We invite you to watch our webinar, “Deciphering the FTC’s Non-Compete Ban: Navigating the New Regulatory Terrain and Adequately Protecting Employers’ Interests.” Our multi-disciplinary team, comprised of Michael Wexler, Robert Milligan, Kate Perrelli, Suzie Saxman, Marc Fosse, and Cary Burke, dissected the ramifications of the new FTC rule banning most non-competes with workers and provided invaluable insights into how it impacts a variety of aspects of many businesses. 

Here are the key takeaways from the webinar:

  • Labor: The FTC rule is just the latest salvo in President Biden’s “whole of government” approach relating to restrictive covenants. For over a year, the NLRB’s general counsel has taken the position that restrictive covenants agreements as applied to non-supervisory employees are unlawful. With both the NLRB and FTC cracking down on non-competes, employers may wish to take this opportunity to revisit their practices with respect to restrictive covenants.
  • Trade Secrets: As the FTC Rule is the subject of pending legal challenges, it is a good time to review your restrictive covenant agreements, including non-competes, to make sure they comply with state laws. If the Rule becomes effective, other restrictive covenants will become even more important to protect business assets. If the Rule does not become effective, you have the benefit of having audited your agreements for state compliance.
  • M&A: While buyers in an M&A transaction will generally be able to benefit from non-competes given by sellers, with the FTC Rule, it will be more difficult to obtain enforceable non-competes from worker/sellers who hold small shares of the target and are not involved in negotiating the terms of the sale. M&A buyers will need to develop alternatives to a “one size fits all” approach to non-competes.
  • Employee Benefits: This is a good time to analyze the potential scope of employees who would have non-grandfathered agreements. For example, analyze now which employees in a nonqualified deferred compensation plan with a post termination noncompete and who are part of a top hat group would also be treated as senior executives.
  • Compliance: September 4, 2024 is the current scheduled effective date of the FTC Rule. Prudent employers should carefully follow whether the Rule is vacated and the FTC is enjoined from enforcing the Rule. At a minimum, employers should be prepared to send the required notices if there is no injunction prior to the effective date.  Employers should compile a list of impacted current and former employees, with relevant contact information and determine whether any of the impacted employees qualify for the “senior executive” and evaluate whether there are “senior executives” who should sign non-competes prior to the rule’s effective date. Model notice language is included in the FTC Rule and can be delivered by email or text message, or by delivering a paper notice by hand or mail. The notices must be sent before the effective date of the rule. But for right now employers should carefully monitor the federal action brought in the Northern District of Texas seeking to vacate the Rule and enjoin the FTC from enforcing it.

To view the webinar recording, click here.

On May 3, 2024, the United States District Court for the Eastern District of Texas entered an Order staying the proceedings in Chamber of Commerce v. FTC by granting the FTC’s motion to apply the first-to-file doctrine, in which a district court should generally order “stay, transfer, or dismissal” of a second-filed action that substantially overlaps with a pending, first-filed action—in this case, Ryan, LLC v. FTC.


The Court’s Order found that the first-to-file rule required the Eastern District’s deference to the Northern District’s action in Ryan because the two cases’ procedural postures were roughly the same, “the substantial overlap between the cases and the comity factors support consolidation, and Ryan is the first-filed case.”


Although the Court found a transfer or consolidation of the two pending cases would avoid duplication of judicial effort, potentially inconsistent judgments, and piecemeal litigation, it nonetheless questioned its authority to do so. Therefore, the Eastern District elected to stay proceedings in the Chambers case to allow the Chamber of Commerce to seek either intervention or addition as parties in the Ryan case, which we expect to occur.


As a result, the remaining unexpired deadlines in the Court’s briefing schedule are lifted, and the proceedings are currently stayed. The Order also requires the Chamber of Commerce to notify the Court if its claims are accepted in Ryan, or denied.


The Northern District of Texas, meanwhile, entered an Order on May 2, 2024, requiring the FTC respond by 5:00 p.m. CT on May 7th to the Ryan Plaintiff’s emergency motion for an expedited briefing schedule for its request for a preliminary injunction and stay of the Non-Compete Rule. The FTC had previously requested 21 days to respond to Plaintiff’s motion to expedite briefing. The Ryan Plaintiff also recently amended its pleadings to elaborate on its arbitrary-and-capricious claim and seek an order vacating the Non-Compete Rule under the Administrative Procedure Act (APA), which would apply a vacatur of the Non-Compete Rule to parties and non-parties alike, if granted.


As it currently stands, we should see the FTC’s response to the Ryan Plaintiff’s motion by Tuesday, May 7, 2024, in addition to the Chamber of Commerce’s efforts to join the Ryan suit, with the Court’s schedule on Plaintiff’s request for a preliminary injunction to shortly follow.

Last week on April 23, 2024, the FTC adopted a final rule that would effectively ban non-compete agreements in the context of employment relationships when the rule becomes effective on September 4, 2024, absent a stay or injunctive relief.  The rule would render unenforceable a broad array of employment-based non-competition agreements.  It would also require that employers provide notice to workers that certain non-competition agreements already entered into will not be and cannot be enforced.  Not surprisingly, before the weekend, at least three different lawsuits had been initiated challenging the validity of the FTC’s final rule as adopted. For firms engaged in M&A activity, investors and their advisors, they should carefully track whether the rule is struck down as it may impact standard buyer protection strategies with key employees of the target.

What the Rule Says

The core of the rule is found in 16 CFR 910.2(a), which states that it is an unfair method of competition under the Federal Trade Commission Act for an employer to enter into, attempt to enter into, enforce or attempt to enforce a non-compete clause against a worker.  The term “worker” is defined as a natural person who works for the employer and the term expressly includes independent contractors.  The term “non-compete clause” is defined very broadly as a term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from, seeking or accepting employment after conclusion of employment or from operating a business in the United States after conclusion of employment.  Workers defined as “senior executives” are treated differently: while it is still an unfair method of competition to enter into a non-competition agreement with a senior executive after the effective date of the rule, employers are permitted to enforce non-compete clauses entered into with a senior executive before the effective date of the rule.

Limited Impact in M&A

As a general matter, the FTC’s final rule does not apply to non-compete arrangements entered into by a person pursuant to a bona fide sale of a business entity, sale of the person’s ownership interest in the business entity or sale of all or substantially all the assets of a business entity’s operating assets. 16 C.F.R. § 910.3(a). The language of the rule is unclear whether “sale of a business entity” requires sale of 100% of the interests in the business entity or whether a smaller stake, perhaps a mere majority interest, is sufficient to qualify as a “sale of a business entity”.  Despite this ambiguity, firms engaged in M&A activity can expect that non-compete  clauses will continue to be enforceable against sellers of business entities, at least, in the regular course, which among other things allows for allocation of purchase price to the non-compete for tax purposes. Seasoned corporate practitioners may raise an eyebrow to the use of the term “bona fide” in describing the exemption from the rule. Ostensibly the FTC seeks to limit employers from engaging in a “sham transaction” of a business interest to secure the benefit of the exemption in the proposed rule  Buyers of businesses will need to undertake due diligence around the enforceability of non-compete clauses purporting to bind key employees of the target company; some of those non-compete clauses may have been rendered unenforceable and constitute violations of the new rule. .

