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Federal Register / Vol. 89, No. 89 / Tuesday, May 7, 2024 / Rules and Regulations
FEDERAL TRADE COMMISSION
16 CFR Parts 910 and 912
RIN 3084–AB74
Non-Compete Clause Rule
Federal Trade Commission.
ACTION: Final rule.
AGENCY:
Pursuant to the Federal Trade
Commission Act (‘‘FTC Act’’), the
Federal Trade Commission
(‘‘Commission’’) is issuing the NonCompete Clause Rule (‘‘the final rule’’).
The final rule provides that it is an
unfair method of competition for
persons to, among other things, enter
into non-compete clauses (‘‘noncompetes’’) with workers on or after the
final rule’s effective date. With respect
to existing non-competes—i.e., noncompetes entered into before the
effective date—the final rule adopts a
different approach for senior executives
than for other workers. For senior
executives, existing non-competes can
remain in force, while existing noncompetes with other workers are not
enforceable after the effective date.
DATES: The final rule is effective
September 4, 2024.
FOR FURTHER INFORMATION CONTACT:
Benjamin Cady or Karuna Patel, Office
of Policy Planning, 202–326–2939
(Cady), 202–326–2510 (Patel), Federal
Trade Commission, 600 Pennsylvania
Avenue NW, Mail Stop CC–6316,
Washington, DC 20580.
SUPPLEMENTARY INFORMATION:
SUMMARY:
I. Background
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A. Summary of the Final Rule’s
Provisions
The Commission proposed the NonCompete Clause Rule on January 19,
2023 pursuant to sections 5 and 6(g) of
the FTC Act.1 Based on the
Commission’s expertise and after careful
review and consideration of the entire
rulemaking record—including empirical
research on how non-competes affect
competition and over 26,000 public
comments—the Commission adopts this
final rule addressing non-competes.
The final rule provides that it is an
unfair method of competition—and
therefore a violation of section 5—for
employers to, inter alia, enter into noncompete clauses with workers on or
after the final rule’s effective date.2 The
Commission thus adopts a
1 Non-Compete
Clause Rule, NPRM, 88 FR 3482
(Jan. 19, 2023) (hereinafter ‘‘NPRM’’).
2 § 910.2(a)(1)(i) and § 910.2(a)(2)(i).
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comprehensive ban on new noncompetes with all workers.
With respect to existing noncompetes, i.e., non-competes entered
into before the final rule’s effective date,
the Commission adopts a different
approach for senior executives 3 than for
other workers. Existing non-competes
with senior executives can remain in
force; the final rule does not cover such
agreements.4 The final rule allows
existing non-competes with senior
executives to remain in force because
this subset of workers is less likely to be
subject to the kind of acute, ongoing
harms currently being suffered by other
workers subject to existing noncompetes and because commenters
raised credible concerns about the
practical impacts of extinguishing
existing non-competes for senior
executives. For workers who are not
senior executives, existing noncompetes are no longer enforceable after
the final rule’s effective date.5
Employers must provide such workers
with existing non-competes notice that
they are no longer enforceable.6 To
facilitate compliance and minimize
burden, the final rule includes model
language that satisfies this notice
requirement.7
The final rule contains separate
provisions defining unfair methods of
competition for the two subcategories of
workers. Specifically, the final rule
provides that, with respect to a worker
other than a senior executive, it is an
unfair method of competition for a
person to enter into or attempt to enter
into a non-compete clause; to enforce or
attempt to enforce a non-compete
clause; or to represent that the worker
is subject to a non-compete clause.8 The
Commission describes the basis for its
finding that these practices are unfair
methods of competition in Parts IV.B.1
through IV.B.3.
The final rule provides that, with
respect to a senior executive, it is an
unfair method of competition for a
person to enter into or attempt to enter
into a non-compete clause; to enforce or
attempt to enforce a non-compete clause
entered into after the effective date; or
to represent that the senior executive is
subject to a non-compete clause, where
the non-compete clause was entered
into after the effective date.9 The
Commission describes the basis for its
finding that these practices are unfair
methods of competition in Part IV.C.2.
The final rule defines ‘‘non-compete
clause’’ 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.’’ 10 The final rule further
provides that, for purposes of the final
rule, ‘‘term or condition of
employment’’ includes, but is not
limited to, a contractual term or
workplace policy, whether written or
oral.11 The final rule further defines
‘‘employment’’ as ‘‘work for a
person.’’ 12
The final rule defines ‘‘worker’’ as ‘‘a
natural person who works or who
previously worked, whether paid or
unpaid, without regard to the worker’s
title or the worker’s status under any
other State or Federal laws, including,
but not limited to, whether the worker
is an employee, independent contractor,
extern, intern, volunteer, apprentice, or
a sole proprietor who provides a service
to a person.’’ 13 The definition further
states that the term ‘‘worker’’ includes a
natural person who works for a
franchisee or franchisor, but does not
include a franchisee in the context of a
franchisee-franchisor relationship.14
The final rule does not apply to noncompetes entered into by a person
pursuant to a bona fide sale of a
business entity.15 In addition, the final
rule does not apply where a cause of
action related to a non-compete accrued
prior to the effective date.16 The final
rule further provides that it is not an
unfair method of competition to enforce
or attempt to enforce a non-compete or
to make representations about a noncompete where a person has a goodfaith basis to believe that the final rule
is inapplicable.17
The final rule does not limit or affect
enforcement of State laws that restrict
non-competes where the State laws do
not conflict with the final rule, but it
preempts State laws that conflict with
the final rule.18 Furthermore, the final
10 § 910.1.
11 Id.
3 See
§ 910.1 (defining ‘‘senior executive’’).
4 See Part IV.C.3.
5 § 910.2(a)(1)(ii).
6 § 910.2(b)(1).
7 § 910.2(b)(4).
8 § 910.2(a)(1).
9 § 910.2(a)(2).
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12 Id.
13 Id.
14 Id.
15 § 910.3(a).
16 § 910.3(b).
17 § 910.3(c);
see also Part V.C.
18 § 910.4.
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rule includes a severability clause
clarifying the Commission’s intent that,
if a reviewing court were to hold any
part of any provision or application of
the final rule invalid or unenforceable—
including, for example, an aspect of the
terms or conditions defined as noncompetes, one or more of the particular
restrictions on non-competes, or the
standards for or application to one or
more category of workers—the
remainder of the final rule shall remain
in effect.19 The final rule has an
effective date of September 4, 2024.20
B. Context for the Rulemaking
1. Growing Concerns Regarding the
Harmful Effects of Non-Competes
The purpose of this rulemaking is to
address conduct that harms fair
competition. Concern about noncompetes dates back centuries, and the
evidence of harms has increased
substantially in recent years. However,
the existing case-by-case and State-byState approaches to non-competes have
proven insufficient to address the
tendency of non-competes to harm
competitive conditions in labor,
product, and service markets.
The ability of employers 21 to enforce
non-competes has always been
restricted, based on public policy
concerns that courts have recognized for
centuries. For example, in Mitchel v.
Reynolds (1711), an English case that
provided the foundation for American
common law on non-competes,22 the
court noted that workers were
vulnerable to exploitation through noncompetes and that non-competes
threatened a worker’s ability to practice
a trade and earn a living.23 These
concerns have persisted. Today, noncompetes between employers and
workers are generally subject to greater
scrutiny under State common law than
other employment terms ‘‘because they
are often the product of unequal
bargaining power and because the
employee is likely to give scant
19 § 910.5.
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20 § 910.6.
21 For ease of reference, the Commission uses the
term ‘‘employer’’ in this Supplementary
Information to refer to a person for whom a worker
works. The text of part 910 does not use the term
‘‘employer.’’
22 Harlan Blake, Employee Agreements Not to
Compete, 73 Harv. L. Rev. 625, 629–31 (1960).
23 The Mitchel court expressed concern that noncompetes threaten ‘‘the loss of [the worker’s]
livelihood, and the subsistence of his family.’’
Mitchel v. Reynolds, 1 P. Wms. 181, 190 (Q.B.
1711). The court likewise emphasized ‘‘the great
abuses these voluntary restraints’’ are subject to—
for example, ‘‘from masters, who are apt to give
their apprentices much vexation’’ by using ‘‘many
indirect practices to procure such bonds from them,
lest they should prejudice them in their custom,
when they come to set up for themselves.’’ Id.
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attention to the hardship he may later
suffer through loss of his livelihood.’’ 24
For these reasons, State courts often
characterize non-competes as
‘‘disfavored.’’ 25
Furthermore, as ‘‘contract[s] . . . in
restraint of trade,’’ 26 non-competes have
always been subject to our nation’s
antitrust laws.27 As early as 1911, in the
formative antitrust case of United States
v. American Tobacco Co., the Supreme
Court held that several tobacco
companies violated both section 1 and
section 2 of the Sherman Act because of
the ‘‘constantly recurring’’ use of noncompetes, among other practices.28
Concerns about non-competes have
increased substantially in recent years
in light of empirical research showing
that they tend to harm competitive
conditions in labor, product, and service
markets. Changes in State laws
governing non-competes 29 in recent
decades have allowed researchers to
better isolate the effects of noncompetes, giving rise to a body of
empirical research documenting these
harms. This research has shown that the
use of non-competes by employers tends
to negatively affect competition in labor
markets, suppressing earnings for
workers across the labor force—
including even workers not subject to
non-competes.30 This research has also
shown that non-competes tend to
negatively affect competition in product
and service markets, suppressing new
business formation and innovation.31
Alongside this large body of empirical
work, news reports revealed that
employers subject even middle-income
and low-wage workers to non-competes
24 Restatement (Second) of Contracts sec. 188,
cmt. g (1981).
25 See, e.g., Navarre Chevrolet, Inc. v. Begnaud,
205 So. 3d 973, 975 (La. Ct. App. 3d 2016); Eastman
Kodak Co. v. Carmosino, 77 A.D.3d 1434, 1435
(N.Y. App. Div. 4th 2010); Access Organics, Inc. v.
Hernandez, 175 P.3d 899, 904 (Mont. 2008); Bybee
v. Isaac, 178 P.3d 616, 621 (Idaho 2008); Softchoice,
Inc. v. Schmidt, 763 NW2d 660, 666 (Minn. Ct.
App. 2009).
26 15 U.S.C. 1.
