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FTC Issues Rule Banning Noncompete Agreements

Independent insurance agents who are considering the impact of the new regulation on their agencies and firms should consider some of the rule’s key elements and certain revisions that were incorporated in the final text.
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ftc issues rule banning noncompete agreements

On Tuesday, the Federal Trade Commission (FTC) completed its work on a high-profile regulation that prohibits the use and enforcement of most noncompete agreements. The FTC commissioners voted 3-2 to approve the “Non-Compete Clause Rule." 

The rule targets employment agreements that prohibit, penalize or effectively prevent a worker from seeking or accepting work elsewhere or operating a business after leaving a particular job. 

Among the agreements that would be banned are those that expressly prohibit a person from working elsewhere; those that require a person to pay liquidated damages to do so; and severance agreements in which a person is paid only if they refrain from competing against a former employer. 

Once the rule takes effect, the regulation will ban for-profit employers from utilizing such agreements, terms or conditions and will prohibit their enforcement or attempted enforcement in most instances.

The FTC unveiled its draft rule in January 2023. The proposal produced significant concern and confusion in the business community and generated 26,000 public comments. The final rule is slated to take effect 120 days after its formal publication in the Federal Register, which is expected to occur in the next two weeks. However, multiple legal challenges have already been filed and this litigation could delay implementation of the rule indefinitely or even permanently.  

(Update: The rule is scheduled for publication in the Federal Register on May 7, and slated to go into effect on Sept. 4. Watch a video from the Big "I" government affairs team explaining the rule, its effect on independent agents and the current state of play.)

An estimated 30 million American workers are subject to noncompete agreements today, and the FTC's rule will have significant ramifications for many businesses if it takes effect. 

Independent insurance agents who are considering the impact of the new regulation on their agencies and firms should consider some of the rule's key elements and certain revisions that were incorporated in the final text. Items of special note include: 

Sale-of-a-Business Exemption. The draft rule unveiled last year included an exemption that allowed the use of noncompete agreements between the buyer of a business and a seller but the usefulness of this otherwise helpful exclusion was diminished because it only applied to sellers possessing at least a 25% ownership interest in the entity. 

The Big “I" argued in oral testimony and written comments that were submitted to the FTC that this ownership stake restriction should be eliminated. The final regulation issued by the FTC deletes the artificial and arbitrary restriction and permits reasonable noncompetes to be used in connection with the sale of a business. Specifically, the rule that was issued this week does not restrict the use of any agreement “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 Big “I" welcomes this helpful revision and important clarification.  

Treatment of other types of employment agreements. The new regulation is intended to address noncompete agreements and does not prohibit the use and enforcement of other forms of employment covenants. Nonsolicitation, nondisclosure, and other types of employment agreements are unaffected by the rule if they do not prohibit or function to prevent a worker from switching jobs or starting a new business. Protecting the ability of independent agents and other businesses to use these alternative agreements in reasonable ways was a top priority of the Big “I."  

Effect on existing noncompetes with senior executives. The FTC's initial proposal would have nullified any noncompete agreement executed before the final rule's effective date. The final regulation takes a different approach and allows noncompetes with “senior executives" in place on the effective date to remain in force. The rule defines a “senior executive" as someone who earns more than $151,164 per year and serves in a “policy-making position," which is a term also defined by the rule.  

Effect on existing noncompetes with other workers. Existing noncompete agreements with workers who are not senior executives are not enforceable after the regulation takes effect. Any for-profit entity that has an existing noncompete in place with such a worker must disclose to that person that the agreement is no longer enforceable prior to the effective date. These notice requirements have been simplified and flexibility toward compliance has been added to the final rule.  

Effect on state law. The final regulation is intended to preempt any state law that conflicts with its terms but only to the extent of any such conflict. In other words, state laws that address, restrict, or prohibit the use of noncompetes are unaffected by the FTC regulation if they do not directly conflict with it.  

Despite the FTC's action this week, the fate of the noncompete regulation remains in doubt and will ultimately be resolved in the courts. At least two legal challenges have already been filed, including one initiated by the U.S. Chamber of Commerce, the Business Roundtable, and two other Texas-based plaintiffs that also seeks a stay of the effective date and a preliminary injunction. These lawsuits have very strong legal arguments on their side. They question whether the FTC possesses the statutory authority to act as it has and challenge the validity of the regulation on additional grounds, and many observers predict that the rule will not survive.  

Wes Bissett is Big “I" senior counsel, government affairs.

This article was updated on May 2.