FTC Bans Nearly All Noncompete Agreements

The U.S. Federal Trade Commission (FTC) voted 3-2 last week to approve a final regulation that would ban nearly all new noncompete agreements, or provisions in contracts that prohibit workers from pursuing certain employment after their term of service with an employer ends. In addition to barring companies from using these provisions in the future, the regulation requires that employers throw out existing agreements and to notify current and former workers that they will not be enforced. (The final rule includes model language employers can use to communicate with workers.)

The regulation does not apply to existing agreements with executives who earn more than $151,164 annually and who are in policymaking positions, and it does not apply to nonprofit organizations. According to Venable, LLP, the rule also exempts:

• Relationships between franchisors and franchisees;
• Non-compete clauses entered into as a result of a bona fide sale of a business entity or, substantially, of all of a business’s assets; and
• Agreements where a cause of action already has accrued.

The regulation also includes a safe harbor provision that exempts enforcement of a noncompete clause when an employer has a good-faith basis to believe the FTC’s final rule is not applicable to a certain situation.

As Connecting the Dots previously reported, the Metals Service Center Institute (MSCI) worked with other trade organizations, including the U.S. Chamber of Commerce (USCC), to try to get the FTC to reconsider this regulation. The day after the commission’s vote, the USCC announced it would challenge the rule in federal court, arguing the FTC cannot simply declare common business practices to be illegal, especially when, as is the case with noncompete agreements, these practices have been around longer than the 110-year-old FTC.

The National Association of Manufacturers (NAM) also opposes the final rule. “The FTC’s rule banning noncompete agreements is unprecedented and threatens manufacturers’ ability to attract and retain talent,” NAM’s Managing Vice President of Policy Chris Netram said in a statement. “In addition, [it] puts at risk the security of intellectual property and trade secrets — anathema to an industry that accounts for 53 percent of all private-sector research and development.”

If federal courts do not intervene, the rule will take effect 120 days after publication in the Federal Register.

Read the full final rule here. The FTC also has provided a fact sheet, which is available here.