27 See, e.g., Newburger, Loeb & Co., Inc. v. Gross,
563 F.2d 1057, 1082 (2d Cir. 1977) (‘‘Although such
issues have not often been raised in the federal
courts, employee agreements not to compete are
proper subjects for scrutiny under section 1 of the
Sherman Act. When a company interferes with free
competition for one of its former employee’s
services, the market’s ability to achieve the most
economically efficient allocation of labor is
impaired. Moreover, employee-noncompetition
clauses can tie up industry expertise and
experience and thereby forestall new entry.’’)
(internal citation omitted).
28 221 U.S. 106, 181–83 (1911).
29 See NPRM at 3494 (describing recent legislative
activity at the State level).
30 See Parts IV.B.3.a and IV.C.2.c.ii.
31 See Parts IV.B.3.b and IV.C.2.c.i.
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on a widespread basis.32 Workers came
forward to recount how—by blocking
them from taking a better job or starting
their own business, and subjecting them
to threats and litigation from their
employers—non-competes derailed
their careers, destroyed their finances,
and upended their lives.33
Yet despite the mounting empirical
and qualitative evidence confirming
these harms and the efforts of many
States to ban them, non-competes
remain prevalent in the U.S. economy.
Based on the available evidence, the
Commission estimates that
approximately one in five American
workers—or approximately 30 million
workers—is subject to a non-compete.34
The evidence also indicates that
employers frequently use non-competes
even when they are unenforceable
under State law.35 This suggests that
employers may believe workers are
unaware of their legal rights; that
employers may be seeking to take
advantage of workers’ lack of knowledge
of their legal rights; or that workers are
unable to enforce their rights through
case-by-case litigation.36 In addition, the
ability of States to regulate noncompetes effectively is constrained by
employers’ use of choice-of-law
provisions, significant variation in how
courts apply choice-of-law rules in
disputes over non-competes, and the
increasingly interstate nature of work.
As the public comments attest, this
patchwork of laws and legal uncertainty
has become extremely burdensome for
both employers and workers.37
As concern about the harmful effects
of non-competes increased, the
Commission began exploring the
potential for Federal rulemaking on
non-competes. In 2018 and 2019, the
Commission held several hearings on
twenty-first century competition and
consumer protection issues, including
‘‘the use of non-competition agreements
32 See, e.g., Dave Jamieson, Jimmy John’s Makes
Low-Wage Workers Sign ‘Oppressive’ Noncompete
Agreements, HuffPost, Oct. 13, 2014, https://
www.huffpost.com/entry/jimmy-johns-noncompete_n_5978180; Spencer Woodman, Exclusive:
Amazon Makes Even Temporary Warehouse
Workers Sign 18-Month Non-Competes, The Verge,
Mar. 26, 2015, https://www.theverge.com/2015/3/
26/8280309/amazon-warehouse-jobs-exclusivenoncompete-contracts.
33 See, e.g., Conor Dougherty, How Noncompete
Clauses Keep Workers Locked In, N.Y. Times, May
13, 2017, https://www.nytimes.com/2017/05/13/
business/noncompete-clauses.html; Lauren Weber,
The Noncompete Clause Gets a Closer Look, Wall
St. J., Jul. 21, 2021, https://www.wsj.com/articles/
the-noncompete-clause-gets-a-closer-look11626872430.
34 See Part I.B.2. As described therein, this is
likely a conservative estimate.
35 See Part IV.B.2.b.i.
36 See id.
37 See Part IX.C.2.
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and the conditions under which their
use may be inconsistent with the
antitrust laws.’’ 38 In January 2020, the
Commission held a public workshop on
non-competes. The speakers and
panelists who participated in the
workshop—and the hundreds of public
comments the Commission received in
response to the workshop—addressed a
wide range of issues, including statutory
and judicial treatment of non-competes;
the economic literature regarding the
effects of non-competes; and whether
the Commission should initiate a
Federal rulemaking on non-competes.39
The Commission also sought public
comment on non-competes as part of an
August 2021 solicitation for public
comment on contract terms that may
harm competition and a December 2021
public workshop on competition in
labor markets.40 The Commission has
also addressed non-competes in
connection with its merger review
work.41
In 2021, the Commission initiated
investigations into the use of noncompetes. In 2023, the Commission
secured final consent orders settling
charges that certain firms engaged in an
unfair method of competition in
violation of section 5 because their use
of non-competes tended to impede
rivals’ access to the restricted
employees’ labor, harming workers,
consumers, and competitive
conditions.42
The Commission also secured a final
consent order settling charges that
another firm violated section 5 by using
non-competes with its employees.43 The
38 Hearings on Competition and Consumer
Protection in the 21st Century, Notice, 83 FR 38307,
38309 (Aug. 6, 2018).
39 FTC, Non-Competes in the Workplace:
Examining Antitrust and Consumer Protection
Issues (Jan. 9, 2020), https://www.ftc.gov/newsevents/events/2020/01/non-competes-workplaceexamining-antitrust-consumer-protection-issues.
40 FTC, Solicitation for Public Comments on
Contract Terms that May Harm Competition (Aug
5, 2021), https://www.regulations.gov/document/
FTC-2021-0036-0022; FTC, Making Competition
Work: Promoting Competition in Labor Markets
(Dec. 6–7, 2021), https://www.regulations.gov/
docket/FTC-2021-0057/comments.
41 See NPRM at 3498–99.
42 FTC, Press Release, FTC Approves Final Orders
Requiring Two Glass Container Manufacturers to
Drop Noncompete Restrictions That They Imposed
on Workers (Feb. 23, 2023), https://www.ftc.gov/
news-events/news/press-releases/2023/02/ftcapproves-final-orders-requiring-two-glass-containermanufacturers-drop-noncompete-restrictions; FTC,
Press Release, FTC Approves Final Order Requiring
Anchor Glass Container Corp. to Drop Noncompete
Restrictions That It Imposed on Workers (June 2,
2023), https://www.ftc.gov/news-events/news/pressreleases/2023/06/ftc-approves-final-order-requiringanchor-glass-container-corp-drop-noncompeterestrictions-it.
43 FTC, Press Release, FTC Approves Final Order
Requiring Michigan-Based Security Companies to
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Commission’s complaint alleged the
firm’s imposition of non-competes took
advantage of the unequal bargaining
power between the firm and its
employees, including low-wage security
guard employees, and thus reduced
workers’ job mobility; limited
competition for workers’ services; and
ultimately deprived workers of higher
wages and more favorable working
conditions.44
Based on the feedback obtained from
years of extensive public outreach and
fact-gathering, in January 2023, the
Commission published a notice of
proposed rulemaking (NPRM)
concerning non-competes.45 The
proposed rule would have categorically
banned employers from using noncompetes with all workers and required
rescission of all existing noncompetes.46
In response to the NPRM, the
Commission received over 26,000
public comments.47 The comments
reflected a diverse cross-section of the
U.S. The Commission received
comments from employers and workers
in a wide range of industries and from
every State; 48 from small, medium, and
large businesses; and from workers with
wide-ranging income levels.49 The
Commission also received comments
from representatives of different
industries through trade and
professional groups as well as from
Drop Noncompete Restrictions That They Imposed
on Workers (Mar. 8, 2023), https://www.ftc.gov/
news-events/news/press-releases/2023/03/ftcapproves-final-order-requiring-michigan-basedsecurity-companies-drop-noncompete-restrictions.
44 FTC, Analysis of Agreement Containing
Consent Order to Aid Public Comment, In re
Prudential Sec., Inc. et al. at 1 (Jan. 4, 2023).
45 NPRM, supra note 1.
46 Id. at 3482–83.
47 The public comments are available online. See
Regulations.gov, Non-Compete Clause Rule
(NPRM), FTC–2023–0007, https://
www.regulations.gov/docket/FTC-2023-0007/
comments. The Commission cannot quantify the
number of individuals or entities represented by the
comments. The number of comments undercounts
the number of individuals or entities represented by
the comments because many comments, including
comments from different types of organizations,
jointly represent the opinions or interests of many.
48 This reflects information provided by
commenters. Commenters self-identify their State
and are not required to include geographic
information.
49 Though most commenters identifying as
workers did not provide information regarding their
income or compensation levels, many provided
information about their particular jobs or industries
from which the Commission was able to infer a
broad range of income levels based on occupational
data from the Bureau of Labor Statistics (‘‘BLS’’).
BLS wage data for each year can be found at
Occupational Employment and Wage Statistics,
Tables Created by BLS, https://www.bls.gov/oes/
tables.htm (hereinafter ‘‘BLS Occupational
Employment and Wage Statistics’’). The
Commission used data from the May 2022 National
XLS table, generally for private ownership.
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academics and researchers. Federal,
State, and local governmental
representatives also submitted public
comments.
Among these comments, over 25,000
expressed support for the Commission’s
proposal to categorically ban noncompetes. Among the public
commenters were thousands of workers
who described how non-competes
prevented them from taking a better job
or starting a competing business, as well
as numerous small businesses who
struggled to hire talented workers.
Commenters stated that non-competes
have suppressed their wages, harmed
working conditions, negatively affected
their quality of life, reduced the quality
of the product or service their company
provided, prevented their business from
growing and thriving, and created a
climate of fear that deters competitive
activity. The following examples are
illustrative of the comments the
Commission received: 50
• I currently work in sales for an asphalt
company in Michigan. The company had me
sign a two year non-compete agreement to
not work for any other asphalt company
within 50 miles if I decide to resign. After
two years with the company I have been
disheartened at how poorly customers are
being treated and how often product quality
is sub-par. I would love to start my own
business because I see this as an opportunity
to provide a better service at a lower cost.
However, the non-compete agreement stands
in the way even though there are no trade
secrets and too many customers in this
market.51
• [I] signed a non-compete clause for
power-washing out of duress. My boss said
that if I didn’t sign before the end of the
week, not to come in the next week. . . . I’d
like to start my own business but I would
have to find another job and wait 5 years. All
I know is power-washing and these business
owners all want me to sign a non-compete
clause. It’s one big circle of wealthy business
owners keeping the little man down.
