| The Federal Trade Commission (FTC) voted 3-2 on April 23rd in favor of a new rule banning covenants not to compete in most instances. The rule is scheduled to take effect 120 days from publication in the Federal Register, but the effective date is likely to be delayed, as the rule is expected to face multiple immediate legal challenges (including one from the U.S. Chamber of Commerce) arguing, among other things, that the rule is an overreach. Covenants not to compete, widely known as “noncompetes,” are agreements between employees and employers in which the employee promises not to compete with the employer for a specific period of time and/or within a particular geographic area should the employment relationship terminate. The new rule makes it illegal for an employer: (i) to enter into or attempt to enter into a non-compete clause;
(ii) to enforce or attempt to enforce a non-compete clause (subject to the exceptions described below); or
(iii) to represent that the worker is subject to a non-compete clause. For existing noncompetes, the rule adopts a different approach for senior executives (workers earning more than $151,164 who are in a “policy-making position”) than for other workers. For senior executives, existing noncompetes can remain in force. Existing noncompetes with workers other than senior executives are not enforceable after the effective date. The rule includes a limited exception for noncompete clauses agreed to in connection with 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 FTC contends the practice of allowing noncompetes suppresses wages, hampers innovation, and blocks entrepreneurs from starting new businesses. It estimates that its rule would impact about 30 million Americans and boost wages by nearly $300 billion per year. In a press release, FTC Chair Lina M. Khan stated: ““Noncompete clauses keep wages low, suppress new ideas, and rob the American economy of dynamism, including from the more than 8,500 new startups that would be created a year once noncompetes are banned. The FTC’s final rule to ban noncompetes will ensure Americans have the freedom to pursue a new job, start a new business, or bring a new idea to market. | 
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