By Thomas W. Young
– The Federal Trade Commission (FTC) has issued a “final rule” going into effect on September 4, 2024, that bans virtually all non-compete agreements in the employee-employer context. This final rule is being challenged on multiple fronts due to uncertainties regarding the authority of federal courts to delegate rule-making power to the Federal Trade Commission plus issues surrounding the final rule’s impact on the major questions doctrine, also known as the Chevron Doctrine.
Background: The rule voids most existing non-competes with a limited exception for senior executives: those employees making more than $151,164 annually who are in a “policy-making position.” The FTC anticipates less than 1% of employees nationwide will fall into this excepted category. Even with the exception for existing non-competes, the rule bans new non-competes for all employees, including the small number of senior executives who may have fit into the existing non-compete exception. The final rule represents a significant change in employment law and contract law; if it survives the onslaught of challenges, it will have a significant impact on business practices nationwide.
For existing non-competes that do not fit the exception, employers must provide “clear and conspicuous” notice to all employees previously subject to non-competes that the non-competes are no longer enforceable. The notice can be delivered by hand, by mail, by email or by text message, unless no contact information is available. Additionally, this notice must be delivered before the effective date which is September 4, 2024.
Defining Worker: The final rule defines “workers” as people who work “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.” “Worker” includes those who work for a franchisee or a franchisor but not the franchisee themselves in a franchisee-franchisor relationship.
The rule does not expressly include or exclude members of an LLC, directors of a corporation, or partners of limited and common law partnerships; though these persons are probably excluded from the FTC’s definition of “worker” unless they are also employees, executives, or officers of the entity. The rule does expressly exclude bona fide sale of business non-competes: “the requirements of this part 910 shall not apply to a non-compete clause that is 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.” The non-compete agreements that fall into these exceptions will still be enforceable, so long as they satisfy the common law scope and duration requirements and do not violate state statutes.
Impact on Other Types of Agreements: The final rule does not expressly restrict non-disclosure agreements (NDA), non-solicitation agreements, training-repayment agreements (TRAPS), severance agreements, or other restrictive employment agreements, generally. The rule only restricts non-compete clauses and their functional equivalents, meaning that if NDAs or non-solicitation agreements are so broad that they effectively act as a prohibition or a penalty on a worker seeking or accepting work after terminating employment, the FTC will determine those restrictive covenants to be a non-compete clause under the rule, and thus unenforceable. Employers will need to be mindful, as NDAs that cover a large scope of information may function to prevent workers from working in the same field after leaving their current employment, which could be characterized as a non-compete agreement under the new rule.
Anticipated Challenges: The final rule is being challenged on multiple fronts. First, some argue that banning non-competes is within the major questions doctrine. When delegating rulemaking authority to executive agencies on questions of great economic and political significance, Congress must provide clear and direct authority to the agency to do so, and the court will not defer to agency interpretations of its own enabling statutes. This rule involves a claim of substantial new regulatory power. There is a long history of state regulation of non-competes and never before has the FTC challenged the validity of non-competes. The FTC estimates that the rule will affect one in every five U.S. workers and have an economic impact of over $400 billion over the next ten years, which arguably raises a major question.
Second, Congress delegating law making power to an executive agency is an impermissible delegation of authority under the Non-Delegation Doctrine: “all legislative Powers herein granted shall be vested in a Congress of the United States.” Thus, the Supreme Court has held that Congress may not transfer “powers which are strictly and exclusively legislative” to the executive branch.
Third, the final rule’s critics argue that non-competes are not categorically unfair methods of competition and have historically been subject to a fact-specific analysis.
Finally, the rule is impermissibly retroactive because it invalidates millions of existing non-competes.
Most importantly, the doctrine of “Chevron deference” can no longer support the FTC’s unchecked rulemaking. Chevron required federal courts to defer to an agency’s reasonable interpretations of ambiguities and gaps in statutes they implement. The Supreme Court voted to end Chevron deference in Loper Bright Enterprises v. Raimondo, effectively stripping away the FTC’s prior ability to interpret Congress’ ambiguous laws in its rulemaking. Ending Chevron means that courts may reach inconsistent holdings when interpreting an ambiguous law, holdings that will likely be appealed and may end up in front of the Supreme Court. Critics of Chevron would respond that the doctrine itself allowed for inconsistency since agency’s interpretation of laws would change depending on the makeup of the agency. This could assist agencies in some cases while hindering them in others. Still, Congress can avoid courts interpreting their laws by passing laws with less ambiguity. The real question regarding non-compete clauses becomes, can those in Congress intent on ending the enforcement of non-compete clauses get the required votes to ban such clauses or will the issue eventually reach the Supreme Court?
—
This article was originally published on August 19, 2024 by Missouri Lawyers Weekly.
Thomas Young is a 2024 summer associate in the corporate/transactional practice group at Carmody MacDonald P.C. in St. Louis and a rising third-year student at the University of Missouri School of Law.
This article is for informational purposes only. Nothing herein should be treated as legal advice or as creating an attorney-client relationship. The choice of a lawyer is an important decision and should not be based solely upon advertisements.