Essentially, non-compete clauses limit an
employee’s opportunity to excel in whatever
skill or trade they’re familiar with. In the
land of the free, we should be free to start a
business not limited by greedy business
owners.52
• In October 2020, I started working as a
bartender at a company called [REDACTED]
for $10 an hour. On my first day, I
50 To be clear, the Commission does not rely on
any particular individual comment submission for
its findings, but rather provides here (and
throughout this final rule) examples of comments
that were illustrative of themes that spanned many
comments. The Commission’s findings are based on
consideration of the totality of the evidence,
including its review of the empirical literature, its
review of the full comment record, and its expertise
in identifying practices that harm competition.
51 Individual commenter, FTC–2023–0007–2215.
Comment excerpts have been cleaned up for
grammar, spelling, and punctuation.
52 Individual commenter, FTC–2023–0007–12689.
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unknowingly signed a 2-year non-compete,
slipped between other paperwork while my
boss rushed me, and downplayed its
importance. . . . At [REDACTED], I was
sexually harassed and emotionally abused. I
needed money, so I searched for a new job
while remaining at [REDACTED] for one
year. I was eventually offered a bartending
job at a family-owned bar with better wages,
conditions, and opportunities. Upon
resigning, I was threatened with a noncompete I didn’t know existed. Still, I
couldn’t take it anymore, so believing it was
an unenforceable scare tactic, I took the new
job, thinking our legal system wouldn’t allow
a massive company with over 20 locations to
sue a young entry-level worker with no
degree. In December 2021, I was sued for
$30,000 in ‘‘considerable and irreparable
damages’’ for violating the noncompete. . . .53
• I am a physician in a rural underserved
area of Appalachia. . . . ‘‘[N]on-compete’’
clauses have become ubiquitous in the
healthcare industry. With hospital systems
merging, providers with aggressive non
compete clauses must abandon the
community that they serve if they chose to
leave their employer. . . . Healthcare
providers feel trapped in their current
employment situation, leading to significant
burnout that can shorten their career
longevity. Many are forced to retire early or
take a prolonged pause in their career when
they have no other recourse to combat their
employer.54
• I am a practicing physician who signed
an employment contract containing a
noncompete agreement in 2012, entering into
this agreement with an organization that no
longer exists. My original employer merged
with, and was made subsidiary to, a new
organization that is run under religious
principles in conflict with my own. . . . I
would have never signed such an agreement
with my new employer, yet I am bound to
this organization under threat of legal
coercion. To be clear, the forced compromise
of my religious principles does direct harm
to me. My only recourse to this coercion is
to give up medical practice anywhere
covered by my current medical license,
which is injurious to the patients in my care,
and to myself.55
• I am the owner of a small-midsize freight
brokerage, and non-competes of large
brokerages have time and time again
constrained talent from my business.
Countless employees of [a] mega brokerage
. . . have left and applied for our company
and we must turn them away. These are
skilled brokers that are serving the market
and their clients well due to THEIR
skillsets. . . . These non-competes affect not
just me but the clients they work with as
these skilled brokers are forced out of the
entire logistics market for an entire year and
possibly a lifetime when they pick up a new
career in a different field because of these
aggressive non-competes. . . .56
• I was laid off from my company in 2008
due to the economy, not to any fault of my
commenter, FTC–2023–0007–8852.
54 Individual commenter, FTC–2023–0007–0026.
55 Individual commenter, FTC–2023–0007–9671.
56 Individual commenter, FTC–2023–0007–6142.
own. However, when I was offered a job at
another company, my former company
threatened them and my offer was rescinded.
I was unable to find gainful employment for
months, despite opportunities in my field,
and had to utilize unemployment when I
otherwise would not have needed it. To find
work, I ultimately had to switch fields, start
part time somewhere, and just continue to
work my way up. All of this because I was
laid off to no fault of my own.57
• I was terminated by a large hospital
organization suddenly with a thriving, full
Pediatric practice. . . . My lawyer and I
believe the non-compete does not apply in
my circumstances and that the noncompete
is overly broad, restrictive and harmful to the
public (my patients). I started seeing my
patients mostly gratuitously in their homes
so they would not go without the care they
wanted and needed . . . The judge awarded
the order and I was told I cannot talk to
patients on the phone, text patients, zoom
visits or provide any pediatric care within
my non-compete area. Patients are angry and
panicked. I’m worried every day about my
patients and how I can continue to care for
them. . . . Patients have a right to choose
and keep their doctor. The trust built
between a patient and his doctor is crucial
to keeping a patient healthy. It’s not a
relationship that can or should be
replaced. . . . Patients should always come
first and that is not happening.58
• When I first graduated veterinary school
I signed a noncompete clause that was for 7
years. I tried to negotiate it to a more
reasonable time period but the employer
wouldn’t budge. There weren’t many job
openings for new graduates at the time and
I had student loans to pay back so I signed
it. . . . I moved back home to a small town
and took a job that required a 10-radial-mile,
2-year noncompete (this is currently
considered ‘‘reasonable/standard’’ in my
industry). Unfortunately since it’s a rural area
the 10 miles blocked me out of the locations
of all other veterinary clinics in the county
and I had to commute an hour each way to
work in the next metropolitan area. This put
a lot of stress on my family since I have
young children. Some days I didn’t even get
to see them when they were awake.59
• I work for a large electronic health
records company . . . that is known for
hiring staff right out of college, myself
included. I was impressed with their starting
salary and well-advertised benefits, so I was
quick to accept their offer. After accepting
their offer, I was surprised to receive a
contract outlining a strict non-compete
agreement . . . I feel disappointed that this
information was not made apparent to me
prior to my acceptance of the position, and
now I feel stuck in a job that I’ve quickly
discovered is not a good long-term fit for me.
I am certain that many other recent graduates
often find themselves in a similar position—
they accept shiny offers from a workplace,
not knowing whether the company and
position will be the right fit for them, and
53 Individual
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find themselves trapped by such contracts as
mine.60
• Non competes are awful. I am being sued
right now for going into business on my own
in Boston, Massachusetts, by my former
employer who says I signed a non-compete
in 2003, 20 years ago. . . . I am fighting
them in court. Hopefully I will prevail. . . .
[The] corporation I worked for is a billiondollar corporation. And they just keep trying
scare tactics to make me back down. They
went as far as trying to get a preliminary
injunction ordered against me. And the judge
refused but I still have to spend $1,000 an
hour to defend myself.61
• I have been working in the field of multimedia in the DC/Baltimore region since the
early 2000s. . . . I was 26 when I first
became employed, and at that time a
requirement was that I sign a non-compete
agreement. . . . This means I can’t be an
entrepreneur- which kills any opportunities
for me to grow something of my own- which
could potentially provide jobs for others in
the future. So what this non-compete does is
basically enables businesses to be small
monopolies. I could literally have a new
lease on my career if non competes were
abolished. As of now, when I think of
working someplace else I have to consider
changing careers altogether.62
• A former employer had me sign a noncompete when I started employment at an
internship in college. It was a part-time
position of 20 hours of work as an electrical
engineer, while I finished university. After
university, I worked for this employer
another 4 years full time, but then found a
better job in another state. It was not a
competitor, but a customer of my former
employer. My former employer waited till
the day after my 4-week notice to tell me that
I had signed a non-compete agreement and
that it [barred] me from working for any
competitor, customer or any potential
customer up to 5 years after leaving the
company with no geographic limitations.
This was effectively the entire semiconductor industry and put my entire career
at risk.63
• Non-competes serve little more purpose
than to codify and entrench inefficiencies. I
have seen this firsthand in the context of a
sophisticated management consulting
environment where company owners
provided ever less support in terms of
contributing to projects or even to sales of
new business while still feeling secure
through agreements that substantially limited
anyone from working in the relevant industry
for two years on a global basis after
leaving. . . . The reality is that there are
innumerable retention mechanisms (such as
good working conditions, compensation,
culture, management, growth trajectory and/
or strategy) that can contribute to loyal
employees without the need for noncompetes.64
The Commission has undertaken
careful review of the public comments
60 Individual
commenter, FTC–2023–0007–10729.
commenter, FTC–2023–0007–10871.
62 Individual commenter, FTC–2023–0007–10968.
63 Individual commenter, FTC–2023–0007–16347.
64 Individual commenter, FTC–2023–0007–3963.
61 Individual
57 Individual
commenter, FTC–2023–0007–15497.
commenter, FTC–2023–0007–14956.
59 Individual commenter, FTC–2023–0007–0922.
58 Individual
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Federal Register / Vol. 89, No. 89 / Tuesday, May 7, 2024 / Rules and Regulations
and the entirety of the rulemaking
record. Based on this record and the
Commission’s experience and expertise
in competition matters, the Commission
issues this final rule pursuant to its
authority under sections 5 and 6(g) of
the FTC Act.
2. Prevalence of Non-Competes
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Based on its own data analysis,
studies published by economists, and
the comment record, the Commission
finds that non-competes are in
widespread use throughout the
economy and pervasive across
industries and demographic groups,
albeit with some differences in the
magnitude of the prevalence based on
industries and demographics. The
Commission estimates that
approximately one in five American
workers—or approximately 30 million
workers—is subject to a non-compete.65
As described in Part II.F, the inquiry
as to whether conduct is an unfair
method of competition under section 5
focuses on the nature and tendency of
the conduct, not whether or to what
degree the conduct caused actual
harm.66 Although a finding that noncompetes are prevalent is not necessary
to support the Commission’s
determination that the use of noncompetes by employers is an unfair
method of competition, the Commission
finds that non-competes are prevalent
and in widespread use throughout the
economy, which is why researchers
have observed such significant negative
actual effects from non-competes on
competitive conditions in labor markets
and markets for products and services.67
A 2014 survey of workers finds that
18% of respondents work under a noncompete and 38% of respondents have
worked under one at some point in their
lives.68 This study has the broadest and
likely the most representative coverage
of the U.S. labor force among the
prevalence studies discussed here.69
This study reports robust results
contradicting the prior assumptions of
some that non-competes were, in most
cases, bespoke agreements with
65 This is likely a conservative estimate. Surveys
of workers likely underreport the share of workers
subject to non-competes, since many workers may
not know they are subject to a non-compete. See,
e.g., Alexander J.S. Colvin & Heidi Shierholz, Econ.
Policy Inst., Noncompete Agreements, Report (Dec.
10, 2019) at 3.
66 See infra note 288 and accompanying text.
67 See Parts IV.A through IV.C (describing this
evidence).