Major Impact in Capital Markets

While the FTC’s final rule may be of modest impact to those engaged in M&A work, those engaged in deploying growth capital will have a more complicated road ahead in connection with the FTC’s new rule. There is no exemption for non-compete clauses entered into as a condition for investing capital into early stage and growth companies. While sales of businesses are priced on established multiples or other well-understood pricing mechanisms, venture capital investors, private equity investors deploying growth equity, and other capital providers often find themselves betting on a prospective portfolio company’s management team to execute on business plans and pro forma projections. Accordingly, the human capital risk is heightened, and in the absence of a secondary liquidation of equity interests of the management team, investors who usually condition their capital on the management team members entering into non-compete arrangements will find that this tool is no longer available to them when it comes time to protect their investment

A Reprieve for Non-Competes with Senior Executives

In a change from the FTC’s initial proposed rule, the final rule does not impact existing   non-compete arrangements with “senior executives” who meet certain duty and remuneration thresholds, but this is not a solution for prospective non-compete arrangements with senior executives after the effective date. 16 C.F.R. § 910.1.

Near Term Mitigations

While venture capital and private equity investors will invariably be waiting to see how the litigation filed immediately on the heels of the FTC’s announcement shakes out, it is perhaps more important than ever to begin considering whether transaction terms protect capital providers.

  1. A common-place exercise in the venture capital world, asking members of an operating team to “re-vest” their equity, will likely creep upmarket as a regular term in any investment transaction that does not include a liquidation of existing ownership interests.
  2. In later-stage transactions wherein capital providers are providing capital in tranches, we will likely begin to see more covenants regarding the operating team continuing their employment with the issuer at the time of each tranche of capital is disbursed, more akin to private credit arrangements.
  3. The FTC rule incentivizes the  use of confidentiality clauses and trade secrets protection language to limit unfair competition by departing members of the management team and may result in an uptick litigation for such breaches, but less certainty compared to non-compete enforcement.

A Need for Vigilance and New Thinking

Broader in title than it is in fact, the FTC’s final rule on non-competes certainly gives rise to concern for those engaged in corporate transactional matters and more for those involved in emerging growth and middle-market capital formation. For capital providers the specter of allocating capital to an issuer or borrower who subsequently loses some or all its differentiating operating team is real.

Perhaps more than ever before, financial incentives for retention, perfection of intellectual property rights, and culture must be revisited and enhanced.


To learn more about the FTC’s final rule on non-competes and its implications, join us for our webinar on Friday, May 3, 2024.

On April 23, 2024, the Federal Trade Commission (FTC) voted in a 3 to 2 decision along party lines to adopt its Final Non-Compete Clause Rule (“Noncompete Rule”) banning post-employment non-compete clauses between employers and their workers. The Noncompete Rule is scheduled for publication in the Federal Register on May 7, 2024, giving the rule an Effective Date of September 4, 2024, pending any efforts to block the rule.

As anticipated, the Noncompete Rule was immediately met by legal challenges from business interests who assert that the FTC has brazenly overstepped its authority. Within hours of the Noncompete Rule’s announcement, the first lawsuit was filed against the FTC in the Northern District in Texas in Ryan, LLC v. Federal Trade Commission.[1] 3:24-cv-00986. The United States Chamber of Commerce, the nation’s largest business advocacy group, had announced prior to its unveiling that it planned to file suit to block the rule should the Agency vote to ban non-compete agreements. It followed through on its plans in a lawsuit filed this past Wednesday in the Eastern District of Texas.[2] As of the date of filing, a third lawsuit was filed against the FTC, its Chair Lina Khan, and each of the Commissioners in their official capacities on Thursday in the Eastern District of Pennsylvania which may potentially set up a circuit split for the Supreme Court’s review.[3]  We expect these three suits to be merely the tip of the iceberg.

The court in U.S. Chamber of Commerce v. FTC has set a scheduling order for Chamber’s motion for a preliminary injunction that, after entertaining any forum challenges, gives the FTC until May 31st to respond or file a motion for summary judgment, until June 12th for the Chamber’s reply and opposition to summary judgment, with all motions fully briefed by June 19th. From there, the Court will set a hearing on preliminary relief and summary judgment, and if necessary a consolidated bench trial, on a date close to the completion of briefing that should allow sufficient time for resolution of the case before the Noncompete Rule’s effective date for any desired appellate review.  

Each of the lawsuits offer similar grounds for challenging the Noncompete Rule, namely that: (1) the FTC lacked or exceeded the statutory authority to issue the Noncompete Rule, (2) the Noncompete Rule is an unconstitutional delegation of legislative power, and (3) the Noncompete Rule is arbitrary and capricious. The challengers’ arguments expose the infirmities of the Noncompete Rule in its current form, and in the months ahead, the courts will be tasked with answering the following questions.

  1. Did the FTC lack the statutory authority to issue the Noncompete Rule?

    The FTC claims to derive its authority to issue the Noncompete Rule from Section 5 of the FTC Act, which declared unlawful “unfair methods of competition,” and Section 6, which authorizes the Agency “to make rules and regulations for the purpose of carrying out the provisions” of the Act. The challengers to the Noncompete Rule, however, argue that the Agency relies on novel interpretations of the FTC Act to promulgate substantive rules as it never has in its 114-year history. The FTC previously acknowledged in its notice of proposed rulemaking (NPRM) in the lead up to the final Noncompete Rule that it has never before used its rulemaking authority to regulate employee non-compete agreements.[4]

    This places the Noncompete Rule squarely within the Major Questions Doctrine, a rule of constitutional interpretation holding that, when delegating rulemaking authority to agencies on questions of vast economic and political significance, Congress must provide clear and direct authority to the agency to do so, and the court will not defer to agency interpretations of its own enabling statutes.[5] The Court has previously applied the Major Questions Doctrine when agencies have claimed substantial new regulatory power over important economic areas,[6] or when the regulation will have a substantial aggregate economic impact.[7] In 2022, the Supreme Court invalidated the EPA’s renewable energy clean air regulations and OSHA’s vaccine mandate for private sector workers based on the Major Questions Doctrine, which recognizes that, when delegating rulemaking authority to agencies on questions of vast economic and political significance, “Congress does not usually ‘hide elephants in mouseholes.’”[8] The same reasoning is likely to apply here.

