What Employees Need to Know About The Federal Trade Commission’s New Non-Compete Rule

The FTC is a federal agency created by Congress in 1914 to enforce our country’s antitrust laws and to protect consumers. The FTC has five members who are appointed for seven-year terms. The commissioners can be removed from their positions only for “inefficiency, neglect of duty, or malfeasance in office.” The FTC acts primarily by filing lawsuits (for example, for suspected antitrust violations) or by issuing regulations, which then have the force of federal law.

The FTC’s non-compete rule originated in a 2021 executive order by the Biden Administration that encouraged agencies (including the FTC) to pursue a “whole government” approach to promoting competition, with the goal of lowering prices and increasing wages.

In January 2023, the FTC issued a notice of proposed rulemaking, which is the first step in creating a final – that is, enforceable – rule. That rule proposed to effectively ban non-competes across the country. As it is required to do, the FTC invited members of the public to comment on the proposed rule, and it received more than 26,000 comments. The final rule ultimately adjusted the proposed rule to incorporate some of those comments. (For example, it added an exception to allow the enforcement of existing non-competes for senior executive employees.)

The rule declares that it is a prohibited “unfair method of competition” – and therefore a violation of Section 5 of the Federal Trade Commission Act – to enter into a non-compete and, with limited exceptions, to enforce an existing non-compete.

The rule applies to all forms of workers, including both employees and independent contractors.

Technically, the rule does not mean that non-competes are automatically invalid or unenforceable. Rather, it means that asking for or enforcing a non-compete would be against federal law, which in turn means that – if the rule becomes effective – employers would likely stop trying to enforce non-competes for fear of civil liability, and non-competes in turn would become practically unenforceable.

The only exceptions would be:

Senior executives: Existing non-competes for senior executives could still be enforced. The FTC says that “senior executives” is meant to be a very narrow category – fewer than 1% of all workers. It is limited to a company’s president, CEO, or equivalent, and any other executive with “policy-making authority,” which means the ability to make policy decisions controlling “significant aspects of a business entity or common enterprise.” This category does not include executives who only “advis[e] or exert influence over such policy decisions” or those only having “final authority to make policy decisions for . . . a subsidiary of or affiliate of a common enterprise.”

Sale of a business: Existing or future non-competes could still be enforced if they were entered into in connection with the “bona fide sale of a business entity, of the person’s ownership interest in a business entity, or of all or substantially all of a business entity’s operating assets.” There is no minimum ownership level or sale price; the sale just have to be “bona fide” (meaning it’s not an attempt to impose an otherwise-invalid non-compete). (The proposed rule required the person to sell at least 25% of the business, but the final rule removes that requirement.)

Practically speaking, there may be one more major exemption, because the FTC typically doesn’t have jurisdiction to regulate non-profit entities. And non-profits are a huge category, including most major hospitals and healthcare systems. So while the breadth of the FTC rule is expansive, it is not universal, and there are some industries – such as healthcare – where the effects may be significantly less pronounced.

That depends on whom you ask.

According to the FTC, the economic benefits of this rule are huge: $74 billion to $194 billion in reduced healthcare spending over the next decade; 8,500 new businesses every year; 17,000 to 29,000 more patents each year; and $400 billion to $488 billion in increased wages for workers over the next decade (or $524 per worker per year).

According to many businesses, though, non-competes are essential to protect investments in research and development and to encourage businesses to train their employees without fear that those employees will use the training to compete, and the rule undermines those important interests.

The effective date of the rule is 120 days after its publication in the Federal Register. As of our publication of this blog, it’s not clear exactly when the rule will be published, but it is likely to be soon. If so, the effective date of the rule would be around the end of August 2024.

But that’s assuming that the existing and future legal challenges the rule are unsuccessful and that the rule actually gets to go into effect, and as we explain below, that’s a big “if.” The U.S. Chamber of Commerce – which represents businesses and is by some accounts the largest lobbying group in the country – has already sued to stop the rule.