68 Evan P. Starr, J.J. Prescott, & Norman D.
Bishara, Noncompete Agreements in the US Labor
Force, 64 J. L. & Econ. 53, 53 (2021).
69 The final survey sample of 11,505 responses
represented individuals from nearly every
demographic in the labor force. Id. at 58.
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sophisticated and highly-paid workers.
It finds that, among workers without a
bachelor’s degree, 14% of respondents
reported working under a non-compete
at the time surveyed and 35% reported
having worked under one at some point
in their lives.70 For workers earning less
than $40,000 per year, 13% of
respondents were working under a noncompete and 33% worked under one at
some point in their lives.71 Furthermore,
this survey finds that 53% of workers
covered by non-competes are hourly
workers.72 The survey suggests that a
large share of workers subject to noncompetes are relatively low-earning
workers. In addition, a survey from the
Federal Reserve Board of Governors
found that 11.4% of workers have noncompetes, including workers with
relatively low earnings and low levels of
education. The survey finds some
degree of geographic heterogeneity,
though it finds that large numbers of
workers in all regions of the country
have non-competes (including 7.0% of
workers in States which broadly do not
enforce non-competes).73
Furthermore, a survey of workers
conducted in 2017 estimates that 24.2%
of workers are subject to a noncompete.74 This survey also finds that
non-competes are often used together
with other restrictive employment
agreements, including non-disclosure
agreements (‘‘NDAs’’) and nonrecruitment and non-solicitation
agreements.75 A methodological
limitation of this survey is that it is a
convenience sample of individuals who
visited Payscale.com during the time
period of the survey and is therefore
unlikely to be fully representative of the
U.S. working population. While
weighting based on demographics helps,
it does not fully mitigate this concern.
Additionally, a 2017 survey of
business establishments with 50 or more
employees estimates that 49% of such
70 Id.
at 63.
71 Id.
72 Michael Lipsitz & Evan Starr, Low-Wage
Workers and the Enforceability of Noncompete
Agreements, 68 Mgmt. Sci. 143, 144 (2022)
(analyzing data from the Starr, Prescott, & Bishara
survey).
73 Tyler Boesch, Jacob Lockwood, Ryan Nunn, &
Mike Zabek, New Data on Non-Compete Contracts
and What They Mean for Workers (2023), https://
www.minneapolisfed.org/article/2023/new-data-onnon-compete-contracts-and-what-they-mean-forworkers.
74 Natarajan Balasubramanian, Evan Starr, &
Shotaro Yamaguchi, Employment Restrictions on
Resource Transferability and Value Appropriation
from Employees (Jan. 18, 2024), https://
papers.ssrn.com/sol3/papers.cfm?abstract_
id=3814403.
75 Id. at 11 (reporting that if a worker has a noncompete, there is a 70%–75% chance that all three
restrictive covenants are present).
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establishments use non-competes for at
least some of their employees, and 32%
of such establishments use noncompetes for all of their employees.76
Other estimates of non-compete use
cover subsets of the U.S. labor force.
One 2022 study is based on National
Longitudinal Survey of Youth (NLSY)
data.77 The NLSY is an often-used labor
survey conducted by the Bureau of
Labor Statistics (‘‘BLS’’) that consists of
a nationally representative sample of
8,984 men and women born from 1980–
84 and living in the U.S. at the time of
the initial survey in 1997; it is a subset
of the workforce by age of worker.78 The
2022 study using NLSY data reports
prevalence of non-competes to be 18%,
in line with the number estimated based
on the 2014 survey of workers directed
solely at calculating the prevalence of
non-competes.79
Non-competes are pervasive across
occupations. For example, a survey of
independent hair salon owners finds
that 30% of hair stylists worked under
a non-compete in 2015.80 A survey of
electrical and electronic engineers finds
that 43% of respondents signed a noncompete.81 A different study finds that
45% of physicians worked under a noncompete in 2007.82 One study published
in 2021 finds that 62% of CEOs worked
under a non-compete between 1992 and
2014.83 Another, published in 2023,
supports that finding and reflects an
upward trend in the use of noncompetes among executives—
specifically, the proportion of
executives working under a noncompete rose from ‘‘57% in the early
1990s to 67% in the mid-2010s.’’ 84 The
2014 survey reports industry-specific
rates ranging from 9% in the Agriculture
and Hunting category to 32% in the
76 Colvin
& Shierholz, supra note 65 at 1.
S. Rothstein & Evan Starr, Noncompete
Agreements, Bargaining, and Wages: Evidence from
the National Longitudinal Survey of Youth 1997,
June 2022 Mthly. Lab. Rev. (2022).
78 BLS, NLSY97 Data Overview, https://
www.bls.gov/nls/nlsy97.htm.
79 Rothstein & Starr, supra note 77 at 1.
80 Matthew S. Johnson & Michael Lipsitz, Why
Are Low-Wage Workers Signing Noncompete
Agreements?, 57 J. Hum. Res. 689, 700 (2022).
81 Matt Marx, The Firm Strikes Back: NonCompete Agreements and the Mobility of Technical
Professionals, 76 a.m. Socio. Rev. 695, 702 (2011).
Calculated as 92.60% who signed a non-compete of
the 46.80% who were asked to sign a non-compete.
82 Kurt Lavetti, Carol Simon, & William D. White,
The Impacts of Restricting Mobility of Skilled
Service Workers: Evidence from Physicians, 55 J.
Hum. Res. 1025, 1042 (2020).
83 Omesh Kini, Ryan Williams, & Sirui Yin, CEO
Noncompete Agreements, Job Risk, and
Compensation, 34 Rev. Fin. Stud. 4701, 4707
(2021).
84 Liyan Shi, Optimal Regulation of Noncompete
Contracts, 91 Econometrica 425, 447 (2023).
77 Donna
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Information category.85 The
Balasubramaian et al. survey reports
industry-specific rates ranging from
12% in the Arts, Entertainment, and
Recreation category to 30% in the
Professional, Scientific, and Technical
category.86 The same survey also reports
occupation-specific rates ranging from
8% in the Community and Social
Services category to 32% in the
Computer and Mathematical category.87
In addition, commenters presented
survey data on the prevalence of noncompetes in various occupations and
industries. The Commission does not
rely on these surveys to support its
finding that non-competes are in
widespread use throughout the
economy. Because the Commission
lacked access to a detailed description
of the methodology for these surveys
(unlike for the surveys described
previously), the Commission cannot
evaluate how credible their research
designs are. However, they generally
confirm the Commission’s finding that
non-competes are in widespread use
throughout the economy and pervasive
across industries and demographic
groups.
For example, commenters reported
that 33% of practitioners in the applied
behavioral analysis field reported being
subject to a non-compete,88 along with
68% of cardiologists,89 42% of
colorectal surgeons,90 72% of members
of the American Association of Hip and
Knee Surgeons,91 and 31% of wireless
telecommunications retail workers.92
Other commenters cited a 2019 study
finding that 29% of businesses where
85 Starr,
Prescott, & Bishara, supra note 68 at 67.
et al., supra note 74 at 47.
86 Balasubramanian
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87 Id.
88 Kristopher J. Brown, Stephen R. Flora, & Mary
K. Brown, Noncompete Clauses in Applied
Behavior Analysis: A Prevalence and Practice
Impact Survey, 13 Behavioral Analysis Practice 924
(2020) (survey of 610 workers).
89 Comment of Am. Coll. of Cardiology, FTC–
2023–0007–18077, at 2. The comment did not
provide a citation to the survey or the underlying
data, including the number of respondents or the
time period.
90 William C. Cirocco. Restrictive Covenants in
Physician Contracts: An American Society of Colon
and Rectal Surgeons’ Survey, 54 Diseases of the
Colon and Rectum 482 (2011). The survey
examined 157 colorectal surgeons who had
completed their residency in the prior decade.
91 Comment of Am. Ass’n of Hip and Knee
Surgeons, FTC–2023–0007–21076, at 4. The
comment said the internal poll was conducted in
early 2023, but the comment did not provide a
citation to the survey or the underlying data,
including the number of respondents.
92 Comm. Workers of Am. and Nat’l Employment
L. Project, Broken Network: Workers Expose Harms
of Wireless Telecom Carriers’ Outsourcing to
‘Authorized Retailers’ (Feb. 2023), https://cwaunion.org/sites/default/files/2023-02/20230206_
BrokenNetwork.pdf, at 12. The survey had 204
respondents.
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the average wage is below $13 per hour
use non-competes for all their
workers.93
Several trade organizations included
information in their comments about the
percentage of their members that use
non-competes for at least some of their
workers, based on surveys of their
membership. For the National
Association of Wholesaler-Distributors,
this figure was 80%; 94 for the
Independent Lubricant Manufacturing
Association, 69%; 95 for the Michigan
Chamber of Commerce, 73%; 96 for the
Gas and Welding Distributors
Association, 80%; 97 and for the
National Association of Manufacturers,
70%.98 One industry organization said
its survey found that 57% of
respondents require workers earning
over $150,000 to sign non-competes.99
A survey by the Authors Guild finds
that 19.2% of respondents reported that
non-competes prevented them from
publishing a similar or competing
book.100 The HR Policy Association
stated that 75% of respondents
indicated they use non-competes for
less than 10% of their workers, and
nearly one third indicated they use noncompetes for less than 1% of their
workers.101 The association stated that
its survey covered 3 million workers
and argued that its survey finding less
usage of non-competes was more
representative than studies cited in the
93 Colvin
& Shierholz, supra note 65 at 13.
of Nat’l Assoc. of WholesalerDistribs., FTC–2023–0007–19347, at 2. The
comment did not provide a citation to the survey
or the underlying data, including the number of
respondents.
95 Comment of Indep. Lubricant Mfrs. Ass’n,
FTC–2023–0007–19445, at 3. The comment did not
provide a citation to the survey or the underlying
data, including the number of respondents.
96 Calculated as 77%*95% (assuming that the
95% reported in their comment applies to the 77%
who reported using restrictive covenants).
Comment of Mich. Chamber of Com., FTC–2023–
0007–20855. The comment did not provide a
citation to the survey or the underlying data,
including the number of respondents.
97 Comment of Gas and Welding Distribs. Ass’n,
FTC–2023–0007–20934, at 2–3. The comment did
not provide a citation to the survey or the
underlying data. The comment said the survey took
place after the NPRM was proposed and had 161
respondents.
