By Christopher Farmer, NFDA General Counsel
Just this afternoon the Federal Trade Commission voted 3 to 2 to approve a final rule that makes noncompete agreements illegal (https://www.ftc.gov/system/files/ftc_gov/pdf/noncompete-rule.pdf).
The final rule provides that it is an unfair method of competition and, therefore, a violation of the FTC Act, for employers to bind employees with noncompete clauses as of the final rule’s effective date, 120 days from its publishing in the Federal Register (tbd).
This is a comprehensive ban on noncompetes with workers in all for-profit businesses in the United States.
The FTC rule carves out a small exception for “senior executives” who entered into noncompetes prior to the effective date. Noncompetes with senior executives that existed before the effective date can remain in force but are prohibited as of the effective date. A “senior executive” is defined by the rule as a worker earning more than $151,164 who is in a “policy-making position.”
For workers who are not senior executives, existing noncompetes are no longer enforceable after the final rule’s effective date. Further, employers must provide workers with existing non-competes notice that they are no longer enforceable. To facilitate compliance, the final rule includes model language that satisfies this notice requirement.
The final rule defines a “noncompete clause” as a term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from:
- 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
- Operating a business in the United States after the conclusion of the employment that includes the term or condition. 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. The final rule further defines “employment” as “work for a person.”
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.” 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.
The final rule does not apply to noncompetes entered into by a person pursuant to a bona fide sale of a business entity. Thus, the final rule does not apply to owners who have sold their funeral homes and are restricted by a noncompete provision as a part of the sale.
In addition, the final rule does not apply where a cause of action related to a noncompete accrued prior to the effective date.
The final rule does not limit or affect enforcement of state laws that restrict noncompetes where the state laws do not conflict with the final rule, but it preempts state laws that conflict with the final rule. Currently, four states ban the use of noncompetes entirely (California, North Dakota, Minnesota and Oklahoma) and 33 states plus D.C. restrict their use. Any state law provisions that exceed the FTC’s final rule will still be enforceable in addition to this new FTC rule.
This rule affects every segment of the American economy and in a simple 3-2 vote destroys billions of dollars in value that employers have spent in compensation for a covenant not to compete.
Undoubtedly, this rule will be challenged. As the two new members of the Federal Trade Commission noted in their dissents, the FTC only has the power that Congress has given to them, and there is certainly a very strong argument that the FTC has exceeded its Congressionally granted authority in this case.
I anticipate that the rule’s effective date will be pushed off (“stayed”) by a federal appeals court and, most likely, challenged all the way up to the Supreme Court.
If challenges fail in the courts, the only way for this rule to be prevented from going into effect would be an act of Congress.
Right now, there are many uncertainties and I continue to read the 570-page published final rule. Additionally, NFDA has been working with the U.S. Chamber of Commerce to oppose the proposed rule. NFDA submitted comments to the FTC on the proposed rule voicing our concern that a ban on noncompetes would have on funeral service and the anticipated negative effect it would have on quality of service provided to the families we serve.
Stay tuned to NFDA for more information and updates on this critical issue.