    Non-competes have been a matter of political significance over the past several years, with numerous states enacting new laws restricting use of non-competes with low-wage workers. As we have previously reported here, in the past few years, Congress itself has considered, but failed to enact, numerous bills that would have banned or placed limitations on use of non-competes with workers. See VA Hiring Enhancement Act (H.R.3401) (to void non-competes for physicians going to work at VA hospitals); Workforce Mobility Act of 2021 (H.R.1367) (to ban employee non-competes); Workforce Mobility Act of 2021(S.483) (same); Freedom To Compete Act of 2022 (S.2375) (to ban non-competes for workers who are not exempt under the Fair Labor Standards Act); Restoring Workers’ Rights Act of 2022 (H.R. 8755) (same); FTC Whistleblower Act of 2021 (H.R.6093) (to void non-competes for whistleblowers to the FTC); Employment Freedom for All Act (H.R.5851) (to void non-competes for any employee who is fired for not complying with their employer’s COVID-19 vaccine mandate).

    1. Does the Noncompete Rule violate the Non-Delegation Doctrine?

      Next, the challengers argue that, even if Congress had given the FTC authority to make rules on non-competes, such authority would be an impermissible delegation of authority under the Non-Delegation Doctrine. Article I of the Constitution provides that “[a]ll legislative Powers herein granted shall be vested in a Congress of the United States.” Accordingly, the U.S. Supreme Court has held that Congress may not transfer to another branch “powers which are strictly and exclusively legislative.” Although Congress may grant executive agencies substantial discretion to implement and enforce the laws it creates, it must still “lay down by legislative act an intelligible principle to which the person or body authorized to [exercise that authority] is directed to conform.”[9] The FTC’s authority for its noncompete ban again rests on its broad interpretation of Section 5 of the FTC Act that makes “unfair methods of competition” unlawful, but the Act itself provides no real intelligible principle to guide the Agency’s decision-making or discretion as would be required to survive judicial scrutiny. Even if Congress had intended to delegate to the FTC the power to make rules regarding employee noncompetes, the Agency’s vague reference to the phrase “unfair methods of competition” in Section 5 is too broad to meet this standard or pass constitutional muster.

      Though the FTC will argue the doctrine of “Chevron deference” will save its rulemaking here, that is unlikely to be successful. The 40-year-old doctrine requires federal courts to defer to an agency’s reasonable interpretations of gaps and ambiguities in statutes they implement, but it has also faced significant legal challenge in recent years. In January 2024, the Supreme Court heard oral arguments in two cases, Loper Bright Enterprises v. Raimondo[10]and Relentless, Inc. v. Department of Commerce,[11] which seek to overrule Chevron. It is expected that the Supreme Court Justices will do so, or significantly limit Chevron deference once and for all which could spell doom for the Noncompete Rule.

      1. Is the Noncompete Rule is arbitrary and capricious?

        In addition to the FTC’s dubious claim of authority, the legal challenges take aim at the Noncompete Rule itself as arbitrary and capricious. The lawsuits claim that the FTC failed to properly take into consideration the vast economic impact of such a radical shift in policy, including the lost prior expectations of employers and workers who are parties to existing non-compete agreements.

        The U.S. Chamber of Commerce points out that the Noncompete Rule imposes considerable retroactive consequences on businesses and workers in every sector of the economy, and if implemented, “will unilaterally void almost every existing noncompete agreement, thereby disrupting the settled expectations of parties that rely on the enforceability of reasonable noncompete agreements and depriving those who have given consideration for such agreements of the benefits of their bargain.”[12]

        Moreover, the legal challenges assert that the Noncompete Rule upends centuries of established contract law as noncompetes have been enforceable contracts since before the Nation’s founding. Indeed, enforcement of non-competes has been a feature of English common law since the early 18th century,[13] and they were not uncommon in 1914, when Congress passed the FTC Act. This raises the question of whether the purported benefit of the Noncompete Rule to workers and the economy as a whole touted by the Agency outweighs the costs to employers who have long relied on the expectation of enforceable noncompetes to protect their specialized training, investment, and confidential information and whether the FTC engaged in reasoned decision-making or considered reasonable alternative proposals to its categorical ban.

        CONCLUSION

        Ultimately, we believe that the answer to each of these questions above is likely to be a resounding “yes,” and that the FTC’s Noncompete Rule is unlikely to be upheld in its current form. Further, we expect more lawsuits to come and that a successful court challenge on any of the bases outlined above would result in an injunction, at a minimum, staying implementation of the Noncompete Rule pending further court order or agency action. Such injunctive relief is likely to occur at the outset of litigation and prior to the Noncompete Rule’s Effective Date.


        [1] Ryan, LLC v. Federal Trade Commission, Case No. 3:24-cv-00986, in the United States District Court for the Northern District of Texas.

        [2] Chamber of Commerce of the United States of America, et al. v. Federal Trade Commission, Case No. 6:24-cv-00148, in the United States District Court for the Eastern District of Texas (Tyler Division).

        [3] ATS Tree Services, LLC v. Federal Trade Commission, et al., Case No. 2:24-cv-01743, in the United States District Court for the Eastern District of Pennsylvania.

        [4]https://www.tradesecretslaw.com/2023/01/articles/ftcs-crackdown-on-non-competes/answering-the-296-billion-question-ftcs-proposed-rulemaking-on-worker-non-competes-likely-to-be-found-unconstitutional/#more-12135

        [5] See West Virginia v. Environmental Protection Agency, 142 S. Ct. 2587, 2622 (2022) (striking down EPA Affordable Clean Energy rules); National Federation of Independent Business v. Department of Labor, Occupational Safety and Health Administration, 142 S. Ct. 661, 669 (U.S. 2022) (striking down OSHA emergency temporary standard mandating COVID-19 vaccine or testing for private sector workers).

        [6] West Virginia v. Environmental Protection Agency, 142 S. Ct. 2587, 2622 (2022).

        [7] See, e.g., Texas v. United States, 809 F.3d 134, 181 (5th Cir. 2015).

        [8] See, e.g., West Virginia v. Environmental Protection Agency, 142 S. Ct. at  2622-2623 (citing Whitman v. American Trucking Assns., Inc., 531 U.S. 457 (2001)).

        [9] See Gundy v. United States, 139 S.Ct. 2116, 2123 (U.S. 2019) (“Congress does not usually ‘hide elephants in mouseholes.’”) (citing Mistretta v. United States, 488 U.S. 361, 372 (1989)).

        [10] Loper Bright Enterprises v. Raimondo (S. Ct. Docket No. 22-451).

        [11] Relentless, Inc. v. Department of Commerce (S. Ct. Docket No. 22-1219).

        [12] Chamber of Commerce of the United States of America, et al. v. Federal Trade Commission, Case No. 6:24-cv-00148.

        [13] Mitchel v. Reynolds, 24 Eng. Rep. 347 (Q.B. 1711).

        At least three lawsuits have now been filed against the FTC to block implementation of its new rule to ban non-competes.

        The first suit was filed in Texas federal court (Northern District) the day that the rule was announced by a global tax preparation service.

        Next, the US Chamber of Commerce and related business associations filed suit in federal court (Eastern District) in Texas the following day seeking a preliminary injunction and a stay of the effective date of the rule.