98 Comment of Nat’l Ass’n of Mfrs., FTC–2023–
0007–20939, at 2 (citing Nat’l Ass’n of Mfrs.,
Noncompete Survey Data Report, https://
www.nam.org/wp-content/uploads/2023/03/
Noncompete_Survey_Data_Report.pdf). The survey
had 150 respondents.
99 Comment of Soc. for Hum. Res. Mgmt., FTC–
2023–0007–20903, at 5 n.2. The comment did not
provide a citation to the survey or the underlying
data, including the number of respondents.
100 Comment of The Authors Guild, FTC–2023–
0007–20854, at 7. The comment did not provide a
citation to the survey or the underlying data, but
said it had 630 respondents.
101 Comment of HR Policy Ass’n, FTC–2023–
0007–20998, at 8.
94 Comment
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NPRM.102 However, the commenter did
not provide the data underlying its
claims. The Retail Industry Leaders
Association stated that a recent survey
of its members indicated that, among
members that use non-competes, the
majority do so with less than 1% of
their workforce and an additional
quarter use non-competes with less than
10% of their workforce.103 Additionally,
a commenter referenced a survey of
small business owners finding that 48%
use non-competes for their own
business.104
Several commenters misrepresented
the Commission’s finding related to
prevalence as based on ‘‘a single study
from 2021’’ (Starr, Prescott, and Bishara,
2021), which relied on survey data from
2014. The Commission’s finding is not
based on a single study. The NLSY
study reaches similar conclusions about
the prevalence of non-competes across
the economy,105 and the occupationspecific studies indicate that noncompetes are pervasive in various
occupations.106 Furthermore, despite its
methodological limitations, the data
submitted by commenters generally
comport with the estimates reported in
the academic literature. One commenter
stated the respondents to the Starr,
Prescott, and Bishara survey were not
necessarily representative of the
population. The Commission believes
that the weighting of the data
sufficiently addresses this concern.
Another commenter argued that
individuals may misunderstand
contracts that they have signed, leading
them to mistakenly believe they are
bound by a non-compete. The
Commission does not find this to be a
plausible explanation for the high
numbers of workers, businesses, and
trade associations that report that noncompetes are prevalent.
The Commission appreciates the
additional estimates provided by
commenters. The comments broadly
corroborate the Commission’s finding
that non-competes are used across the
workforce, with some heterogeneity in
the magnitude of the prevalence. The
102 Id.
103 Comment of Retail Indus. Leaders Ass’n, FTC–
2023–0007–20989, at 6. The comment did not
provide a citation to the survey or the underlying
data, including the number of respondents or the
time period.
104 Comment of Sm. Bus. Majority, FTC–2023–
0007–21093 (citing Small Business Majority,
Opinion Poll: Small Business Owners Support
Banning Non-Compete Agreements (Apr. 13, 2013),
https://smallbusinessmajority.org/sites/default/
files/research-reports/2023-non-compete-pollreport.pdf).
105 See Rothstein & Starr, supra note 77 and
accompanying text.
106 See supra notes 80–87 and accompanying text.
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Commission finds that this
heterogeneity is insufficient to warrant
industry-specific exclusions from
coverage under the final rule in part
because employers’ use of non-competes
is prevalent across labor markets and for
the reasons discussed in Part V.D
regarding requests for exclusions.
II. Legal Authority
A. The History of the Commission and
Section 5 of the FTC Act
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The FTC Act was enacted in 1914.107
Section 5 of that Act ‘‘declared’’ that
‘‘unfair methods of competition in
commerce’’ are ‘‘unlawful,’’ and it
‘‘empowered and directed’’ the
Commission ‘‘to prevent’’ entities
subject to its jurisdiction from ‘‘using’’
such methods.108 Congress removed
certain enumerated industries,
activities, or entities—such as
banks 109—from the Commission’s
jurisdiction but otherwise envisioned a
Commission whose purview would
cover commerce across the national
economy.
The term ‘‘‘unfair methods of
competition’ . . . was an expression
new in the law’’ when it first appeared
in the FTC Act.110 Congress purposely
introduced this phrase to distinguish
the Commission’s authority from the
definition of ‘‘unfair competition’’ at
common law. Because the ‘‘meaning
which the common law had given to
[‘unfair competition’] was . . . too
narrow,’’ Congress adopted ‘‘the broader
and more flexible phrase ‘unfair
methods of competition.’ ’’ 111 Using this
new phrase also made clear that
Congress designed section 5 to extend
beyond the reach of other antitrust
laws—most notably, the Sherman Act—
whose text did not include the term
107 Federal Trade Commission Act of 1914, Public
Law 63–203, 38 Stat. 717, 719 (hereinafter ‘‘FTC Act
of 1914’’).
108 FTC Act of 1914, 38 Stat. at 719. Section 5 is
codified as amended at 15 U.S.C. 45. Congress later
amended the term ‘‘in commerce’’ to ‘‘in or
affecting commerce.’’ The Supreme Court has
explained that this amended phrase makes section
5 of the FTC Act ‘‘coextensive with the
constitutional power of Congress under the
Commerce Clause.’’ United States v. Am. Bldg.
Maintenance Indus., 422 U.S. 271, 277 n.6 (1975).
For simplicity, this statement of basis and purpose
often refers to ‘‘unfair methods of competition’’
without the commerce requirement, but the
Commission acknowledges that it has power to
prevent only such methods that are in or affect
commerce as that term is defined in the Act. See
15 U.S.C. 44.
109 See 15 U.S.C. 45(a)(2).
110 A.L.A. Schechter Poultry Corp. v. United
States, 295 U.S. 495, 532 (1935).
111 See FTC v. R. F. Keppel & Bro., Inc., 291 U.S.
304, 310–11 (1934); see also Schechter Poultry, 295
U.S. at 532.
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‘‘unfair methods of competition.’’ 112 In
particular, Congress wanted the
Commission to apply a standard that
would reach conduct not captured by
other antitrust laws and the rule of
reason, which courts applied when
interpreting the Sherman Act, making it
‘‘impossible to predict with any
certainty’’ whether courts would
condemn the many ‘‘practices that
seriously interfere with
competition.’’ 113 Allowing the
Commission to prevent unfair methods
of competition would also help the
Commission achieve a core purpose of
the Act: to stop ‘‘trade restraints in their
incipiency’’ before they grew into
violations of other antitrust laws.114
By design, the new phrase ‘‘unfair
methods of competition’’ did ‘‘not
‘admit of precise definition.’ ’’ 115
Congress intentionally gave the
Commission flexibility to adapt to
changing circumstances.116 The
Supreme Court has affirmed the more
inclusive scope of section 5 on
numerous occasions 117 and has
affirmed the Commission’s power under
the Act to condemn coercive and
otherwise unfair practices that have a
tendency to stifle or impair
competition.118 Federal appellate courts
have likewise consistently held that the
Commission’s authority under section 5
extends beyond ‘‘the letter’’ of other
antitrust laws.119
Congress further expanded the
Commission’s jurisdiction over time.
Congress extended the Commission’s
authority in 1938 by adding the further
112 See E.I. du Pont de Nemours v. FTC (Ethyl),
729 F.2d 128, 136 (2d Cir. 1984) (‘‘Congress’ aim
was to protect society against oppressive anticompetitive conduct and thus assure that the
conduct prohibited by the Sherman and Clayton
Acts would be supplemented as necessary and any
interstices filled.’’).
113 S. Rep. No. 62–1326, at 14 (1913) (hereinafter
‘‘Cummins Report’’). After analyzing a series of
Supreme Court decisions interpreting the Sherman
Act—e.g., Standard Oil Co. of New Jersey v. United
States, 221 U.S. 1, 60 (1911)—the Senate committee
feared that the rule of reason meant that ‘‘in each
instance it [would be] for the court to determine
whether the established restraint of trade is a due
restraint or an undue restraint’’ and that this made
it ‘‘imperative to enact additional legislation.’’
Cummins Report at 11–12.
114 FTC v. Brown Shoe Co., 384 U.S. 316, 322
(1966); see also FTC v. Motion Picture Advert. Serv.
Co., 344 U.S. 392, 394–95 (1953).
115 R.F. Keppel & Bro., 291 U.S. at 312.
116 Id. at 311 n.2.
117 See, e.g., id. at 311; A.L.A. Schechter Poultry
Corp. v. United States, 295 U.S. 495, 532 (1935);
Brown Shoe Co., 384 U.S. at 320–22.
118 FTC v. Texaco, 393 U.S. 223, 225–26 (1968)
(citing Atl. Refin. Co. v. FTC, 381 U.S. 357, 376
(1965)).
119 Spiegel, Inc. v. FTC, 540 F.2d 287, 292 (7th
Cir. 1976) (quoting FTC v. Sperry & Hutchinson Co.,
405 U.S. 233, 244 (1972)); cf., Chuck’s Feed & Seed
Co. v. Ralston Purina Co., 810 F.2d 1289, 1292–93
(4th Cir. 1987).
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prohibition on ‘‘unfair or deceptive acts
or practices.’’ 120 And in 1975, Congress
amended the phrase ‘‘in commerce’’ in
section 5 to ‘‘in or affecting commerce,’’
a change that was ‘‘specifically designed
to expand the Commission’s jurisdiction
. . . to make it coextensive with the
constitutional power of Congress under
the Commerce Clause.’’ 121
Congress gave careful thought to the
structure of the FTC as an independent
agency entrusted with this considerable
responsibility. The Commission would
consist of five members, no more than
three of whom could be part of the same
political party, who would serve for
terms of seven years.122 The
Commission would draw on trained
expert staff to develop the body of law
regarding what constitutes unfair
methods of competition (and, later,
unfair and deceptive practices),123 both
through acting as ‘‘a quasi judicial
body’’ 124 that determines whether
conduct is an unfair method of
competition in adjudications and
through authority to promulgate
legislative rules delineating conduct
that constitutes an unfair method of
competition. Recognizing that the
Commission is an expert agency in
making such determinations about
anticompetitive conduct, courts
reviewing Commission determinations
as to what practices constitute an unfair
method of competition have given the
Commission’s decisions ‘‘great
weight.’’ 125
The FTC Act today reflects a careful
balance from Congress. Congress has
directed the Commission to proceed
120 Federal Trade Commission Act, Public Law
447, 75th Cong., 3d Sess. (March 21, 1938) c. 49;
52 Stat. 111 (1938).
121 United States v. Am. Bldg. Maintenance
Indus., 422 U.S. 271, 277 n.6 (1975). As noted, the
Commission’s authority does not reach certain
enumerated industries or activities—a list that has
also grown over time. See 15 U.S.C. 45(a)(2); see
also Part II.E.1. Some of these industries are
statutorily prohibited from engaging in unfair or
deceptive practices or unfair methods of
competition under different laws overseen by other
agencies. See, e.g., 49 U.S.C. 41712(a) (allowing the
Secretary of Transportation to ‘‘decide whether an
air carrier, foreign air carrier, or ticket agent’’ has
engaged in such conduct).
