Federal Trade Commission Issues Rule Banning Noncompete Agreements

Last month, the Federal Trade Commission (FTC) announced that it had issued a final rule banning noncompete agreements, a type of employment contract that prohibits employees from working for their employers’ competitors for a period of time after their employment ends. The FTC has long had noncompete agreements in its crosshairs. The final rule follows a January 2023 proposed rule, which received over 26,000 comments. Those comments were then incorporated into the recently issued final rule. With noncompete agreements facing a less certain future than ever before, you should consider speaking to a Richmond noncompete lawyer if you are subject to one or are attempting to enforce one. 

First, Can the FTC Do That? 

You may be asking yourself why a rule banning a particular type of contractual provision is coming from the FTC — an administrative agency — rather than, say, the legislature or the courts. And such questions are not without merit. The FTC’s authority derives from the Federal Trade Commission Act, which allows it to: 

1. Prevent unfair methods of competition and unfair or deceptive acts or practices 
2. Seek monetary redress and other relief for conduct injurious to consumers
3. Prescribe rules defining acts or practices that are unfair or deceptive and establish requirements designed to prevent such acts or practices
4. Gather and compile information and conduct investigations relating to the organization, business, practices, and management of entities engaged in commerce
5. Make reports and legislative recommendations to Congress and the public 

By deeming noncompete agreements “unfair methods of competition,” the FTC believes that it is squarely within its legal authority to issue a rule banning them. But not everyone is convinced. Shortly after the rule was published, the U.S. Chamber of Commerce filed a lawsuit challenging the FTC’s authority and calling it a “blatant power grab.” Our Richmond noncompete lawyer will monitor this litigation to assess its impact on the rule. 

Why the FTC Issued the Rule 

The full rule providing the justification for the ban is 570 pages long, so we will provide only a condensed version here. The Commission has long been concerned about the use of noncompete agreements, which it views as unfair methods of competition and unnecessary restraints on trade. It characterizes them as take-it-or-leave-it contracts that exploit workers’ lack of bargaining power and coerce them into staying in jobs they would rather leave, force them into a different profession, or require them to relocate. It also claims that noncompete agreements even suppress the wages of workers who aren’t subject to them. 

The Commission believes that banning noncompete agreements will have the following effects: 

• A 2.7% annual increase in the rate of new business formation, resulting in an additional 8,500 per year
• A boost in innovation in the form of an additional 17,000-29,000 patents being issued per year (an increase of 11-19% annually over a 10-year period) 
• Higher worker earnings, with the average worker’s earnings estimated to rise by $524 per year
• Reduced health care costs of $74-194 billion over the next decade

According to FTC Chair Lina Khan, “Noncompete clauses keep wages low, suppress new ideas, and rob the American economy of dynamism…[t]he FTC’s final rule to ban noncompetes will ensure Americans have the freedom to pursue a new job, start a new business, or bring a new idea to market.”

Major Provisions of the Rule 

The major provisions of the rule are as follows:  

Definition of “Noncompete Clause” 

The rule defines a noncompete 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 terms or conditions; or
2. Operating a business in the United States after the conclusion of the employment that includes the term or condition.”

Note that the rule does not require that the language of the contract use “noncompete” or similar terms; so long as the agreement functions to prevent a worker from engaging in the above activities, the FTC considers it a noncompete agreement. The FTC’s definition will likely lead to disagreements between employers and employees over whether certain contract language qualifies as a noncompete agreement, and such disputes may require the assistance of a Richmond noncompete lawyer. 

Unfair Methods of Competition

According to the rule, it is an unfair method of competition for a person to: 

1. Enter into or attempt to enter into a noncompete agreement
2. Enforce or attempt to enforce a noncompete agreement
3. Represent to a worker that the worker is subject to a noncompete agreement

Existing Noncompete Agreements

The noncompete ban applies to all noncompete agreements — including existing noncompete agreements — except those involving “senior executives,” which the rule defines as those in a policy-making position earning more than $151,164 in the preceding year. 

Notice to Subject Employees

As a corollary to the rule’s ban on existing noncompete agreements, it requires the person who entered into a noncompete agreement with a worker to provide “clear and conspicuous” notice to the worker that the worker’s noncompete agreement is no longer legally enforceable. 

Exceptions 

As with almost all rules, there are a few exceptions. Those are: 

1. Bona fide sale of a business: The rule does not apply to a noncompete agreement entered into by a person pursuant to a bona fide sale of a business entity, the person’s ownership interest in a business entity, or all or substantially all of a business entity’s operating assets. 
2. Existing causes of action: The rule does not apply to where a cause of action related to a noncompete agreement arose before the effective date of the rule. 
3. Good faith: It is not an unfair method of competition to enforce or attempt to enforce a noncompete agreement where a person has a good-faith basis to believe that the particular noncompete agreement is not subject to the FTC’s rule. 

Navigate the New Landscape With Help From a Richmond Noncompete Lawyer

For more information about the FTC’s rule and the future of noncompete agreements, please speak to a Richmond noncompete lawyer at Pierce / Jewett by calling 804-502-2320 or using our online contact form.