        The Chamber identified the following key arguments against the rule:

        • The FTC lacks authority to issue a rule in this context, and has acknowledged the limitations in the past.
        • The Rule is a sweeping abuse of the FTC’s authority under Section 5 of the FTC Act, opening the door for the FTC to regulate virtually anything any three commissioners — now and in the future — wish to regulate.
        • If statutorily authorized, then the Rule rests on an unconstitutional delegation of authority to the agency.
        • The Rule is impermissibly retroactive.
        • The Rule violates the Administrative Procedures Act.
        • The Rule is not rationally connected to economic data.
        • The Rule was arbitrarily chosen without duly considering alternatives.

        The Court has set a briefing schedule to address forum of the dispute, summary judgment, and a preliminary injunction:

        Chamber Plaintiffs have until May 10 “to supplement their motion with additional briefing and attachments pertinent to summary judgment, including any ‘parts of [the administrative record] cited by’ plaintiffs in support of judgment in their favor.”

        The FTC has until May 31 “to file briefing on the matters of plaintiffs’ request for preliminary relief and summary judgment in favor of either party.”

        Chamber Plaintiffs have until June 12 to respond to that filing.

        The FTC has June 19 to file any reply in support of summary judgment.

        “The court will set a hearing on preliminary relief and summary judgment, and if necessary a consolidated bench trial, on a date close to completion of that briefing.”

        Lastly, a small business filed suit in Pennsylvania federal court (Eastern District) on Thursday seeking to upset the FTC’s rule. The case was assigned to a Biden appointee.

        It appears that we may have a ruling in June or July in the Chamber of Commerce case. We will continue to monitor these cases for significant developments.

        We could potentially see a circuit split setting the issue up for US Supreme Court review.

        Friday, May 3, 2024
        1:00 p.m. to 2:30 p.m. Eastern
        12:00 p.m. to 1:30 p.m. Central
        11:00 a.m. to 12:30 p.m. Mountain
        10:00 a.m. to 11:30 a.m. Pacific

        Cost

        There is no cost to attend, but registration is required.

        REGISTER HERE

        About the Program

        In a landmark decision, the Federal Trade Commission (FTC) has given the green light to a final rule that prohibits most non-compete agreements between employers and workers. This development carries profound implications for businesses and employees alike, reverberating throughout competitive conditions in labor markets, mergers and acquisitions, employee benefits, and beyond.

        Join our multi-disciplinary team as they dissect the ramifications of this ruling and provide invaluable insights into its implications for your organization.

        Key discussion points will include:

        • A comprehensive overview of the FTC ruling and its far-reaching implications.
        • In-depth analysis of the exceptions and limitations delineated in the final rule.
        • Understanding the ripple effect on businesses, employees, and competitive markets.
        • Addressing the impact on traditional use of non-competes in mergers and acquisitions.
        • Addressing the impact on traditional use of restrictive covenants (e.g., forfeitures/clawbacks) in employee benefit arrangements.
        • Proactive strategies for ensuring compliance and mitigating associated risks, including ensuring compliance with state law and enhancing trade secret protections.
        • Exploring potential legal challenges and mapping out the future outlook.

        This webinar will provide analysis and actionable guidance to help you navigate this evolving landscape with confidence.

        Don’t miss this opportunity to stay ahead of the curve and gain a competitive edge in adapting to this pivotal regulatory shift.

        Speakers

        Michael Wexler, Partner, Seyfarth Shaw LLP
        Robert Milligan, Partner, Seyfarth Shaw LLP
        Kate Perrelli, Partner, Seyfarth Shaw LLP
        Suzie Saxman, Partner, Seyfarth Shaw LLP
        Marc Fosse, Partner, Seyfarth Shaw LLP
        Cary Burke, Partner, Seyfarth Shaw LLP

        If you have any questions, please contact Joan Gwak at jgwak@seyfarth.com and reference this event.

        Learn more about our Trade Secrets, Computer Fraud & Non-Competes practice.

        To comply with State CLE Requirements, CLE forms requesting credit in IL or CA must be received before the end of the month in which the program took place. Credit will not be issued for forms received after such date. For all other jurisdictions forms must be submitted within 10 business days of the program taking place or we will not be able to process the request.

        Our programming is accredited for CLE in CA, IL, and NY. Credit will be applied as requested, but cannot be guaranteed for TX, NJ, GA, NC and WA. The following jurisdictions may accept reciprocal credit with our accredited states, and individuals can use the certificate they receive to gain CLE credit therein: AZ, AR, CT, HI and ME. For all other jurisdictions, a general certificate of attendance and the necessary materials will be issued that can be used for self-application. CLE decisions are made by each local board, and can take up to 12 weeks to process. If you have questions about jurisdictions, please email CLE@seyfarth.com.

        Please note that programming under 60 minutes of CLE content is not eligible for credit in GA. programs that are not open to the public are not eligible for credit in NC.

        On April 23, 2024, the FTC announced its Final Non-Compete Clause Rule (“Final Rule”), which bans post-employment non-compete clauses between employers and their workers. The Final Rule becomes effective 120 days after being published in the Federal Register (Effective Date).[1] As of the date of this paper, the Final Rule has not been published in the Federal Register.

        Key Provisions

        • Scope:
          • The Final Rule prohibits an employer from entering into, or attempting to enter into, a non-compete clause with a “worker” (including, e.g., employees and independent contractors) or representing that a worker is subject to a non-compete clause.[2] The Final Rule allows employers to maintain existing non-compete agreements with “senior executives,”[3] (those with over $151,164 annual compensation and in a policy making position for the business) but bars an employer from entering into, or attempting to enter into, a non-compete clause with a senior executive after the Effective Date of the Final Rule.[4]
          • The Final Rule does not apply to non-competes entered into by a person pursuant to a bona fide sale of a business entity.[5]
          • The Final Rule does not prohibit employers from enforcing non-compete clauses where the cause of action related to the non-compete clause accrued prior to the Effective Date of the Final Rule.[6]
          • 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.[7]
          • The Final Rule supersedes all state laws to the extent, and only to the extent, that a state’s laws permit or authorize conduct prohibited under the Final Rule or conflict with the Final Rule’s notice requirements.[8]
        • Notice of Non-Enforcement:
          • The Final Rule requires an employer to provide clear and conspicuous notice to workers subject to a prohibited non-compete, in an individualized communication, that the worker’s non-compete clause will not be, and cannot be legally be, enforced against the worker.[9]
          • The employer must provide by the Final Rule’s Effective Date by hand-delivery, by mail at the worker’s last known street address, by email, or by text message.[10]

        Analysis

        The Final Rule bans almost all non-competes between employers and workers, but does not explicitly ban non-disclosure agreements, customer non-solicitation agreements, or employee non-solicit  agreements.

