Non-Compete Clause Rule

<RULE> FEDERAL TRADE COMMISSION <CFR>16 CFR Parts 910 and 912</CFR> <RIN>RIN 3084-AB74</RIN> <SUBJECT>Non-Compete Clause Rule</SUBJECT> <HD SOURCE="HED">AGENCY:</HD> Federal Trade Commission. <HD SOURCE="HED">ACTION:</HD> Final rule. <SUM> <HD SOURCE="HED">SUMMARY:</HD> Pursuant to the Federal Trade Commission Act (“FTC Act”), the Federal Trade Commission (“Commission”) is issuing the Non-Compete Clause Rule (“the final rule”). The final rule provides that it is an unfair method of competition for persons to, among other things, enter into non-compete clauses (“non-competes”) with workers on or after the final rule's effective date. With respect to existing non-competes— <E T="03">i.e.,</E> non-competes entered into before the effective date—the final rule adopts a different approach for senior executives than for other workers. For senior executives, existing non-competes can remain in force, while existing non-competes with other workers are not enforceable after the effective date. </SUM> <EFFDATE> <HD SOURCE="HED">DATES:</HD> The final rule is effective September 4, 2024. </EFFDATE> <FURINF> <HD SOURCE="HED">FOR FURTHER INFORMATION CONTACT:</HD> Benjamin Cady or Karuna Patel, Office of Policy Planning, 202-326-2939 (Cady), 202-326-2510 (Patel), Federal Trade Commission, 600 Pennsylvania Avenue NW, Mail Stop CC-6316, Washington, DC 20580. </FURINF> <SUPLINF> <HD SOURCE="HED">SUPPLEMENTARY INFORMATION:</HD> <HD SOURCE="HD1">I. Background</HD> <HD SOURCE="HD2">A. Summary of the Final Rule's Provisions</HD> The Commission proposed the Non-Compete Clause Rule on January 19, 2023 pursuant to sections 5 and 6(g) of the FTC Act. <SU>1</SU> <FTREF/> Based on the Commission's expertise and after careful review and consideration of the entire rulemaking record—including empirical research on how non-competes affect competition and over 26,000 public comments—the Commission adopts this final rule addressing non-competes. <FTNT> <SU>1</SU>  Non-Compete Clause Rule, NPRM, 88 FR 3482 (Jan. 19, 2023) (hereinafter “NPRM”). </FTNT> The final rule provides that it is an unfair method of competition—and therefore a violation of section 5—for employers to, <E T="03">inter alia,</E> enter into non-compete clauses with workers on or after the final rule's effective date. <SU>2</SU> <FTREF/> The Commission thus adopts a comprehensive ban on new non-competes with all workers. <FTNT> <SU>2</SU>  § 910.2(a)(1)(i) and § 910.2(a)(2)(i). </FTNT> With respect to existing non-competes, <E T="03">i.e.,</E> non-competes entered into before the final rule's effective date, the Commission adopts a different approach for senior executives  <SU>3</SU> <FTREF/> than for other workers. Existing non-competes with senior executives can remain in force; the final rule does not cover such agreements. <SU>4</SU> <FTREF/> The final rule allows existing non-competes with senior executives to remain in force because this subset of workers is less likely to be subject to the kind of acute, ongoing harms currently being suffered by other workers subject to existing non-competes and because commenters raised credible concerns about the practical impacts of extinguishing existing non-competes for senior executives. For workers who are not senior executives, existing non-competes are no longer enforceable after the final rule's effective date. <SU>5</SU> <FTREF/> Employers must provide such workers with existing non-competes notice that they are no longer enforceable. <SU>6</SU> <FTREF/> To facilitate compliance and minimize burden, the final rule includes model language that satisfies this notice requirement. <SU>7</SU> <FTREF/> <FTNT> <SU>3</SU>   <E T="03">See</E> § 910.1 (defining “senior executive”). </FTNT> <FTNT> <SU>4</SU>   <E T="03">See</E> Part IV.C.3. </FTNT> <FTNT> <SU>5</SU>  § 910.2(a)(1)(ii). </FTNT> <FTNT> <SU>6</SU>  § 910.2(b)(1). </FTNT> <FTNT> <SU>7</SU>  § 910.2(b)(4). </FTNT> The final rule contains separate provisions defining unfair methods of competition for the two subcategories of workers. Specifically, the final rule provides that, with respect to a worker other than a senior executive, it is an unfair method of competition for a person to enter into or attempt to enter into a non-compete clause; to enforce or attempt to enforce a non-compete clause; or to represent that the worker is subject to a non-compete clause. <SU>8</SU> <FTREF/> The Commission describes the basis for its finding that these practices are unfair methods of competition in Parts IV.B.1 through IV.B.3. <FTNT> <SU>8</SU>  § 910.2(a)(1). </FTNT> The final rule provides that, with respect to a senior executive, it is an unfair method of competition for a person to enter into or attempt to enter into a non-compete clause; to enforce or attempt to enforce a non-compete clause entered into after the effective date; or to represent that the senior executive is subject to a non-compete clause, where the non-compete clause was entered into after the effective date. <SU>9</SU> <FTREF/> The Commission describes the basis for its finding that these practices are unfair methods of competition in Part IV.C.2. <FTNT> <SU>9</SU>  § 910.2(a)(2). </FTNT> 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.”  <SU>10</SU> <FTREF/> The final rule further provides that, for purposes of the final rule, “term or condition of employment” includes, but is not limited to, a contractual term or workplace policy, whether written or oral. <SU>11</SU> <FTREF/> The final rule further defines “employment” as “work for a person.”  <SU>12</SU> <FTREF/> <FTNT> <SU>10</SU>  § 910.1. </FTNT> <FTNT> <SU>11</SU>   <E T="03">Id.</E> </FTNT> <FTNT> <SU>12</SU>   <E T="03">Id.</E> </FTNT> The final rule defines “worker” as “a natural person who works or who previously worked, whether paid or unpaid, without regard to the worker's title or the worker's status under any other State or Federal laws, including, but not limited to, whether the worker is an employee, independent contractor, extern, intern, volunteer, apprentice, or a sole proprietor who provides a service to a person.”  <SU>13</SU> <FTREF/> The definition further states that the term “worker” includes a natural person who works for a franchisee or franchisor, but does not include a franchisee in the context of a franchisee-franchisor relationship. <SU>14</SU> <FTREF/> <FTNT> <SU>13</SU>   <E T="03">Id.</E> </FTNT> <FTNT> <SU>14</SU>   <E T="03">Id.</E> </FTNT> The final rule does not apply to non-competes entered into by a person pursuant to a bona fide sale of a business entity. <SU>15</SU> <FTREF/> In addition, the final rule does not apply where a cause of action related to a non-compete accrued prior to the effective date. <SU>16</SU> <FTREF/> 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. <SU>17</SU> <FTREF/> <FTNT> <SU>15</SU>  § 910.3(a). </FTNT> <FTNT> <SU>16</SU>  § 910.3(b). </FTNT> <FTNT> <SU>17</SU>  § 910.3(c); <E T="03">see also</E> Part V.C. </FTNT> The final rule does not limit or affect enforcement of State laws that restrict non-competes where the State laws do not conflict with the final rule, but it preempts State laws that conflict with the final rule. <SU>18</SU> <FTREF/> Furthermore, the final rule includes a severability clause clarifying the Commission's intent that, if a reviewing court were to hold any part of any provision or application of the final rule invalid or unenforceable—including, for example, an aspect of the terms or conditions defined as non-competes, one or more of the particular restrictions on non-competes, or the standards for or application to one or more category of workers—the remainder of the final rule shall remain in effect. <SU>19</SU> <FTREF/> The final rule has an effective date of September 4, 2024. <SU>20</SU> <FTREF/> <FTNT> <SU>18</SU>  § 910.4. </FTNT> <FTNT> <SU>19</SU>  § 910.5. </FTNT> <FTNT> <SU>20</SU>  § 910.6. </FTNT> <HD SOURCE="HD2">B. Context for the Rulemaking</HD> <HD SOURCE="HD3">1. Growing Concerns Regarding the Harmful Effects of Non-Competes</HD> The purpose of this rulemaking is to address conduct that harms fair competition. Concern about non-competes dates back centuries, and the evidence of harms has increased substantially in recent years. However, the existing case-by-case and State-by-State approaches to non-competes have proven insufficient to address the tendency of non-competes to harm competitive conditions in labor, product, and service markets. The ability of employers  <SU>21</SU> <FTREF/> to enforce non-competes has always been restricted, based on public policy concerns that courts have recognized for centuries. For example, in <E T="03">Mitchel</E> v. <E T="03">Reynolds</E> (1711), an English case that provided the foundation for American common law on non-competes, <SU>22</SU> <FTREF/> the court noted that workers were vulnerable to exploitation through non-competes and that non-competes threatened a worker's ability to practice a trade and earn a living. <SU>23</SU> <FTREF/> The ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━ Preview showing 10k of 1354k characters. Full document text is stored and available for version comparison. ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━