FTC’s Non-Compete Clause Rule
On July 9, 2021, in the Executive Order Promoting Competition in the American Economy, President Biden directed the Federal Trade Commission (FTC) “to exercise the[ir] statutory rulemaking authority under the Federal Trade Commission Act to curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.” President Biden aimed to use the FTC to address what his administration saw as a concerning restriction on workforce mobility caused by the widespread use of non-compete clauses. So, on July 10, 2021, the FTC issued a Notice of Proposed Rulemaking, and on January 19, 2023, the FTC released the Proposed Final Rule to ban all non-compete clauses.
On May 7, 2024, the FTC promulgated the Non-Compete Clause Final Rule, banning all employee non-compete agreements, which are defined as agreements where employees agree to not work for their employer’s competitor after their employment ends. The FTC defined non-compete clauses 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.” The Final Rule would be applied both prospectively and retrospectively. Exceptions to the Final Rule were listed in § 910.3, allowing non-competes for senior executives, non-competes entered into pursuant to a sale of a business, existing causes of action related to a non-compete, and enforcement of a non-compete clause based on good-faith basis that Part 910 is inapplicable. It also preempts any state law that conflicts with the ban on non-competes.
The FTC’s authority for the proposed rulemaking originates from Section 5 and 6(g) of the FTC Act. In Section 5, the legislature empowered the FTC “to prevent persons, partnerships, or corporations… from using unfair methods of competition in or affecting commerce and unfair or deceptive acts or practices in or affecting commerce.” Section 6(g), titled “Classification of Corporations; regulations,” allows for the FTC to “make rules and regulations for the purposes of carrying out the provisions of this Act.”
Citing the “serious anticompetitive harm to labor, product, and service markets” caused by non-competes, and the powers vested in it through the FTC Act, the Commission concluded that non-competes constitute an unfair method of competition and banned their use. Soon after the FTC’s Final Rule was implemented, several legal challenges emerged questioning the Commission’s authority to conduct rulemaking to this scale.
Legal Challenges to FTC’s Final Rule
Currently, there are three lawsuits challenging the FTC’s substantive rulemaking power required to issue the Final Rule, and each suit is pending appeal. Each follows a similar pattern: A private business alleges that (1) the FTC does not have substantive rulemaking authority over unfair methods of competition, (2) even if the FTC does have substantive rulemaking authority, the Final Rule exceeds its statutory limits, and (3) the Final Rule is arbitrary and capricious.
The Fifth and Eleventh Circuits reached a similar conclusion regarding the FTC’s authority to issue the Final Rule. The courts both found that the FTC did not have the authority to have substantive rulemaking power because the rulemaking authority granted by Section 6(g) concerns the FTC’s ability to “classify corporations,” not to make substantive rules regarding “unfair methods of competition.” Thus, because the Section 6(g) provides limited rulemaking power and Section 5 grants the FTC the authority to conduct “case-by-case adjudication” to prevent unfair methods of competition, the Commission lacks the “statutory authority” to make the Final Rule.
However, the Sixth Circuit reached the opposite conclusion, finding that the FTC does have the authority to “promulgate substantive rules of business conduct.” The District Court analyzed a series of 26 rules the FTC issued using its Section 6(g) authority and declared that those rules were “not procedural in nature but substantive.” Thus, because the FTC conducted substantive rulemaking under Section 6(g) in the past, and the D.C. Circuit in National Petroleum Refiners Association et al. v. Federal Trade Commission et al. held that Section 6(g) grants the FTC substantive rulemaking authority, the Final Rule does not exceed the powers granted to the FTC by Congress.
However, the new administration’s choice of FTC chair is likely to make any Court of Appeals ruling on the Final Rule unnecessary.
Trump-Vance Administration’s FTC Chair Choice
On December 10, President-elect Donald Trump announced that Andrew Ferguson is his administration’s choice for FTC chair. His selection is likely to lead to the repeal of the Final Rule.
On June 28, 2024, Andrew Ferguson released a Dissenting Statement regarding the Non-Compete Clause Rule. Ferguson argued that the power to regulate contracts, including non-compete clauses, lies with the states rather than the federal government. He explains that the powers of administrative agencies are limited to those enumerated and expressly granted by the legislature. Thus, the FTC does not have the power to issue the Final Rule because Section 6(g) “authorizes the Commission to make rules governing its internal affairs and procedures rather than generally applicable rules governing private conduct.” Even if Section 6(g) grants the agency substantive rulemaking power, the Major Questions Doctrine precludes the agency’s authority because the Final Rule has vast “economic and political significance” potentially affecting nearly thirty million existing contracts.
Ferguson argued that Section 5 is merely a general grant of authority to prevent unfair competition and does not empower the agency to undertake substantive rulemaking consistent with the Final Rule. He further explained that Section 6(g) serves the purpose of empowering the FTC to classify corporations rather than granting broad substantive rulemaking power. Additionally, the FTC has never brought an enforcement action against an employee’s non-compete clause, and no regulation premised on Section 5 and 6(g) has ever approached the size and importance of the Final Rule. Thus, there is no historical precedent for the FTC to rely on in support of their authority to make the Final Rule. As a result, the Final Rule is unconstitutional and beyond the FTC’s authority to prevent unfair methods of competition, offering insight into the FTC’s direction under his leadership.
Further hinting at the reversal of the Final Rule, Ferguson wrote an additional dissenting statement discussing the Biden-Harris administration’s decision to update the FTC’s antitrust guidance days before the Trump-Vance administration takes power. He stated that the Biden-Harris FTC “has no future.” Under Ferguson, it is highly likely that the Final Rule will be reversed, and any existing and future non-compete clause will be enforceable.
Advice for Employers and Employees
With the next FTC Chair’s disapproval of the Non-Compete Clause Final Rule well documented, attorneys representing both physicians and employers must stay informed about the status of the Final Rule to provide effective counsel to their clients. The use of non-competes amongst physicians is prevalent: The FTC noted that 68% of cardiologists, 42% of colorectal surgeons, and 72% of members of the American Association of Hip and Knee Surgeons are all subject to a non-compete. The American Medical Association determined that between 37% and 45% of physicians are subject to unfair non-compete clauses, and the likely reversal of the FTC’s Final Rule informs how attorneys should advise their clients.
Many employees may have signed stricter non-competes under the assumption that they would be rendered void under the FTC’s Final Rule, so attorneys representing physicians need to advise their clients that the Final Rule that they may attempt to rely upon will likely be repealed under the new administration. Additionally, employers will not have to give notice to current employees that their non-competes are unenforceable, so they will no longer need to update their employment contracts in compliance with the Final Rule.