        Nevertheless, the Final Rule makes clear that it bans these other forms of restrictive covenants when they have the same functional effects as non-compete clauses.[12]  The Final Rule provides that a non-disclosure clause operates as a non-compete, for example, “where they span such a large scope of information that they function to prevent workers from seeking or accepting other work or starting a business after they leave their job.” Such non-disclosure agreements are so broadly written, the FTC states, that for practical purposes, “they function to prevent a worker from working for another employer in the same field and are therefore non-competes under [the Final Rule.]”[13] Similarly, non-solicitation agreements can satisfy the definition of non-compete clause “where they function to prevent a worker from seeking or accepting other work or starting a business after their employment ends.”[14]

        The Final Rule becomes effective 120 days after being published in the Federal Register. During that time, we expect trade associations and businesses across the country to challenge the Final Rule and seek an injunction against it.[15] In fact, two lawsuits have already been filed. We expect at least some of the challenges to be successful, because any final rule in which the FTC claims authority to ban restrictive covenants is not likely to withstand constitutional scrutiny, for the reasons set out below.

        First, the banning of non-competes is squarely within the Major Questions Doctrine, which is a rule of constitutional interpretation holding that, when delegating rulemaking authority to agencies on questions of vast economic and political significance, Congress must provide clear and direct authority to the agency to do so, and the court will not defer to agency interpretations of its own enabling statutes.[16] The Court has previously applied the major questions doctrine when agencies have claimed substantial new regulatory power over important economic areas,[17] or when the regulation will have a substantial aggregate economic impact.[18] It is likely undisputed that the FTC’s Final Rule involves a claim of substantial new regulatory power, particularly given the long history of state regulation regarding non-competes and the near-complete absence of FTC challenges to non-competes prior to issuance of the proposed rule. And by the FTC’s own estimation, the Final Rule will effect 1 in 5 U.S. workers and have an estimated economic impact of $400bn-$488bn in increased wages for workers over the next 10 years.[19] Accordingly, the Final Rule raises a “Major Question.”

        Second, this rule-making is likely an impermissible delegation of authority under the Non-Delegation Doctrine. Article I of the Constitution provides that “[a]ll legislative Powers herein granted shall be vested in a Congress of the United States.” Based on that provision, the Supreme Court holds that Congress may not transfer to another branch “powers which are strictly and exclusively legislative.” Congress may confer substantial discretion on executive agencies to implement and enforce the laws, but Congress must still “lay down by legislative act an intelligible principle to which the person or body authorized to [exercise that authority] is directed to conform.”[20] Here, even if Congress had intended to delegate to the FTC the power to make rules regarding employee non-competes, the vague reference to “unfair methods of competition” in Section 5 of the FTC Act is arguably far too broad to meet this standard.

        Third, the doctrine of “Chevron deference” is unlikely to save the FTC’s rule-making. The 40-year-old doctrine, which requires that federal courts defer to an agency’s reasonable interpretations of gaps and ambiguities in statutes they implement, has been under significant challenge in recent years. In January 2024, the Supreme Court heard oral arguments in two companion cases, Loper Bright Enterprises v. Raimondo and Relentless, Inc. v. Department of Commerce, which seek to completely overrule Chevron. It is widely expected that the majority of Supreme Court Justices will soon vote to end, if not severly limit, Chevron deference once and for all.

        While it is very likely the FTC Final Rule will be successfully challenged under these doctrines, the appeals process may take 12-18 months before the Supreme Court issues a final ruling. A final decision may take less time if there are expedited appeals.

        Below are some answers to some frequently asked questions about the FTC Final Rule.

        Frequently Asked Questions

        What happened?

        The SEC voted 3-2 to ban most non-competes for U.S. workers. The final rule and discussion is over 500 pages long, but it is intentionally broad and captures most non-competes for both employees and independent contractors.

        Are non-compete agreements void right now?

        No. The rule, assuming it is not enjoined, is not effective until 120 days from publication in the Federal Register (which as of April 24th has not happened but will happen soon). The rule also does not apply to breach of contract actions where the action accrues before the effective date.

        Why did the FTC do this?

        The FTC concluded that non-competes unlawfully stifle competition and depress wages for U.S. workers, and that banning them would encourage competition, innovation, and increased wages. More to the point, the current administration issued an executive order in 2021 directing the FTC to curtail non-competes in some fashion, so this rule was long in the making.

        What does the ban cover?

        The ban covers all non-competes for U.S. workers (including employees and independent contractors) with limited carve-outs, and subject to certain exceptions based on the FTC’s statutory authority. For example, the rule notes that the FTC has no authority over not-for-profit enterprises, so those entities are not subject to the new rule. There are exceptions for existing agreements with “senior executives” (discussed below) and for non-competes entered into as part of the bona fide sale of a business.

        Is the rule retroactive?

        In most instances, yes – the rule bans new non-competes after the effective date, but also invalidates existing non-competes subject to few exceptions.  

        Does it only apply to non-competes?

        On its face, the rule only applies to non-competes and does not ban other restrictions like confidentiality or non-solicitation provisions. The rule makes clear that it bans these other forms of restrictive covenants when they have the same functional effects as non-compete clauses. The rule provides that a non-disclosure clause operates as a non-compete, for example, “where they span such a large scope of information that they function to prevent workers from seeking or accepting other work or starting a business after they leave their job.” Such non-disclosure agreements are so broadly written, the FTC states, that for practical purposes, “they function to prevent a worker from working for another employer in the same field and are therefore non-competes under [the Final Rule.]” Similarly, non-solicitation agreements can satisfy the definition of non-compete clause “where they function to prevent a worker from seeking or accepting other work or starting a business after their employment ends.”

        How is non-compete defined?

        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 the term or condition.” Again those terms should be construed broadly.

        What are the exceptions?

        There are industry-specific exceptions based on certain industries excepted from the Federal Trade Commission Act (“the FTC Act”). Specifically, the rule does not apply to banks, savings and loan institutions, federal credit unions, common carriers, air carriers and foreign air carriers, and persons and businesses subject to the Packers and Stockyards Act. Outside of those industries, the major exceptions include (1) existing agreements for “senior executives” (defined below), (2) non-competes entered into in connection with the bona fide sale of a business, and (3) non-compete enforcement where the cause of action accrued prior to the rule’s effective date.

        Who are qualified senior executives under the exception?

        The rule largely adopts the SEC’s existing definitions for “executive officers, “ but also includes an income threshold of $151,164 in the preceding year. Put differently, a “senior executive” includes someone making in excess of that threshold who also meets a “job duties test” set forth in the rule. Who falls under that exception leaves room for interpretation, but it is intended to be narrow and requires the individual to have “policy-making” authority for the entire organization, and would closely align with the SEC’s definition of an executive officer. Again, this exception only allows for existing non-competes prior to the effective date. It does not allow for new non-competes with senior executives that are entered into after the effective date.

        Does this rule replace state laws regarding non-competes?

        The rule preempts states laws only where they conflict with the final rule. Put differently, the rule allows for customer non-solicits but California state law does not. If the rule remains in place, customer non-solicits will continue to be void in California. The patchwork of state-level income and notice requirements for non-competes would also remain in effect.

        Are non-profits covered by the ban?

