This article explores the January 2023 FTC rule to ban non-compete agreements and what this means for employers and employees nationwide.
As discussed in our prior article, in January 2023, the Federal Trade Commission (FTC) announced a proposed rule to ban non-compete agreements between most employers and employees nationwide. Subsequently, the FTC reviewed and considered over 26,000 comments to the proposed rule. On April 24, 2024, the FTC, in a 3-2 vote split along party lines, issued a final rule (Rule) which bans non-competes for nearly all workers throughout the United States. The Rule is scheduled to take effect 120 days after publication in the Federal Register.
Substance Of Rule
According to the Rule , it is an unfair method of competition:
- With respect to a worker, other than a senior executive, (i) to enter into or attempt to enter into a non-compete clause; (ii) to enforce or attempt to enforce a non-compete clause; or (iii) to represent that the worker is subject to a non-compete clause.
- With respect to a senior executive, (i) to enter into or attempt to enter into a non-compete clause; (ii) to enforce or attempt to enforce a non-compete clause entered into after the effective date of the Rule; or (iii) to represent that the senior executive is subject to a non-compete clause, where the noncompete clause was entered into after the effective date of the Rule.
“Worker” is defined in the Rule 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 term “worker” also 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.
A “Senior Executive” is a worker who (1) was in a policy-making position and (2) received total annualized compensation of at least $151,164 (the 2025 salary threshold for a “highly compensated employee” under the Fair Labor Standards Act) in the preceding year (as defined in the Rule). To be in “a policy-making position,” a worker must (i) be the chief executive officer or president (or the equivalent) of a business entity, or (ii) have policy-making authority with respect to the business entity. “Policy-making authority” means “final authority to make policy decisions that control significant aspects of a business entity or common enterprise and does not include authority limited to advising or exerting influence over such policy.”
Definition Of Non-Compete Clause
The Rule defines “non-compete clause” as a term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent, a worker from: (1) 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 (2) operating a business in the United States after the conclusion of the employment that includes the term or condition. According to the Rule, “term or condition of employment” includes, but is not limited to, a contractual term or workplace policy, whether oral or written (such as a provision in an employee handbook). “Employment” is defined as “work for a person.”
Impact on Other Restrictive Covenants
Restrictive covenants such as non-disclosure agreements (NDAs) and non-solicitation agreements, as well as training repayment agreements, no-hire agreements, and no business agreements, are not categorically prohibited by the Rule. However, if a term or condition of any of these agreements is “so broad or onerous that it has the same functional effective as a term or condition prohibiting or penalizing a worker from seeking or accepting other work or starting a business after [his/her] employment ends, such a term is a non-compete clause under the [Rule].”
As examples, per the FTC, NDAs that bar a worker from disclosing, in a future job, any information that is “usable in’ or “relates to” the industry in which he/she works, or that bar a worker from disclosing any information or knowledge the worker may obtain during his/her employment whatsoever, including publicly available information, would be considered functional non-competes. Whether a restrictive covenant or other agreement rises to the level of a functional non-compete is to be determined on a case-by-case basis and a fact-specific inquiry.
Notice Requirement
Employers are required to provide “clear and conspicuous notice” to workers, other than senior executives, subject to a non-compete clause, that enforcing or attempting to force the non-compete clause will not be, and cannot be, enforced against the worker.
The notice must (1) identify the person who entered into the non-compete clause with the worker, and (2) be on paper delivered (a) by hand to the worker, (b) by mail at the worker’s last known personal street address, (c) by email at an email address belonging to the worker, including the worker’s work email address or last know personal email address, or (d) by text message at a mobile telephone number belonging to the worker. A model notice is included in the Rule.
Applicability of/Exceptions to the Rule
The Rules does not apply in the following instances:
- Entities Not Covered by the Federal Trade Commission Act (FTC Act): The Rule does not apply to entities not covered by the FTC Act, such as certain non-profit organizations and industry specific entities, such as banks, savings and loan institutions, federal credit unions, certain common carriers, and persons subject to the Packers and Stockyards Act of 1921.
- Sale of a Business: The Rule does not apply to non-competes entered into by a person pursuant to a 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.
- Prior Breach: The Rule does not apply where a cause of action related to a non-compete accrued prior to the effective date. For example, an employer’s claim against a former employee for violation of a valid non-compete prior to the effective date of the Rule would remain viable under the Rule.
- Good Faith Belief that Rule is Inapplicable: The Rule does not apply where an employer enforces or attempts to enforce a non-compete or makes representations about a non-compete where the employer has a good-faith basis to believe that the Rule is inapplicable. For instance, a non-profit organization’s good faith belief that it is not subject to the FTC Act would provide a defense to an enforcement action under the Rule.