122 15 U.S.C. 41.
123 Id. (anticipating that the Commission would
‘‘build up a comprehensive body of information for
the use and advantage of the Government and the
business world’’); id. at 11,092 (‘‘[W]e want trained
experts; we want precedents; we want a body of
administrative law built up.’’).
124 A.L.A. Schechter Poultry Corp. v. United
States, 295 U.S. 495, 533 (1935).
125 FTC v. Cement Inst., 333 U.S. 683, 720 (1948);
Atl. Ref. Co. v. FTC, 381 U.S. 357, 368 (1965); FTC
v. Texaco, 393 U.S. 223, 226 (1968); Official Airline
Guides, Inc. v. FTC, 630 F.2d 920, 927 (2d. Cir.
1980) (quoting Cement Inst., 333 U.S. at 720); see
also FTC v. Motion Picture Advert. Serv. Co., 344
U.S. 392, 396 (1953); FTC v. Ind. Fed’n of Dentists,
476 U.S. 447, 454 (1986).
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against a broader range of
anticompetitive conduct than other
antitrust laws like the Sherman and
Clayton Acts can reach. On the other
hand, Congress has never established a
private right of action under section
5,126 nor has it authorized the
Commission to recover civil penalties or
other monetary relief from parties who
engage in unfair methods of
competition.127 Instead, the
Commission may either pursue an
adjudication under section 5(b) or seek
an injunction in Federal court under
section 13(b) against a party that has
engaged in an unfair method of
competition.128 As explained below, it
may also promulgate rules prohibiting
unfair methods of competition. The
Commission cannot obtain civil
penalties or other monetary relief
against parties for using an unfair
method of competition, although it can
obtain civil penalties in court if a party
is ordered to cease and desist from a
violation and fails to do so.129
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B. The Commission’s Authority To
Promulgate the Rule
Alongside section 5, Congress
adopted section 6(g) of the Act, in
which it authorized the Commission to
‘‘make rules and regulations for the
purpose of carrying out the provisions
of’’ the FTC Act, which include the
Act’s prohibition of unfair methods of
competition.130 The plain text of section
5 and section 6(g), taken together,
empower the Commission to promulgate
rules for the purpose of preventing
unfair methods of competition. That
includes legislative rules defining
certain conduct as an unfair method of
competition.
The Commission has exercised its
authority under section 6(g) to
promulgate legislative rules on many
occasions stretching back more than half
a century. Between 1963 and 1978,131
126 See, e.g., Holloway v. Bristol-Myers Corp., 485
F.2d 986, 988–89 (D.C. Cir. 1973); Liu v. Amerco,
677 F.3d 489, 492 (1st Cir. 2012).
127 Congress has authorized the FTC to seek civil
monetary remedies against parties who engage in
unfair or deceptive acts or practices under some
circumstances. See 15 U.S.C. 45(m); 15 U.S.C. 57b.
128 See 15 U.S.C. 45(b); 15 U.S.C. 53(b).
129 See 15 U.S.C. 45(l).
130 15 U.S.C. 46(g).
131 As explained in more detail later in this Part,
Congress added section 18 to the FTC Act in 1975,
and that section provides the process the
Commission must go through to promulgate rules
defining unfair or deceptive acts or practices. See
Magnuson-Moss Warranty—Federal Trade
Commission Improvement Act, Public Law 93–637,
88 Stat. 2183 (Jan. 4, 1975) (hereinafter ‘‘MagnusonMoss Act’’); 15 U.S.C. 57a. Congress provided,
however, that ‘‘[a]ny proposed rule under section
6(g) . . . with respect to which presentation of data,
views, and arguments was substantially completed
before’’ section 18 was enacted ‘‘may be
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the Commission relied on section 6(g) to
promulgate the following rules: (1) a
rule declaring it an unfair method of
competition (‘‘UMC’’) and an unfair or
deceptive act or practice (‘‘UDAP’’) to
mislead consumers about the size of
sleeping bags by representing that the
‘‘cut size’’ represents the finished
size; 132 (2) a rule declaring it a UMC
and UDAP to use the word ‘‘automatic’’
or similar words to describe household
electric sewing machines; 133 (3) a rule
declaring it a UMC and UDAP to
misrepresent nonprismatic instruments
as prismatic; 134 (4) a rule declaring it a
UMC and UDAP to advertise or market
dry cell batteries as ‘‘leakproof;’’ 135 (5)
a rule declaring it a UMC and UDAP to
misrepresent the ‘‘cut size’’ as the
finished size of tablecloths and similar
products; 136 (6) a rule declaring it a
UMC and UDAP to misrepresent that
belts are made of leather if they are
made of other materials; 137 (7) a rule
declaring it a UMC and UDAP to
represent used lubricating oil as new; 138
(8) a rule declaring it a UDAP to fail to
disclose certain health warnings in
cigarette advertising and on cigarette
packaging (‘‘Cigarette Rule’’); 139 (9) a
rule declaring it a UMC and UDAP to
fail to disclose certain features of light
bulbs on packaging; 140 (10) a rule
declaring it a UMC and UDAP to
promulgated in the same manner and with the same
validity as such rule could have been promulgated
had’’ section 18 ‘‘not been enacted.’’ 88 Stat. 2198;
15 U.S.C. 57a note. This list therefore includes a
handful of rules promulgated under section 6(g) but
after 1975 because those rules were substantially
completed before section 18’s enactment.
132 Advertising and Labeling as to Size of
Sleeping Bags, 28 FR 10900 (Oct. 11, 1963),
repealed by 60 FR 65528 (Dec. 20, 1995).
133 Misuse of ‘‘Automatic’’ or Terms of Similar
Import as Descriptive of Household Electric Sewing
Machines, 30 FR 8900 (Jul. 15, 1965), repealed by
55 FR 23900 (June 13, 1990).
134 Deception as to Nonprismatic and Partially
Prismatic Instruments Being Prismatic Binoculars,
29 FR 7316 (Jun. 5, 1964), repealed by 60 FR 65529
(Dec. 20, 1995).
135 Deceptive Use of ‘‘Leakproof,’’ ‘‘Guaranteed
Leakproof,’’ etc., as Descriptive of Dry Cell
Batteries, 29 FR 6535 (May 20, 1964), repealed by
62 FR 61225 (Nov. 17, 1997).
136 Deceptive Advertising and Labeling as to Size
of Tablecloths and Related Products, 29 FR 11261
(Aug. 5, 1964), repealed by 60 FR 65530 (Dec. 20,
1995).
137 Misbranding and Deception as to Leather
Content of Waist Belts, 29 FR 8166 (Jun. 27, 1964),
repealed by 61 FR 25560 (May 22, 1996).
138 Deceptive Advertising and Labeling of
Previously Used Lubricating Oil, 29 FR 11650 (Aug.
14, 1964), repealed by 61 FR 55095 (Oct. 24, 1996).
139 Unfair or Deceptive Advertising and Labeling
of Cigarettes in Relation to the Health Hazards of
Smoking, 29 FR 8324 (July 2, 1964), repealed by 30
FR 9485 (July 29, 1965). As explained in more
detail herein, Congress superseded this rule with
legislation.
140 Incandescent Lamp (Light Bulb) Industry, 35
FR 11784 (Jul. 23, 1970), repealed by 61 FR 33308
(Jun. 27, 1996).
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misrepresent the actual size of the
viewable picture area on a TV; 141 (11)
a rule declaring a presumption of a
violation of section 2(d) and (e) of the
amended Clayton Act for certain
advertising and promotional practices in
the men’s and boy’s clothing
industry; 142 (12) a rule declaring it a
UMC and UDAP to fail to make certain
disclosures about the handling of glass
fiber products and contact with certain
products containing glass fiber; 143 (13)
a rule declaring it a UMC and UDAP to
make certain misrepresentations about
transistors in radios; 144 (14) a rule
declaring it a UDAP to fail to disclose
certain effects about inhaling certain
aerosol sprays; 145 (15) a rule declaring
it a UMC and UDAP to misrepresent the
length or size of extension ladders; 146
(16) a rule declaring it a UDAP to make
certain misrepresentations, or fail to
disclose certain information, about
games of chance; 147 (17) a rule
declaring it a UMC and UDAP to mail
unsolicited credit cards; 148 (18) a rule
declaring it a UMC and UDAP to fail to
disclose the minimum octane number
on gasoline pumps (‘‘Octane Rule’’); 149
(19) a rule declaring it a UMC and
UDAP to sell finished articles of
clothing without a permanent tag or
label disclosing care and maintenance
141 Deceptive Advertising as to Sizes of Viewable
Pictures Shown by Television Receiving Sets, 31 FR
3342 (Mar. 3, 1966), repealed by 83 FR 50484 (Oct.
9, 2018).
142 Discriminatory Practices in Men’s and Boys’
Tailored Clothing Industry, 32 FR 15584 (Nov. 9,
1967), repealed by 59 FR 8527 (Feb. 23, 1994).
143 Failure to Disclose that Skin Irritation May
Result from Washing or Handling Glass Fiber
Curtains and Draperies and Glass Fiber Curtain and
Drapery Fabrics, 32 FR 11023 (Jul. 28, 1967),
repealed by 60 FR 65532 (Dec. 20, 1995).
144 Deception as to Transistor Count of Radio
Receiving Sets, Including Transceivers, 33 FR 8446
(Jun. 7, 1968), repealed by 55 FR 25090 (Jun. 20,
1990).
145 Failure to Disclose the Lethal Effects of
Inhaling Quick-Freeze Aerosol Spray Products Used
for Frosting Cocktail Glasses, 34 FR 2417 (Feb. 20,
1969), repealed by 60 FR 66071 (Dec. 21, 1995).
