The US Federal Trade Commission Adopted Rule Restricting Non-Compete Clauses

In our article “Non-compete clauses: Federal Trade Commission Amendments and Their Impact on Taiwan Law” ^[1] , we introduced and analyzed the proposed amendment by the Federal Trade Commission (hereinafter, “FTC”) in January 2023 to prohibit employers from entering into non-compete agreements with employees. At that time, we pointed out that the FTC might make a final decision on this important proposal in April 2024. On April 23, the FTC officially adopted the final rule restricting employers from signing non-compete clauses with employees by a 3-2 vote. The final rule has been published in the Federal Register and is expected to take effect on September 4 this year ^[2] .

According to the FTC’s assessment, the final rule prohibiting non-compete agreements will increase the average annual income of employees across the United States by $524, increase the number of new businesses by 2.7% annually, and result in approximately 17,000 to 29,000 additional patents each year over the next 10 years.

1. Comparison with the Proposed Amendment

The final rule adopted by the FTC on April 23 is similar to the proposed amendment, comprehensively prohibiting employers from entering into non-compete agreements with employees. Violations of this rule will be considered a breach of Section 5 of the Federal Trade Commission Act, constituting unfair competition.

Unlike the proposed amendment, the final rule does not render all existing non-compete clauses unenforceable upon its effective date. Instead, it only makes existing non-compete agreements for non-senior employees unenforceable after the final rule takes effect. Existing non-compete agreements for senior executives (those with annual salaries exceeding $151,164 and holding decision-making positions) can still be enforced after the rule takes effect. However, after the final rule takes effect, employers are prohibited from signing or enforcing new non-compete agreements with any employees, including senior executives. Furthermore, the FTC has removed the requirement in the proposed amendment for employers to rescind non-compete clauses previously signed with employees. Instead, it only requires employers to notify employees bound by existing non-compete clauses that these clauses will no longer be enforced against them in the future, simplifying the compliance procedures.

2. Reactions from Various Sectors

Within 24 hours of the FTC’s announcement of the rule, groups and companies such as the US Chamber of Commerce and Ryan LLC. filed lawsuits against the FTC, seeking preliminary injunctions to prevent the rule from taking effect ^[3] . The US Chamber of Commerce contends that if the FTC can arbitrarily regulate non-compete agreements, it implies that the FTC can decide to regulate or prohibit any other business practices, which clearly exceeds the FTC’s statutory authority. Without explicit congressional legislative authorization, the FTC lacks the authority to issue and enforce a ban on non-compete agreements ^[4] . Among the aforementioned lawsuits, Ryan LLC.’s case against the FTC in the Northern District of Texas federal court has progressed the most rapidly. On July 4 (GMT+8), the court issued a ruling, preventing the FTC’s final rule from taking effect “between the parties” in this case. The court is expected to make a final ruling decision by August 30.  Consequently, the subsequent development of this rule and whether it will take effect national wide as scheduled on September 4 this year are worth continuing attention.

[1]  Aaron Chen and Julian Lai,  Non-compete Clauses: Federal Trade Commission Amendments and Their Impact on Taiwan Law , February 2024 (last visited on May 26, 2024).
[2]  See the Federal Register website, available at: https://www.federalregister.gov/documents/2024/05/07/2024-09171/non-compete-clause-rule (last visited on June 26, 2024).
[3]  See FTC Noncompete Rule Challenge Will Be Decided Without Hearing, available at: https://news.bloomberglaw.com/antitrust/ftc-noncompete-rule-challenge-will-be-decided-without-hearing (last visited on June 26, 2024
[4]  See Jeanne Sahadi, FTC is sued by business groups over its ban on noncompete agreements, which may delay enforcement, available at: https://edition.cnn.com/2024/04/25/success/ftc-noncompete-ban-lawsuit/index.html (last visited on June 26, 2024).