        No. By statute, the FTC only has authority over for-profit enterprises, so the rule does not apply to those organizations. This is in addition to the industries noted above which are specifically excluded from the FTC’s purview by statute: banks, savings and loan institutions, federal credit unions, common carriers, air carriers and foreign air carriers, and persons and businesses subject to the Packers and Stockyards Act.

        Will the rule be challenged?

        Yes. There are already two pending lawsuits (one in the Northern District of Texas and one in the Eastern District of Texas) against the FTC, and we expect a request for a nationwide injunction along with potentially more lawsuits.

        What is the outlook for a challenge to the rule?

        The challenges are largely focused on the lack of statutory authority for the FTC to enact these kind of substantive rules, and particularly for a sweeping rule that affects millions of agreements nationwide. See discussion above. While there are no guarantees, based on recent Supreme Court decisions regarding the major questions and non-delegation doctrines, there is a significant chance of the rule being enjoined before it goes into effect.

        If the post-employment non-compete covenant is void, could post-employment vesting of equity compensation stop?

        This will depend on the terms of the equity compensation plan and agreements and the scope of the applicable restrictive covenants.  The ban may affect some, but not all, of the validity of the post-employment restrictive covenants.  The non-compete covenants may be severable from the remainder of the equity compensation agreement.

        Will the ban affect current rights to severance pay?

        Generally, no. The ban does not become effective until 120 days after the rules are published in the Federal Register. For any severance payments scheduled to be paid after that date, and which are conditioned on compliance with specific restrictive covenants, the ban only affects restrictive covenants relating to non-competition (as discussed above) and the payee may still be required to comply with any remaining valid restrictive covenants such as protection of trade secrets.

        What type of notice do employers need to provide to employees under the rule?

        Prior to the effective date of the Rule, employers will need to provide notice to each worker who is subject to a non-compete in violation of the Rule so long as the employer has either a mailing address, email address, or cell phone number for the affected worker. The notice must: (i) identify the person who entered into the non-compete clause with the worker; (ii) be provided via mail, email or text message to the worker.

        Are Forfeiture for Competition Provisions Covered By the Ban?

        Yes.  The ban applies to a term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from:

        (i) seeking or accepting work in the United States . . . where such work would begin after the conclusion of the employment . . . ;

        (ii) operating a business in the United States after the conclusion of the employment . . .

        In the discussion section for the rule, the FTC indicates that  forfeiture-for-competition provisions as penalizing employees, and also states that a “severance arrangement in which the worker is paid only if they refrain from competing” would be a penalty. Additionally, the FTC also notes that  “that a payment to a prospective competitor to stay out of the market may also violate the antitrust laws even if it is not a non-compete under this rule.”

        Is Garden Leave Covered by the Ban?

        No. The FTC acknowledged that “garden leave” provisions – where a worker is still employed and receiving the same total annual compensation and benefits on a pro rata basis – are not non-competes because they are not a post-employment restriction.

        Are Fixed Term Agreements covered by the Ban?

        No. Fixed-term employment agreements with non-competes during the employment term are not covered by the ban.

        What About Non-Solicit, Non-Disclosure, and Training Repayment Provisions?

        Covered by the ban only if they are “so broad or onerous that it has the same functional effect as a term or condition prohibiting or penalizing a worker from seeking or accepting other work or starting a business after their employment ends, such a term is a non-compete clause under the final rule.”

        The FTC references nondisclosure agreements (NDAs), training repayment agreements, nonsolicitation agreements, no-hire agreements, and “no-business” agreements as examples to evaluate whether the functional effect is applicable, that is “where they function to prevent a worker from seeking or accepting other work or starting a business after their employment ends.”

        Would the ban apply to non-compete provisions in ERISA-covered employee benefit plans?

        ERISA preempts state laws that “relate” to any employee benefit plan.  Based on this preemption, regardless of any state law prohibition, employers could add a non-compete restrictive covenant to an ERISA-cover employee benefit plan.  This type of provisions is usually seen in a “top hat” nonqualified deferred compensation plan or an ERISA-covered severance plan. However, ERISA does not preempt federal laws.  The FTC rule and comments do not address if the ban would have any effect on the validity or enforcement of non-compete restrictions in an ERISA-covered employee benefit plan. 

        Would the ban apply to non-compete restrictive covenants in a 457(f) deferred compensation plan?

        Under the proposed regulations for 457(f) of the Internal Revenue Code, the right to payment of nonqualified deferred compensation can vest, or not, based on compliance with a bona fide post-termination non-compete period.  As noted above, the FTC’s jurisdiction does not apply to non-profit organizations.  Therefore, the ban should not affect a bona fide non-compete restrictive covenant in a 457(f) plan that is sponsored by a non-profit organization.

        What Should Employers Do in the Meantime?

        Carefully follow whether the Rule is enjoined and the deadline for compliance should the rule remain intact. It may also be prudent to prepare to send notices should the rule become effective by compiling a list of impacted current and former employees, with relevant contact information. Determine whether any of the impacted employees qualify for the “senior executive” exception described above.  Evaluate whether there are “senior executives” who should sign non-competes prior to the rule’s effective date. Model notice language is included in the rule and can be delivered by email or test message, or by delivering a paper notice by hand or mail. The notices must be sent before the effective date of the rule. DO NOT send notices right away; monitor the progress of the legal challenges.

        We will continue to enhance and expand our FAQ section as new developments arise.


        [1] 16 C.F.R. § 910.6.

        [2] 16 C.F.R. § 910.2(a) (proposed).

        [3] 16 C.F.R. § 910.1.

        [4] 16 C.F.R. § 910.2(a)(2).

        [5] 16 C.F.R. § 910.3(a).

        [6] 16 C.F.R. § 910.3(b).

        [7] 16 C.F.R. § 910.3(c).

        [8] 16 C.F.R. § 910.4.

        [9] 16 C.F.R. § 910.2(b)(1).

        [10] 16 C.F.R. § 910.2(b)(2).

        [12] See 16 C.F.R. § 910.1.

        [13] See Draft Final Rule 78 n.341; Id. at 81, n. 346.

        [14] Draft Final Rule 84.

        [15] For example, at least one business filed suit against the FTC on the same day that the Final Rule was published. The US Chamber of Commerce has filed suit on April 24, 2024 in the Northern District of Texas.

        [16] See West Virginia v. Environmental Protection Agency, 142 S. Ct. 2587, 2622 (2022) (striking down EPA Affordable Clean Energy rules); National Federation of Independent Business v. Department of Labor, Occupational Safety and Health Administration, 142 S. Ct. 661, 669 (U.S. 2022) (striking down OSHA emergency temporary standard mandating COVID-19 vaccine or testing for private sector workers).

        [17] West Virginia v. EPA, 597 U.S. 697 (2022).

        [18] See, e.g. Texas v. United States, 809 F.3d 134, 181 (5th Cir. 2015).

