FTC Finalizes Noncompete Rule By Split Vote

By a 3-2 margin, the FTC voted in April to finalize its noncompete rule. Several lawsuits were immediately filed to stop it. If it were to survive all legal challenges, businesses would be prohibited from entering into noncompete agreements with nearly all workers across the U.S., effective September 4. It would invalidate existing noncompetes for almost 30 million workers.

Mintz reports that the draft Federal Register Notice is 570 pages long, of which 561 pages consist of an explanation of the factual and legal support for the rule. It includes a section that addresses the Supreme Court’s recent “major questions” doctrine, which signaled Federal regulatory agencies to think twice before concluding that they have the authority to issue regulations on significant political and economic issues.

The two dissenters in the April vote said they expect the rule to be challenged on the “major questions” issue. 

They also contended that the Commission lacked authority to issue competition rules, that noncompetes have been principally a matter of state law, and should remain so, and that adopting the rule based on the record was arbitrary and capricious under applicable administrative law. 

In essence, the noncompete rule calls it an unfair method of competition under Section 5 of the Federal Trade Commission Act for businesses to: enter into or attempt to enter into a noncompete clause, enforce or attempt to enforce a non-compete clause, represent that the worker is subject to a noncompete clause.

The rule includes some limitations. Existing noncompetes with “senior executives” can remain in effect, a change from the original proposal. It doesn’t prohibit noncompetes in connection with the sale of a business entity, of a person’s ownership interest in a business entity, or of all or substantially all of a business entity’s operating assets. The original proposed rule included a 25 percent ownership threshold that was eliminated in the final version.