The Federal Trade Commission (FTC) issued a final rule banning non-compete agreements on April 23, 2024. The rule was a response to the proposed non-compete clause rule introduced on January 19, 2023, under sections 5 and 6(g) of the FTC Act. The ban followed a statement from Chair Lina M. Khan to reinvigorate section 5 of the FTC Act to protect workers and prevent unfair practices in labor markets. The FTC’s final rule aims to promote competitive U.S. labor markets and end practices that harm workers.
Ryan, a global tax services and software provider based in Dallas, Texas, filed a legal challenge to the new rule, describing it as “lawless” and claiming it would place an undue burden on businesses trying to protect their intellectual property and retain top talent in professional service industries. The company filed a lawsuit in the U.S. District Court for the Northern District of Texas to prevent what they see as immense burdens on service-driven companies of all sizes nationwide.
The FTC’s final rule prohibits non-compete agreements for non-exempt workers, which make up the vast majority of employees. Exceptions to the ban include senior executives earning more than $151,164 annually and non-competes entered into in connection with the sale of a business. Existing non-competes with non-exempt employees are not enforceable after the effective date, which is defined as 120 days after publication in the Federal Register. Ryan’s lawsuit claims the rule would retroactively invalidate 30 million contracts and preempt the regulatory regimes of 46 states.
While crafting the rule, the FTC found that non-competes negatively affect competitive conditions in labor and product/service markets by inhibiting efficient workforce matching and innovation and leading to increased market concentration. Ryan believes the new rule will jeopardize businesses’ ability to protect intellectual property and retain talent, leading to reduced training investment in employees. The company has engaged former U.S. Secretary of Labor Gene Scalia and his team at Gibson, Dunn & Crutcher LLP to challenge the legality of the FTC’s rule.
The legal challenges to the FTC’s non-compete ban are expected to continue, with more lawsuits being filed to prevent the rule from being enforced. The U.S. Chamber of Commerce and ATS Tree Services have also filed lawsuits against the FTC, arguing that the agency does not have the authority to rewrite millions of American’s employment contracts. Attorneys and legal experts are advising clients to consult with lawyers about existing agreements and obligations but also suggest waiting to see how the legal challenges unfold and whether the rule will be upheld after potential appeals and reviews.
The implications of the FTC’s non-compete ban are far-reaching, affecting businesses of all sizes and industries. While the final rule aims to protect workers from unfair practices and promote competitive labor markets, critics argue that it will hinder companies’ ability to protect their intellectual property and retain key talent. With legal challenges underway and potential future appeals, the fate of the FTC’s rule remains uncertain, and businesses are advised to monitor the situation closely and seek legal advice to navigate the changing landscape of non-compete agreements.