When the FTC first proposed this rule, its sole Republican Commissioner, Christine Wilson, articulated the concerns that are likely to form the basis for any lawsuit. As she wrote:

“The [rule] is vulnerable to meritorious challenges that (1) the Commission lacks authority to engage in “unfair methods of competition” rulemaking, (2) the major questions doctrine addressed in West Virginia v. EPA applies, and the Commission lacks clear Congressional authorization to undertake this initiative; and (3) assuming the agency does possess the authority to engage in this rulemaking, it is an impermissible delegation of legislative authority under the non-delegation doctrine, particularly because the Commission has replaced the consumer welfare standard with one of multiple goals.”

Let’s unpack that.

First, in order to issue a rule, an agency such as the FTC has to receive permission to do so from Congress. If the FTC Act – which created the FTC – doesn’t authorize the FTC to issue this kind of rule, then the rule is invalid, and it’s effectively null and void.

Second, in recent years, the U.S. Supreme Court has invigorated a legal principle called the “major questions doctrine.” This contested principle essentially stands for the proposition that, in order for an agency to decide an issue of major national significance, its action must be supported by clear congressional authorization. Basically, it means that an agency can’t use a vague delegation of rulemaking authority – for example, preventing “unfair methods of competition” – to make important national policy.

Third, and relatedly, the doctrine of nondelegation suggests that an administrative agency cannot operate on the basis of vague delegations of rulemaking authority (such as the one in Section 5 of the FTC Act). This is so, its proponents say, because doing so violates the separation of powers, insofar as Congress cannot assign to any other entity the power to make laws. Under this theory, it is a violation of the Constitution for Congress to create an agency with the assigned task to “make good policy,” for example, because only Congress is allowed to do that. The last time the U.S. Supreme Court relied on the nondelegation doctrine to invalidate an agency action was 1935, but the current Supreme Court is also the most conservative since the 1930s, so anything is possible.

We won’t know anything for certain until the U.S. Supreme Court decides one way or the other. That is very likely, if not inevitable, but it won’t happen quickly. As the Court likes to say, it is “a court of final review and not first view,” and so it typically lets lower courts study legal questions before it weighs in.

Legal challenges are already being pursued in pro-business courts that are likely to pause the rule before it can go into effect, and the U.S. Supreme Court is unlikely to issue a decision about those lower courts’ rulings until June 2025 (at the earliest) or (more likely) June 2026. (Supreme Court terms run from October to June, and with rare exceptions, the Court issues all of its most significant decisions in late June, at the end of the term.)

The FTC rule has not gone into effect; and lawsuits to stop it have already been filed and stand a reasonable likelihood of success. In short, nothing has happened yet to change the status quo. If you’re a Connecticut employee with a non-compete, you still have a non-compete. That might change in the future, but for now, that’s the law. Your non-compete is no more or less valid than it was before the FTC issued its final rule.

The FTC’s new rule is not a reason to ignore your non-compete or to think that you are immune from a lawsuit seeking to enforce it. Indeed, the rule specifically exempts causes of action that have already accrued – meaning the non-compete was already breached (or violated) before the rule went into effect.

At least until the rule becomes effective, Connecticut courts are likely to continue to analyze the enforceability of your non-compete based on the same five-part “reasonableness” test that they have been using for decades.

There are many types of restrictive covenants. The FTC rule only targets non-competes. Even if the rule goes into effect, it won’t do anything to undermine the enforceability of other kinds of covenants, such as non-solicitation or non-service agreements.

However, it is the function or effect of a particular restrictive covenant – and not its title or how it is characterized – that will determine whether the FTC rule affects it. If the covenant functionally prevents a worker from seeking or accepting competing work, then it will fall under the rule. For example, a non-solicitation clause that purports to allow an investment advisor to work for a new employer but prohibits them from soliciting any potential customers of their former employer (which is the same as the current pool of potential customers) would function as an industry-wide non-compete, and it would be prohibited. In other words, if a covenant is so broad that it effectively serves as a non-compete that bars a worker from working in a particular field, then that covenant violates the FTC rule, and it cannot be proposed or enforced.