        [19] https://www.ftc.gov/legal-library/browse/rules/noncompete-rule

        [20] See Gundy v. United States, 139 S.Ct. 2116, 2123 (U.S. 2019) (“Congress does not usually ‘hide elephants in mouseholes.’”) (citing Mistretta v. United States, 488 U.S. 361, 372 (1989).

        On April 18, 2024, the Federal Trade Commission (“FTC”), Justice Department (“DOJ”), and the U.S. Department of Health and Human Services (“HHS”) launched an online reporting portal, HealthyCompetition.gov, for the public to report potentially unfair and anticompetitive health care practices. The online reporting portal provides examples of unfair and anticompetitive health care practices under existing antitrust laws including:

        1. “consolidation, joint ventures, and ‘roll-ups’ ”;
        2. “[a]greements among competitors to limit or fix the terms of employment for employees”;
        3. “collusion or price fixing” among competitors;
        4. “[a]ctions to limit transparency” about “healthcare options and costs”;
        5. “healthcare contract language and other practices which restrict competition”;
        6. “anticompetitive uses of healthcare data,” such as “acquisitions and control of large amounts of data by a few companies” which “prevent other companies from entering the market and reduce future innovation”; and
        7. “unnecessary healthcare provider recertification or accreditation requirements” which may “raise the costs of practicing medicine” and “reduce the number of healthcare practitioners.”

        Under this joint initiative between FTC, DOJ, and HHS, complaints will first undergo a preliminary review by staff at the FTC and DOJ’s Antitrust Division. If a complaint raises sufficient concern under existing antitrust laws or is related to HHS authorities, it will then be selected for further investigation by the appropriate agency which may result in a formal investigation. Notably, the privacy and confidentiality policies which govern information submitted through the online reporting portal, including any personal information members of the public choose to provide, can be found at: DOJ Privacy PolicyDOJ Antitrust Division Confidentiality Policy Regarding Complainants, and FTC Privacy Policy.

        The unveiling of HealthyCompetition.gov marks the latest effort by federal enforcers to combat unfair and anticompetitive health care practices through regulatory and legal actions. Indeed, the FTC, DOJ, and HHS previously issued a Request for Information (RFI) requesting public comment on deals conducted by health systems, private payers, private equity funds and other alternative asset managers involving health care providers, facilities or ancillary products or services. This joint initiative was based on another similar RFI issued by the FTC and HHS on how pharmaceutical middleman groups may be contributing to drug shortages.

        The creation of an online reporting portal is also particularly relevant given the recent Federal Trade Commission v. U.S. Anesthesia Partners, Inc. lawsuit pending in the Southern District of Texas where the FTC challenged a private equity firm’s scheme to suppress competition in anesthesiology practices across Texas. Specifically, the FTC alleged  U.S. Anesthesia Partners, Inc. (“USAP”), the dominant provider of anesthesia services in Texas, and private equity firm Welsh, Carson, Anderson & Stowe engaged in a three-part strategy to consolidate and monopolize the anesthesiology market in Texas by: (1) executing a roll-up scheme, systematically buying up nearly every large anesthesia practice in Texas to create a single dominant provider with the power to demand higher prices; (2) driving up anesthesia prices through price-setting agreements with remaining independent practices; and (3) sidelining a significant USAP competitor by striking a deal to keep it out of USAP’s territory. Consequently, HealthyCompetition.gov allows the public to report such unfair and anticompetitive health care practices sooner and more efficiently—effectively maximizing the ability of the FTC, DOJ, and HHS to enforce existing antitrust laws and prevent anticompetitive acquisitions and practices which can chill fair competition, drive-up health care costs, degrade working conditions, and limit innovation.

        Given the continued focus of the FTC, DOJ, and HHS on increasing antitrust enforcement, companies in the health care and pharmaceutical industries should work closely with antitrust and health care regulatory counsel to ensure their business interests and strategies are adequately protected and in compliance with the evolving antitrust legal and regulatory landscape.

        This afternoon, the FTC voted to adopt a proposed final rule banning most non-competes with workers in the United States. The final rule provides that it is an unfair method of competition—and therefore a violation of Section 5 of the FTC Act—for employers to enter into non-competes with workers. The Commission found that non-competes tend to negatively affect competitive conditions in labor markets by inhibiting efficient matching between workers and employers. The Commission also found that non-competes tend to negatively affect competitive conditions in product and service markets, inhibiting new business formation and innovation. It also found that there is evidence that non-competes lead to increased market concentration and higher prices for consumers.

        The final rule is available here, along with a fact sheet, and press release on the rule. Existing non-competes may remain in effect for senior executives (those with over $151,164 annual compensation and in policy making position for the business similar to an officer), but will be ineffective for all other workers after the effective date and cannot be imposed upon senior executives in new agreements. Fewer than 1% of workers are estimated by the FTC to be senior executives under the final rule.

        There are limited exceptions to the rule based on specific industries, and a general exception for the bona fide sale of a business. The rule does not invalidate other restrictions like a non-solicit or confidentiality restriction, but overbroad restrictions that function to prevent employment and operate as effective non-competes will be invalidated. The proposed final rule must first be published in the Federal Register, and would not be effective until 120 days after publication. Barring an injunction, employers will be required to affirmatively provide notice to employees with existing non-competes that their non-competes will not be and cannot be enforced against them by the rule’s effective date.

        The U.S. Chamber of Commerce announced that it intends to file suit tomorrow to enjoin the rule from becoming effective. Based on recent Supreme Court guidance on the “major questions” doctrine and limits of agency authority, there is a decent chance that the rule is ultimately invalidated. The rule and commentary is over 500 pages long – we are analyzing the final language and actively monitoring the situation, and will provide further reports on this highly significant action.

        Welcome, readers. We are at a pivotal juncture in the realm of non-compete law. Today, we will be providing real-time coverage of a consequential Federal Trade Commission (FTC) meeting. This is not just an ordinary meeting; it’s a crucial dialogue on non-compete agreements, with an anticipated announcement of a final rule that could potentially ban most non-competes with workers.

        This is a significant topic that has ignited considerable debate, and the outcome could have substantial implications for businesses and workers. Whether you’re a legal professional, a business leader, or simply someone interested in the intersection of law and business, our live blog will offer you timely updates and comprehensive analysis. Bookmark this page, refresh for updates, and join us as we delve into the intricate world of non-competes. Your engagement and insights are valuable as we navigate this complex issue.

        Let’s get rolling.

        Your live commentators today are myself, Robert Milligan, editor of the blog and co-chair of our Trade Secrets, Computer Fraud, and Non-Compete practice, and Dawn Mertineit, co-editor of the blog and Trade Secrets/Non-Compete partner.

        With this live blog, we’ll hit the big developments and discuss what they mean.


        Robert: We are eagerly anticipating today’s FTC video conference!

        Dawn: It will be interesting to see what, if anything, has changed from the FTC’s initial proposed rule from last January.