146 Deceptive Advertising and Labeling as to
Length of Extension Ladders, 34 FR 929 (Jan. 22,
1969), repealed by 60 FR 65533 (Dec. 20, 1995).
147 Games of Chance in the Food Retailing and
Gasoline Industries, 34 FR 13302 (Aug. 16, 1969),
repealed by 61 FR 68143 (Dec. 27, 1996).
148 Unsolicited Mailing of Credit Cards, 35 FR
4614 (Mar. 17, 1970), repealed by 36 FR 45 (Jan. 5,
1971). This rule was rescinded in response to an
amendment to the Truth in Lending Act that
prohibited similar conduct. See Public Law 91–508,
84 Stat. 1126 (1970).
149 Posting of Minimum Octane Numbers on
Gasoline Dispensing Pumps, 36 FR 23871 (Dec. 16,
1971), repealed by 43 FR 43022 (Sept. 22, 1978).
This rule was superseded by the Petroleum
Marketing Practices Act, Public Law 95–297, 92
Stat. 333 (June 19, 1978). A similar regulation was
promulgated under that law at 16 CFR part 306.
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instructions; 150 (20) a rule declaring a
UMC and UDAP for a grocery store to
offer products for sale at a stated price
if those products will not be readily
available to consumers (‘‘Unavailability
Rule’’); 151 (21) a rule declaring it a UMC
and UDAP for a seller to fail to make
certain disclosures in connection with a
negative option plan (‘‘Negative Options
Rule’’); 152 (22) a rule declaring it a
UDAP for door-to-door sellers to fail to
furnish certain information to
buyers; 153 (23) a rule declaring it a UMC
and UDAP to fail to make certain
disclosures about sound power
amplification for home entertainment
products; 154 (24) a rule declaring it a
UDAP for sellers failing to include
certain contract provisions preserving
claims and defenses in consumer credit
contracts (‘‘Holder Rule’’); 155 (25) a rule
declaring it a UMC or UDAP to solicit
mail order merchandise from a buyer
unless the seller can ship the
merchandise within 30 days (‘‘Mail
Order Rule’’); 156 and (26) a rule
declaring it a UDAP for a franchisor to
fail to furnish a franchisee with certain
information.157
Some of these rules attracted
significant attention. For instance, the
Commission began the rulemaking
process to require warnings on cigarette
packages just one week after the
Surgeon General’s ‘‘landmark report’’
that determined smoking is a health
hazard,158 and that rule was front-page
news.159 Following a lobbying campaign
150 Care Labeling of Textile Wearing Apparel, 36
FR 23883 (Dec. 16, 1971).
151 Retail Food Store Advertising and Marketing
Practices, 36 FR 8777 (May 13, 1971).
152 Use of Negative Option Plans by Sellers in
Commerce, 38 FR 4896 (Feb. 22, 1973).
153 Cooling-off Period for Door-to-Door Sales, 37
FR 22934 (Oct. 26, 1972).
154 Power Output Claims for Amplifiers Used in
Home Entertainment Products, 39 FR 15387 (May
3, 1974).
155 Preservation of Consumers’ Claims and
Defenses, 40 FR 53506 (Nov. 18, 1975).
156 Mail Order Merchandise, 40 FR 49492 (Oct.
22, 1975) (regulatory text), 40 FR 51582 (Nov. 5,
1975) (statement of basis and purpose). The Mail
Order Rule has since been updated to become the
Mail, internet, or Telephone Order Merchandise
Rule, or MITOR. See 79 FR 55619 (Sept. 17, 2014).
The updates to the rule were based on the
Commission’s authority to regulate unfair or
deceptive acts or practices.
157 Disclosure Requirements and Prohibitions
Concerning Franchising and Business Opportunity
Ventures, 43 FR 59614 (Dec. 21, 1978).
158 Teresa Moran Schwartz & Alice Saker Hrdy,
FTC Rulemaking: Three Bold Initiatives and Their
Legal Impact, 2–3 (Sept. 22, 2004).
159 U.S. to Require Health Warning for Cigarettes,
N.Y. Times (June 25, 1964) at 1, 15 (tobacco
industry indicating plans to immediately challenge
the Commission’s authority to issue the regulation),
https://www.nytimes.com/1964/06/25/archives/usto-require-health-warning-for-cigarettes-tradecommission-orders.html.
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by the tobacco industry,160 Congress
supplanted the Commission’s regulation
with the Cigarette Labeling and
Advertising Act but did not disturb the
Commission’s rulemaking authority.161
The Unavailability Rule was likewise
front-page news upon its release in
1971, and Congress left it intact.162
In National Petroleum Refiners
Association v. FTC (‘‘Petroleum
Refiners’’), the D.C. Circuit expressly
upheld the Octane Rule as a proper
exercise of the Commission’s power
under section 6(g) to make rules
regulating both unfair methods of
competition and unfair or deceptive acts
or practices.163 After construing ‘‘the
words of the statute creating the
Commission and delineating its
powers,’’ the court held ‘‘that under the
terms of its governing statute . . . and
under Section 6(g) . . . the Federal
Trade Commission is authorized to
promulgate rules defining the meaning
of the statutory standards of the
illegality the Commission is empowered
to prevent.’’ 164 That interpretation was
also ‘‘reinforced by the construction
courts have given similar provisions in
the authorizing statutes of other
administrative agencies.’’ 165 The
Seventh Circuit later agreed with the
D.C. Circuit’s decision and
‘‘incorporate[d] [it] by reference’’ when
rejecting a challenge to the Mail Order
Rule.166
Following such rulemakings and the
D.C. Circuit’s confirmation of the
Commission’s rulemaking power in
Petroleum Refiners, Congress in 1975
enacted a new section 18 of the FTC
160 Tobacco Inst., Tobacco—A Vital U.S. Industry
(1965), https://acsc.lib.udel.edu/exhibits/show/
legislation/cigarette-labeling.
161 Public Law 89–92, 79 Stat. 282 (July 27, 1965);
see 15 U.S.C. 1331 et seq.
162 FTC Bars Grocery Ads for Unavailable
Specials, N.Y. Times (May 13, 1971) at 1, https://
www.nytimes.com/1971/05/13/archives/f-t-c-barsgrocery-ads-for-unavailable-specials-bars-grocery;
16 CFR 424.1 and 424.2. The rule was amended
after its enactment in 1971 to add an exception and
defenses but otherwise remains intact as
promulgated. Amendment to Trade Regulation Rule
Concerning Retail Food Store Advertising and
Marketing Practices, 54 FR 35456–08 (Aug. 28,
1989); see also Retail Food Store Advertising and
Marketing Practices Rule, 79 FR 70053–01 (Nov. 25,
2014).
163 Nat’l Petroleum Refiners Ass’n v. FTC, 482
F.2d 672 (D.C. Cir. 1973).
164 Nat’l Petroleum Refiners, 482 F.2d at 674, 698;
see also Am. Fin. Servs. Ass’n v. FTC, 767 F.2d 957,
967 (D.C. Cir. 1985) (concluding, after extensive
review of the legislative history related to the FTC’s
rulemaking authority originating in 1914 and
extending through amendments to the FTC Act in
1980, that ‘‘Congress has not at any time withdrawn
the broad discretionary authority originally granted
the Commission in 1914 to define unfair practices
on a flexible, incremental basis.’’).
165 Nat’l Petroleum Refiners, 482 F.2d at 678.
166 United States v. JS & A Grp., Inc., 716 F.2d
451, 454 (7th Cir. 1983).
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Act. This new section introduced
special procedures, beyond those
required under the Administrative
Procedure Act, for promulgating rules
for unfair or deceptive acts or practices,
and it eliminated the Commission’s
authority to issue such rules under
section 6(g).167 But Congress pointedly
chose not to restrict the Commission’s
authority to promulgate rules regulating
unfair methods of competition under
section 6(g). That choice was deliberate.
While considering this legislation,
Congress knew that the Commission had
promulgated rules regulating unfair
methods of competition and that the
D.C. Circuit in Petroleum Refiners had
confirmed the Commission’s authority
to do so.168 And Congress expressly
considered—but rejected—an
amendment to the FTC Act under which
‘‘[t]he FTC would have been prohibited
from prescribing rules with respect to
unfair competitive practices.’’ 169
Instead, the enacted section 18
confirmed the Commission’s authority
to make rules under section 6(g). The
law expressly preserved ‘‘any authority
of the Commission to prescribe rules
(including interpretive rules), and
general statements of policy, with
respect to unfair methods of
competition in or affecting
commerce.’’ 170 Congress also made
clear that Section 18 ‘‘shall not affect
the validity of any rule which was
promulgated under section 6(g).’’ 171
And it provided that ‘‘[a]ny proposed
rule under section 6(g)’’ with certain
components that were ‘‘substantially
completed before’’ section 18’s
enactment ‘‘may be promulgated in the
same manner and with the same validity
as such rule could have been
promulgated had this section not been
enacted.’’ 172 Among the substantially
completed rules at the time was the
Mail Order Rule, which proposed to
define—and upon promulgation did
define—certain conduct as both an
unfair method of competition and an
unfair or deceptive act or practice.173
The 1975 legislation thus expressly
permitted the Commission to
promulgate a rule under section 6(g)
that defined an unfair method of
competition and evinces Congress’s
167 Magnuson-Moss Act, 88 Stat. 2183; see 15
U.S.C. 57a.
168 S. Rep. No. 93–151, at 32 (1973).
169 H.R. Conf. Rep. No. 93–1606, at 30 (1974).
170 15 U.S.C. 57a(a)(2).
171 Magnuson-Moss Act, 88 Stat. 2183.
172 Magnuson-Moss Act, 88 Stat. 2183.
173 See Undelivered Mail Order Merchandise and
Services, 36 FR 19092 (Sept. 28, 1971) (initial
NPRM); 39 FR 9201 (Mar. 8, 1974) (amended
NPRM); 40 FR 49492 (Oct. 22, 1975) (final
regulatory text).
