04/30/2024 | Press release | Distributed by Public on 04/30/2024 07:56
Making good on President Biden's July 2021 Executive Order commanding it to exercise its rulemaking authority to curtail the use of non-compete clauses and other agreements that limit worker mobility, on April 23, 2024, the Federal Trade Commission (FTC) issued its long-awaited final rule on Non-Compete Clauses, 16 CFR Part 910 (the "Rule"). The Rule was previously released as a Notice of Proposed Rulemaking (NPRM) in January 2023, followed by a lengthy period of public comment. In a 3-2 vote along partisan lines, the full Commission voted to finalize the Rule. The effective date of the Rule is 120 days after the Rule is published in the Federal Register (the official compendium of all federal regulations). In a companion Guide for Businesses issued on April 23, the FTC suggests that the effective date will likely be in early September 2024.
The Rule makes it an "unfair method of competition" for an employer to enter into or maintain with a worker a non-compete clause. 16 CFR ยง910.2(a). Being deemed an unfair method of competition opens the door to the FTC's jurisdiction under Section 5 of the Federal Trade Commission Act, a 1914 law that gives the FTC broad powers to regulate fair competition and bring enforcement actions against businesses engaged in unfair methods of competition.
By federal agency standards, the Rule is short and straightforward. The rule begins with several key definitions:
The Rule's prohibition of non-competes turns on the effective date and a worker's status:
Finally, the Rule contains three exceptions, situations to which the requirements of the Rule shall not apply:
Although the FTC is requiring employers to notify certain employees with existing non-competes that they are invalid prior to the effective date of the Rule, no timeline has been given as to when such notices must be issued. As such, no immediate action is required of employers who maintain non-compete covenants with existing and prior employees. Remember, the effective date of the Rule will likely be in September 2024, or later.
Just hours after the FTC issued the Rule, Plaintiff Ryan, LLC, a global tax services firm, filed the first lawsuit against the FTC in the United States District Court for the Northern District of Texas. Ryan has asked for a judicial declaration that the rule violates the Administrative Procedures Act and Article II of the U.S. Constitution. The next day, the U.S. Chamber of Commerce filed a lawsuit seeking declaratory and injunctive relief in the United States District Court for the Eastern District of Texas, making similar allegations contesting the validity of the Rule. The Chamber's lawsuit includes a request for a permanent injunction on the enforcement of the Rule and delay of the effective date of the Rule pending the conclusion of the litigation. More lawsuits are likely to be filed challenging the Rule. If any reviewing court issues a stay or injunctive relief, the implementation of the Rule likely would be delayed while the challenge to its validity is litigated.
While employers should be mindful of the need to comply by the effective date, they should keep an eye on the news as to the legal challenges to the Rule for any important new developments that could delay or avoid implementation.
Employers who wish to plan on the Rule taking effect as planned would be well-served to use this time to take an "inventory" of their existing non-competes and de facto non-competes. That review should identify all personnel (current and past) with whom the employer has these agreements, and then ascertain which agreements are in place with senior executives (which agreements will survive the Rule), and those agreements with workers who are not senior executives (and who therefore will be entitled to the notice mandated by the Rule).
The Labor & Employment lawyers at Calfee will continue to monitor ongoing developments with the Rule and report significant items in future First Alerts. In the meantime, should you have any questions about the Rule and its impact on your business, please contact any of the lawyers listed below or your regular Calfee contact.
For additional information on this topic, please contact your regular Calfee attorney or the author(s) listed below: |
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216.622.8354
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216.622.8251
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216.622.8358
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216.622.8399
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513.693.4870
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216.622.8259
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614.621.7102
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216.622.8391
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