In a landmark decision on April 23, 2024, the Federal Trade Commission (FTC) announced its Final Rule, marking a significant shift in the landscape of non-compete agreements. This ruling, which is set to reshape applicable non-compete law, effectively prohibits existing non-compete agreements for all workers who do not meet the criteria of “Senior Executives.”

Under the finalized rule, it is now deemed an unfair method of competition to:

1. Enter into or attempt to enter into a non-compete clause.
2. Enforce or attempt to enforce a non-compete clause.
3. Represent that a worker is subject to a non-compete clause.

Defining “Senior Executive”: Understanding Policy-Making Authority

The regulation defines a “Senior executive” as a worker in a “policy-making position” who earns an annualized sum of $151,164, excluding certain benefits like fringe benefits and insurance premiums.

But what constitutes “policy-making authority”? It refers to the ability to make significant policy decisions that control vital aspects of a business entity. However, positions with mere advisory roles or final authority limited to subsidiaries or affiliates are exempted.

Moreover, the FTC’s ruling extends to provisions within non-compete agreements that penalize or prohibit workers from seeking or accepting employment post-termination. This includes confidentiality provisions, which, if deemed part of the non-compete clause, are also prohibited.

Furthermore, the FTC emphasizes that associated employee prohibitions, such as non-disclosure obligations or non-solicitation provisions, may inadvertently hinder a worker’s ability to seek employment elsewhere, thus contravening the spirit of the new rule.

Impact on Non-Compete Agreements

The FTC’s stance reflects a broader concern: restricting human capital flow stifles innovation and flexibility in employment ecosystems. While discussions on innovation policy often revolve around intellectual property rights, the importance of human capital in driving innovation is equally critical.

Recent statistics reveal that a significant portion of the U.S. workforce, including one-third of workers in professional, scientific, and technical occupations, are subject to non-compete agreements. This raises fundamental questions about the role of law in enforcing such contractual instruments.

Policy Perspectives: “Talent Wants to Be Free”:

In recent years, scholars and policymakers have been advocating for a more liberal approach to non-compete agreements. The notion that “talent wants to be free” has gained traction, suggesting that the unrestricted movement of human capital fosters innovation.

This viewpoint recommends adopting a zero-tolerance regime akin to California’s, which bars non-compete enforcement in most circumstances. It challenges the longstanding common law doctrine, which deems non-compete clauses enforceable only if they are deemed “reasonable” regarding temporal, geographic, and industry scope limitations.

For proponents of the “talent wants to be free” philosophy, any limitation on talent movement is considered unreasonable. Thus, the FTC’s bold move represents a significant departure from the traditional approach to non-compete agreements, signaling a new era in labor and competition law.