FTC Issues Final Rule Banning Non-compete Clauses

The FTC recently released a final rule that broadly prohibits non-compete clauses as applied to workers.  The rule defines “non-compete clause” as a term or condition of employment (including but not limited to a contractual term or workplace policy, whether oral or written) that prohibits a worker from, penalizes a worker for, or functionally prevents a worker from (i) seeking or accepting work in the U.S. from a different employer, or (ii) operating a business in the U.S. after such conclusion of employment.  However, the rule does not apply (among other things) to non-compete clauses entered into pursuant to a bona fide sales of a business entity, of a person’s ownership interest in such an entity, or of all or substantially all of a business entity’s operating assets.

Except with respect to “senior executives”, the rule deems the following to be unfair:  (i) entering into or attempting to enter into non-compete clauses; (ii) enforcing or attempting to enforce non-compete clauses (regardless of when they were entered into); or (iii) representing that a worker is subject to a non-compete clause (regardless of when it was entered into).  These prohibitions are retroactive for such workers, and the final rule requires that for each existing non-compete clause that a company entered into with a worker, that company must notify the worker that the clause is no longer enforceable (unless the company has no record of a street address, email address, or telephone number for such worker).  The rule includes model language for this notice.

The prohibitions applicable to senior executives (defined as workers who were in policy-making positions and who received annual compensation above a certain amount) are similar, except that the prohibitions on enforcing or attempting to enforce non-compete clauses and representing that a worker is subject to a non-compete clause only apply with respect to non-compete clauses entered into after the rule’s effective date.  

The rule takes effect 120 days after its publication in the Federal Register.  However, the Chamber of Commerce has already filed a lawsuit in the Eastern District of Texas requesting that the court set aside the rule and enjoin the FTC from enforcing it.