        Robert: According to the FTC’s press release, we can expect at the start of the meeting, the Commission will vote on whether to authorize public disclosure of the proposed final rule that is under consideration. Then, Chair Khan will offer brief remarks. Next, if the Commission votes to authorize public disclosure of the final rule under consideration, the Office of Policy Planning will give a staff presentation on the final noncompete rule under consideration. Finally, the Commission will vote on whether to issue the final rule.

        Dawn: Here we go!

        Robert: Interested to see how the two new FTC commissioners react and what dissent, if any, they supply.

        Dawn: The meeting is being held as an open session because of its impact on businesses and employees.

        Robert: The vote to publicly disclose the proposed final rule passed. Now they are addressing the proposed final rule.

        Dawn: An attorney in the FTC, Ben Kady, will provide an overview. Attorney Kady says that the body of evidence showing that non-competes suppress wages. Needless to say, many have raised concerns with the validity of this “evidence.”

        Robert: The FTC claims over 25k of 26k public comments about proposed ban were in favor of the ban.

        Dawn: The final rule would provide that new noncompetes for all workers would be banned. But they may remain in effect for certain senior execs.

        Robert: FTC claims non-competes with workers suppress wages and stifles innovation.

        Dawn: Kady says that non-competes inhibit efficient management. Again, these statements are not accepted by all.

        Robert: Proposed final rule includes ban on non-competes with workers after rule’s effective date. Preexisting non-competes would also be rescinded except for senior executives. This is a change from the initial proposed rule which a complete retro active ban. Rule would become effective within 120 days after publication in federal register.

        Dawn: What are the odds we hear about California, Robert?

        Dawn: Non-competes are “exploitative” according to Kady.

        Dawn: But not for non-competes binding senior executives. However, the final rule finds that they are still unfair methods of competition. Not sure I follow that logic…

        Robert: FTC claims in its findings that ban with workers (non-senior executives) will increase wages, lead to new business formation, and increase patents.

        Dawn: Bottom line is that existing non-competes for senior executives will not be affected, but no new non-competes even for senior execs going forward. This will get challenged, no doubt.

        Dawn: Ha, I knew it! Kady uses California as an example of why non-competes aren’t necessary.

        Dawn: Never mind that California has a TON of extremely expensive trade secret litigation.

        Robert: FTC claims in its findings that non-competes with senior executives inhibit new business formation.

        Robert: FTC rejects that non-competes are legitimate business justification to protect trade secrets, points to North Dakota and California.

        Dawn: Really surprising that they didn’t address the sale of a business exception, which (in the initial proposal at least) only permits non-competes for sellers having at least 25% interest in the business being sold.

        Robert: Thus far the only modification to the initial proposed ban from January 2023 is allowing existing non-competes with senior executives.

        Dawn: One of the commissioners (Slaughter) currently saying that they have not expanded the rule to cover franchisees, but it sounds like she’s pushing for that in the future. She also points out that they don’t cover non-profit employees, but doesn’t believe there’s a good policy reason to exclude them.

        Dawn: Commissioner Bedoya is also supportive of the rule. “Banning people from working is coercive. It is exploitative.” He says that the FTC has the authority to do this, although he admits he had doubts at first.

        Robert: Commissioner Bedoya says FTC has authority to issue this ban, although he was a skeptic at first.

        Dawn: Interesting he says that there’s authority in the “second highest court in the land” but doesn’t say what the case is.

        Dawn: Holyoak up next. She is fired up – says that the executive branch is trying to bypass the legislative process. “Lawmaking is an extraordinary power.” She does not believe the FTC has the authority to issue this rule.

        Robert: New Republican appointed FTC Commissioner Holyoak indicates agency rule making challenges separation of powers. Says that FTC does not have rule making authority for this non-compete ban.

        Dawn: She makes it clear that she does not support all non-competes. Like many reasonable practitioners in this space, she recognizes that there are abuses that should be curbed. She does not believe this final rule will survive challenge and argues that it’s a waste of the FTC’s resources given the dubious enforceability. She believes the FTC’s resources would be better used tackling those abuses rather than a broad ban.

        Robert: Commissioner Holyoak indicates Section 6g allows the FTC to issue procedural rules, rather than substantive rules, which she characterized as legislative rules. Commissioner Holyoak indicates that the broad non-compete rule exceeds Congressional authorization.

        Dawn: Commissioner Ferguson is now up and he agrees with Holyoak. “The administrative state cannot legislate because Congress declines to do so.”

        Dawn: He does not believe the FTC has the authority to undo tens of millions of existing contracts and the laws of 46 states.

        Robert: New Republican appointed FTC Commissioner Andrew N. Ferguson says the administrative state cannot legislate just because Congress has not.

        Dawn: He raises the major questions doctrine, unsurprisingly.

        Robert: Commissioner Andrew N. Ferguson says agency must point to delegation of power by Congress on this “major issue” and there has not been a delegation.

        Dawn: Commissioner Ferguson will be issuing a written dissent soon and raises constitutional concerns, as well as concerns that the rule is “arbitrary and capricious” (although he acknowledges that there are sound arguments in favor of legislation regulating non-competes – but that the FTC doesn’t have the authority to do so).

        Robert: Commissioner Ferguson concludes that FTC lacks authority and the final rule is unlawful.

        Dawn: Chair Khan now highlighting some comments from the public.

        Dawn: “Robbing people of their economic liberty also robs them of all sorts of other freedoms” including religious practice, right to organize, etc.

        Robert: Commissioner Khan says non-competes stifle innovation too.

        Robert: She also says FTC does have authority to issue the rule and ignores the plain reading of Section 6g.

        Dawn: She insists they have authority. I’m sure we’ll find out soon enough.

        Robert: FTC has issued a fact sheet laying out a key change from their initial proposed rule from January 2023. Highlights the senior executive exception to ban for preexisting non-competes: https://www.ftc.gov/news-events/news/press-releases/2024/04/fact-sheet-ftcs-proposed-final-noncompete-rule

        Dawn: Interesting – she points to changes at the state legislatures as spurring this movement.

        Robert: FTC’s proposed final rule is now available on the FTC’s website, https://www.ftc.gov/system/files/ftc_gov/pdf/noncompete-rule.pdf

        Dawn: Final vote. Khan, Bedoya, and Slaughter vote yes; Holyoak and Ferguson vote no. The rule passes 3-2.

        Robert: US Chamber of Commerce has reported that it will file suit tomorrow and seek to enjoin the new rule. Buckle up.

        Dawn: The rule will be effective 120 days after it is published in the federal register. But as previously noted, this is going to be challenged immediately.

        Dawn: Some other odds and ends we missed while we were furiously typing: formal rescission of existing agreements will not be required (as initially suggested in the proposed rule last year), although employers will still need to notify workers (other than senior executives) that their agreements are no longer enforceable. “Senior executives” are workers who were in “a policy-making position” and who received total annual compensation of at least $151,164 in the preceding year (or annualized if the worker was employed for less than a year).

        Dawn: Also, the 25% threshold for business owners has been removed. The final rule requires that for a non-compete to meet the “sale of a business” exception, it must be a “bona fide sale”.