FTC vacates non-compete clause rule and dismisses court appeals
The Federal Trade Commission (FCT) voted Friday to dismiss its circuit court appeals for the Non-Compete Clause Rule that was finalized last year, according to an FTC news release.
The commission voted 3-1 to dismiss the appeals in the Fifth and Eleventh Circuit Courts and accede to the vacatur. Decisions by lower courts were appealed by the Biden Administration, according to various media reports.
By dropping the appeals, the FTC is killing the rule.
“That Rule purported to ban almost all contracts in which an employee agreed not to work for his or her employer’s competitor after his or her employment,” FTC Chairman Andrew N. Ferguson said in a prepared statement following the vote. “It did so prospectively and retrospectively, extinguishing thirty million existing private contracts. It preempted the laws of all fifty states and actively displaced hundreds of existing laws across forty-six states. It redistributed nearly a half trillion dollars of wealth within the general economy, and it purported to render categorically unlawful a species of contract that has been lawful since the eighteenth century by reimagining a single clause tucked away in an ancillary provision of a century-old statute.”
The rule was finalized by Lina Khan, former FTC chair and an appointee of President Joe Biden. It would have become effective 120 days after publication in the Federal Register in April 2024, but was immediately met with lawsuits. It was never enforced.
Non-compete clauses would no longer be allowed in contracts, paperwork, websites, or guides if the rule were enforced.
The clauses would only have been allowed for current senior executives, defined as employees making more than $151,165 annually and involved in policymaking. Businesses would have been prohibited from creating new non-compete agreements with future executives.
The rule did not apply to franchisor/franchisee contracts, but it did apply to employees working at franchises.
It also did not apply to noncompete clauses involving the sale of a business entity, a person’s ownership interest in a business entity, or all or substantially all of a business entity’s operating assets, according to language in the rule.
A seller would have been able to still agree to a non-compete clause under the rule. However, it would prohibit a non-compete clause for any workers of a business being sold.
Mark Cunningham, Partner at Jones Walker LLP, previously told RDN that the selling of a business exception only applied to owners with 25% or more of the ownership stake.
Cunningham said the FTC rule stemmed from previous FTC lawsuits involving fast food chains that placed non-compete clauses on low-income workers.
He said the FTC was most likely to pay attention to any violations against hourly workers who have no leverage.
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