New FTC Rule Banning Non-Compete Agreements Challenged by the U.S. Chamber of Commerce

New FTC Rule Banning Non-Compete Agreements Challenged by the U.S. Chamber of Commerce

On April 23, 2024, the Federal Trade Commission (FTC) adopted a Final Rule prohibiting most post-employment non-compete agreements. The Rule states that it will have a retroactive effect for all existing non-compete agreements, except for ” senior executive ” non-compete agreements.” The FTC announced that the final Rule will be published in the Federal Register on May 7, 2024. Barring any changes from the ongoing legal challenges, the Rule’s effective date will be Wednesday, September 4, 2024 (120 days after publication). However, on April 24, the U.S. Chamber of Commerce and other business groups filed a federal court challenge to the Final Rule, requesting that the Court vacate or permanently enjoin the Rule.

The lawsuit alleges that the FTC lacked authority to issue Rules that specifically regulate “unfair competition” in accordance with Congress’s statutory grant of authority. FTC Commissioners who voted against the Rule did so on grounds that the Rule violates the U.S. Constitution’s separation of powers and argued that the section of the statute the FTC relied upon to promulgate the Rule did not grant such Rulemaking power.

Other criticisms of the Rule include that it retroactively nullifies millions of pre-existing private agreements between employees and employers, resulting in broad, sweeping, and unknown effects on the economy.

Some of the provisions of the Rule, if it takes effect, are:

  • A ban on all new non-compete agreements, even for senior executives;
  • One exception to the total ban on non-competes for sale of business;
  • Employers are required to provide written notices to employees to inform them that their non-competes are not enforceable and will not be enforced;
  • Preemption of conflicting state laws, effectively banning otherwise lawful non-compete agreements in 46 states that currently allow some form of a non-compete agreement;
  • The Rule bars many healthcare providers and facilities from utilizing non-competes. However, an exception may or may not apply to certain non-profit healthcare providers, as the Rule reserves the right to consider these entities individually.

We will closely monitor this issue for any new developments concerning the litigation and provide timely guidance to our clients. In the interim, employers should take inventory of their existing non-competes agreements and expiration dates. Employers may wish to consider onboarding new executives now to ensure that they are made subject to a non-compete that is expected to be grandfathered if the FTC Rule does take effect. Finally, employers should review the language of existing non-competes and consult with counsel to determine whether the employer’s interests might be protectable via some other form of agreement, such as a non-solicitation or non-disclosure agreement.

The attorneys at Pickrel, Schaeffer & Ebeling are here to help you navigate these issues. Please get in touch with us at (937) 223-1130.