfair method of competition” with La. R.S. 51:1409, which gives a private right of action for unfair trade practices in Louisiana. In other words, given Louisiana’s current regulation of non-competes and the FTC’s rulemaking, can (or will) a Louisiana court find that non-competes are now newly actionable? Regardless of that, would a Louisiana court now defer to the FTC and refuse to enforce a non-compete? Or, will Louisiana courts still enforce non-competes in view of the FTC’s rulemaking? Time will tell.

Will the Rule Even Go Into Effect?
Regardless of whether this rule is good or bad, it is going to undoubtedly trigger an onslaught of legal challenges from employer groups arguing the FTC exceeded its authority. And, there are certainly arguments about why the FTC may have exceeded its authority. I don’t know if the FTC’s projections will come to bear. However, it is interesting to me that, while non-compete agreements are an agreement between the parties and are therefore in at least some sense “bargained for,” at their very core they restrict the free market – yet this rule has been pushed by the Biden-appointed FTC Commissioner, Lina Khan. Given that an “important economic dimension of individual liberty is the right to sell one’s labor services without attenuation,” Conservatives and conservative states will now have to step head-first into criticism that they are “pro-boss” and not “pro-market.”

Interesting times.