The FTC’s recently issued Final Rule banning non-competes for most workers prohibits an employer from (1) threatening to enforce a non-compete against a worker, (2) advising the worker that, due to a non-compete, they should not pursue a particular job opportunity, or (3) telling the worker that the worker is subject to a non-compete.[1] The FTC asserts that these type of representations can have an in terrorem effect on workers who are unaware and unable to vindicate their legal rights against exploitative employers, thereby causing an adverse effect on competition. The Final Rule contains an exception, however, for enforcement or attempted enforcement of non-competes where an employer has a “good-faith” belief that the provisions of the Final Rule do not apply.[2] Where this exception applies, however, remains an open question.

The Final Rule’s good-faith exception states that “it is not an unfair method of competition to enforce or attempt to enforce a non-compete clause or to make representations about a non-compete clause where a person has a good-faith basis to believe that this [Non-Compete Clause Rule] is inapplicable.”[3]

According to the FTC, the good faith exception of § 910.3(c) was added out of an abundance of caution “to ensure that the final rule does not infringe on activity that is protected by the First Amendment and to improve clarity in § 910.2(a).”[4]

 The FTC included a similar version of the good faith exception in the proposed rule issued last January, and represents the agency’s attempt to balance its regulation of anti-competitive activity with an employer’s protected speech and right to petition under the First Amendment.

The foundation for the good faith exception is the United States Supreme Court’s Noerr-Pennington doctrine, which grants antitrust immunity under the First Amendment to parties petitioning the government for relief, even if the relief may tend to restrict competition.[5] Protected speech under the Noerr-Pennington doctrine extends to litigation activities and pre-litigation communications.

The good faith exception, the FTC contends, is intended to ensure that the Final Rule does not infringe upon an employer’s actions towards its employees that may be protected under the First Amendment. By adding the good faith exception, the FTC recognizes that an employer has First Amendment rights to make subjectively truthful statements concerning the employer-employee relationship, and to petition the courts to enforce the employee’s contractual obligations, even if the employer’s belief is found to be incorrect or the lawsuit is unsuccessful. The Final Rule makes clear, however, that the good faith exception does not protect willful misrepresentations about whether a non-compete covered by the rule is enforceable.[6]

So, what does that mean for employers?

The FTC has not suggested an instance in which an employer may have a good faith basis to believe that the Final Rule may be inapplicable.  Presumably, such a good-faith basis may exist where the FTC rules that a restrictive covenant other than an express non-compete (such as a non-solicit or non-disclosure clause) is ultimately deemed a functional non-compete under the new rule, but the employer can demonstrate that it had reason to believe otherwise.[7] The exception may also come into play in those instances where the rule is not clear on the scope of a definition or exception. For example, it is unclear whether partners or members with an ownership stake in a business are considered “workers” covered by the final rule. The rule does not specifically address that issue other than to state that “sole proprietors” can be considered “workers”. The FTC’s comments indicate that such partners, members, or other holders of ownership stakes “may” be covered by the sale-of-business exception, assuming their noncompete agreements are tied to the sale of their ownership stake in the business.  Whether or not a partner or business owner who retains an ownership interest in the business can be held to a noncompete after they stop working for the business is unclear. Given that the FTC has not provided any guidance on the good faith exception,  employers must proceed with caution.

One area exists, however, where the FTC has stated no good-faith basis exists:  the FTC expressly stated that pending legal challenges to the rule’s validity are insufficient to provide cover to employers.

The FTC’s proposed version of the non-compete rule cautioned that the good-faith exception would not apply “where the validity of the rule . . . has been adjudicated and upheld.” However, the prior version of the text appeared to provide a temporary safe harbor to employers during pending litigation, but the agency ultimately declined to adopt that language into the Final Rule, believing that it would create confusion while challenges to the non-compete ban were ongoing.[8]

The FTC clarified its stance in the Final Rule by stating that “the absence of a judicial ruling on the validity of the final rule does not create a good-faith basis for non-compliance.”[9] Therefore, unless the rule is stayed or invalidated by the courts, the FTC’s stance is that there is no good-faith for non-compliance with the Final Rule simply because litigation is pending.

[1] 16 C.F.R. § 910.2(a), 89 Fed. Reg. 38404 (May 7, 2024).

[2] 16 C.F.R. § 910.3(c).

[3] 16 C.F.R. § 910.3(c).

[4] 89 Fed. Reg. 38441 (May 7, 2024).

[5] See E.R.R. Presidents’ Conference v. Noerr Motor Freight, Inc., 365 U.S. 127 (1961); United Mine Workers of Am. v. Pennington, 381 U.S. 657 (1965).

[6] 89 Fed. Reg. 38441 (May 7, 2024).

[7] See 16 C.F.R. § 910.1.

[8] 89 Fed. Reg. 38441 (May 7, 2024).

[9] 89 Fed. Reg. 38341 (May 7, 2024).