Interaction with State Laws
The Rule preempts state laws that conflict with the Rule but does not limit or affect enforcement of state laws that are more restrictive. For example, a preexisting non-compete of a senior executive that would be enforceable under the Rule might not be enforceable under state law if the employer failed to comply with pertinent state law provisions requiring notice or garden leave.
Challenges to Rule’s Legality
The Rule has drawn criticism on multiple grounds, and legal challenges to it have already commenced, including a lawsuit filed by the U.S. Chamber of Commerce in the U.S. District Court for the Eastern District of Texas, Tyler Division, on April 24, 2024. The lawsuit seeks a declaratory judgment that the Rule is arbitrary and capricious, or otherwise contrary to the law within the meaning of the Administrative Procedures Act, an order vacating the Rule in its entirety, and an order permanently enjoining the FTC from enforcing the Rule. The court in this case or another case might issue a nationwide injunction precluding the Rule from taking effect pending a trial on the merits. In this scenario, the effective date of the Rule would not take effect for the foreseeable future.
Moving Forward
Employers should closely monitor developments regarding the Rule, including whether the Rule is enjoined, and, in the event the Rule does stand, the deadline for compliance.
Employers who wish to be proactive may want to prepare for compliance with the Rule by taking steps such as:
- conducting an inventory of their business protection agreements with current and former workers;
- determining if any of the agreements include standard non-competes or functional non-competes;
- identifying agreements involving senior executives;
- compiling contact information for the affected workers who would need to receive the required notice of non-enforcement;
- evaluating whether or not to have senior executive(s) sign a non-compete prior to the effective date of the Rule, and
- reviewing their restrictive covenants, such as NDAs and customer non-solicitation, no-hire, and no-business provisions to ensure that they are narrowly tailored and no broader than is reasonably necessary to protect the employer’s legitimate business interests.
A few days ago, one of my partners passed along an article from Bloomberg Law’s Ray Strom titled “Less Work, More Money: Big Law Associates Never Had it Better.” In the article, Strom noted that Big Law associates are working less and getting paid more than ever. Folks who have operated a business may wonder how it’s possible to pay more for less productive employees, but it’s actually quite simple—as associate productivity has declined, firms have maintained (and in some cases, increased) profitability by passing rate increases along to clients. The strategy may be effective in the short term, but it raises serious questions about the true cost of legal services and highlights a stark contrast with our approach at OGC.
Here’s a closer look at the dynamics in play:
- Diminishing Productivity, Rising Rates: According to Strom’s article, average annual hours billed by lawyers at the 100 largest law firms has dropped nearly 8% from its record high in 2021. Despite this trend, first year associate compensation has risen and, while there have been targeted reductions, top law firms have not generally had significant layoffs. Instead, firms have more than made up for the loss in productivity by passing along rate increases to their clients. Indeed, Strom notes that after the rate increases “the less-busy, more-expensive 2023 associate generates about 6.5% more revenue . . . than the harder-working, less-paid 2021 associate . . . .” Big Law firms have no incentive to effectively manage the costs of their business because they pass those costs along to their clients.
- Client Impact and Value Proposition: You have to hand it to Big Law—it has structured a business model such that profits are up even though productivity is down. And it gets better—the consistency and scale of the rate increases means that if productivity ever again reaches 2021 levels, every incremental dollar drops straight to the partners’ pockets. Clients, however, obviously bear the brunt of these rate increases, facing higher costs for legal services without any measurable improvement in service or value. It doesn’t seem like a good trade.
- A Different Approach: In contrast to Big Law, OGC offers a different paradigm. The firm’s practice model is predicated on the belief that in-house lawyering is better for business, pairing former GCs and senior in-house lawyers with clients based on their particular needs. As a result, our lawyers take a business-oriented approach to problem solving that is more practical, responsive and efficient than traditional firms. And OGC’s profitability isn’t dependent on leveraging associate attorneys because we don’t have any. Our partner-only model allows us to work much more efficiently on behalf of our clients and pass the savings along to them.
- The Future of Legal Services: As the cost of legal services continues to outpace the rate of inflation, clients are increasingly seeking alternatives to the traditional law firm model. OGC represents a paradigm shift—one where clients receive top-notch legal support without sacrificing value or efficiency. By embracing this innovative approach, clients can navigate the complexities of the legal system with confidence, knowing that their needs are prioritized above all else.
The traditional law firm model's reliance on passing rate increases onto clients highlights the need for a new approach to legal services. OGC offers a compelling alternative—one where sophistication, value, and efficiency come together to deliver an exceptional experience for our clients.