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intent to leave in place the
Commission’s authority to promulgate
such rules under section 6(g). As the
Seventh Circuit later put it, ‘‘Congress
. . . considered the controversy
surrounding the Commission’s
substantive rulemaking power under
Section 6(g) to have been settled by the
Octane Rating case.’’ 174
Congress again confirmed the
Commission’s authority to promulgate
rules regulating unfair methods of
competition under section 6(g) when it
enacted section 22 of the FTC Act as
part of the Federal Trade Commission
Improvements Act of 1980.175 Section
22 imposes certain procedural
requirements the Commission must
follow when it promulgates any ‘‘rule.’’
Section 22(a) defines ‘‘rule’’ as ‘‘any rule
promulgated by the Commission under
section 6 or section 18’’ while excluding
from that definition ‘‘interpretive rules,
rules involving Commission
management or personnel, general
statements of policy, or rules relating to
Commission organization, procedure, or
practice.’’ 176 Thus, by its terms, section
22(a) demonstrates the 1980 Congress’s
understanding that the Commission
maintained authority to promulgate
rules under section 6 that are not merely
‘‘interpretive rules, rules involving
Commission management or personnel,
general statements of policy, or rules
relating to Commission organization,
procedure, or practice.’’ 177 Section 22
envisions rules that will have the force
of law as legislative rules and defines
‘‘rule’’ based on whether it may ‘‘have
an annual effect on the national
economy of $100,000,000 or more,’’
‘‘cause a substantial change in the cost
or price of goods or services,’’ or ‘‘have
a significant impact upon’’ persons and
consumers.178 Section 22(b) of the Act
similarly contemplates authority to
make legislative rules by imposing
regulatory analysis obligations on any
rules that the Commission promulgates
under section 6.179 The specific
obligations in section 22(b), such as the
requirement for the Commission to
conduct a cost-benefit analysis, assume
that section 6(g) authorizes substantive
and economically significant rules.
Both the 1975 and 1980 amendments
to the FTC Act thus indicate that
Congress understood the Commission
possessed rulemaking power under
section 6(g) and chose to leave that
174 United States v. JS & A Grp., 716 F.2d 451,
454 (7th Cir. 1983).
175 Public Law 96–252, 94 Stat. 374 (1980).
176 Id.; see 15 U.S.C. 57b–3(a)(1).
177 15 U.S.C. 57b–3(a)(1).
178 Id.
179 15 U.S.C. 57b–3(b).
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authority in place.180 As the Supreme
Court has observed, ‘‘[t]he long time
failure of Congress to alter’’ a statutory
provision, like section 6(g) here, ‘‘after
it had been judicially construed, and the
enactment by Congress of legislation
which implicitly recognizes the judicial
construction as effective, is persuasive
of legislative recognition that the
judicial construction is the correct
one.’’ 181 That is especially true when,
as here, ‘‘the matter has been fully
brought to the attention of the public
and the Congress, the latter has not seen
fit to change the statute.’’ 182 Were there
any doubt that the 1914 Congress
granted the Commission the authority to
make rules under section 6(g) to prevent
unfair methods of competition, the
Congresses of 1975 and 1980 eliminated
such doubt by ratifying the D.C.
Circuit’s decision holding that the
Commission has such authority.
38351
to promulgate the rule. The Commission
has considered these comments and
disagrees for the reasons explained
below.
1. The Commission’s Authority Under
the FTC Act
C. Comments and Responses Regarding
the Commission’s Legal Authority
The Commission received many
comments supporting, discussing, or
questioning its authority to promulgate
the final rule. Numerous commenters
supported that the Commission has
such authority, including, among others,
legal scholars and businesses.183 In
addition, hundreds of small
businesses—hailing from 45 States and
the District of Columbia—joined a
comment by the Small Business
Majority supporting the final rule.184
Commenters questioning the
Commission’s authority typically
advanced one of three arguments. First,
some commenters claimed the FTC Act
does not grant the Commission
authority to promulgate the rule.
Second, some commenters contended
that the validity of non-competes is a
major question that Congress has not
given the Commission the authority to
address. And third, some commenters
argued that Congress had impermissibly
delegated to the Commission authority
to promulgate nationwide rules
governing methods of competition. A
smaller number of comments asserted
other, miscellaneous reasons the
Commission allegedly lacked authority
The Commission received numerous
comments claiming that it lacks
authority under the FTC Act to
promulgate rules prohibiting unfair
methods of competition. The
Commission disagrees. Congress
expressly granted the Commission
authority to promulgate such rules in
the original FTC Act of 1914, Congress
enacted legislation in 1975 expressly
preserving that authority,185 and it
imposed requirements in 1980 that
presumed that authority.
The Commission is not persuaded by
commenters’ arguments in opposition to
its authority. For instance, some
commenters argued that Congress’s
choice to exclude certain industries
from the Commission’s jurisdiction
indicates that Congress did not intend to
give the Commission power to pass
rules that affect commerce across the
national economy.186 But Congress
expressly ‘‘empowered and directed’’
the Commission to prevent unfair
methods of competition throughout the
economy,187 in any activities ‘‘in or
affecting commerce,’’ subject only to
limited exceptions. The final rule will
apply only to the extent that the
Commission has jurisdiction under the
FTC Act. The Act does not limit the
Commission’s authority to pursue, for
example, industry-specific rulemaking.
Where Congress wished to limit the
scope of the Commission’s authority
over particular entities or activities, it
did so expressly, demonstrating its
intent to give the Commission broad
enforcement authority over activities in
or affecting commerce outside the scope
of the enumerated exceptions.188 That
section 22 of the FTC Act requires the
Commission to perform a regulatory
analysis for amendments to rules based
on, inter alia, ‘‘their annual effect on the
180 Congress has also amended section 6 since the
D.C. Circuit decided Petroleum Refiners, but it left
section 6(g) untouched. See Public Law 109–455,
120 Stat. 3372 (2006).
181 Apex Hosiery Co. v. Leader, 310 U.S. 469, 488
(1940).
182 Id. at 489.
183 See, e.g., Comment of Lev Menand et al., FTC–
2023–0007–20871; Comment of Peter Shane et al.,
FTC–2023–0007–21024; Comment of Yelp, FTC–
2023–0007–20974; Comment of Veeva Systems,
FTC–2023–0007–18078.
184 Comment of Sm. Bus. Majority, FTC–2023–
0007–21022.
185 Some commenters argued that the 1975
Magnuson-Moss Act, which created additional
procedures the Commission must use to promulgate
rules regulating unfair or deceptive acts or
practices, implies that the Commission entirely
lacks authority to promulgate rules regulating unfair
methods of competition. The Commission disagrees
with these comments and notes the effect of the
1975 legislation, which preserved the Commission’s
existing rulemaking authority.
186 E.g., Comment of Fed’n of Am. Hosps., FTC–
2023–0007–21034.
187 15 U.S.C. 45(a)(2).
188 15 U.S.C. 45(a)(2), (3).
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national economy’’ confirms the
same.189
Other commenters argued that the
Commission is relying on vague or
ancillary provisions for its authority and
invoked the familiar refrain that
Congress ‘‘does not . . . hide elephants
in mouseholes.’’ 190 None of the
provisions on which the Commission is
relying are either vague or ancillary. As
explained earlier, preventing unfair
methods of competition is at the core of
the Commission’s mandate, the plain
text of the Act gives the Commission
rulemaking authority to carry out that
mandate, and the Commission has
exercised this rulemaking authority
before.191 The D.C. Circuit and Seventh
Circuits have upheld that exercise of
authority, and Congress preserved this
authority in subsequent amendments to
the Act following the D.C. Circuit’s
decision.192
Additional commenters cited select
legislative history from the 1914 FTC
Act to suggest the Commission lacks
authority to promulgate rules regulating
competition.193 ‘‘[T]here is no reason to
resort to legislative history’’ when, as
here, the text of the statute speaks
plainly.194 Even if that were not the
case, however, the legislative history
does not unambiguously compel a
different conclusion. Faced with similar
arguments to those raised by
commenters here, in National Petroleum
Refiners, the D.C. Circuit conducted an
exhaustive review of the 1914 FTC Act
and concluded ‘‘the legislative history
of section 5 and Section 6(g) is
ambiguous’’ and ‘‘certainly does not
compel the conclusion that the
Commission was not meant to exercise
the power to make substantive rules
with binding effect[.]’’ 195 As the D.C.
Circuit explained, even individual
statements by some Congresspeople that
might suggest otherwise,196 when
properly contextualized, ‘‘can be read to
189 15 U.S.C. 57b–3 (outlining requirements of the
Commission’s rulemaking process for new rules and
amendments); see also Part II.E (discussing the
Commission’s jurisdiction).
190 Whitman v. Am. Trucking Ass’ns, 531 U.S.
457, 468 (2001); see, e.g., Comment of La. And 12
Other States, FTC–2023–0007–21094.
191 See Part II.B (discussing the Commission’s
history of using section 6(g) to promulgate rules).
192 Id.
193 E.g., Comment of Nat’l Ass’n of Mfrs., FTC–
2023–0007–20939; Comment of La. And 12 Other
States, FTC–2023–0007–21094.
194 United States v. Gonzales, 520 U.S. 1, 6
(1997).
195 Nat’l Petroleum Refiners Ass’n v. FTC, 482
F.2d 672, 686 (D.C. Cir. 1973).
196 Id. at 704; see also, e.g., Comment from La.
and 12 Other States, FTC–2023–0007–21094
(identifying statements and failed bills that, the
commenters say, show the Commission was not
intended to possess rulemaking authority).
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support substantive rule-making of the
kind asserted by the’’ Commission.197
Statements from the enactment of the
1975 Magnuson Moss Act, which added
section 18 to the FTC Act, confirm the
Commission’s authority to promulgate
rules under section 6(g). That legislative
history reveals Congress in 1975 made
a considered decision to reject an effort
to overturn the D.C. Circuit’s
interpretation of the FTC Act and
instead confirmed that section 6(g)
authorizes the Commission to
promulgate legislative rules concerning
unfair methods of competition.198 More
importantly, these sorts of individual
statements cannot trump the plain text
of the Act that Congress passed,199
which gave the Commission the
authority ‘‘to make rules and regulations
for the purpose of carrying out the
provisions’’ of the FTC Act. Indeed,
even if the legislative history were to be
selectively read to cut against the
Commission’s authority, the
Commission would still conclude that
section 6(g) confers authority to
promulgate this final rule because the
plain text of the statute (including both
the original 1914 Act and subsequent
enacted amendments to the FTC Act)
unambiguously confers that authority.
In short, neither the legislative history
of the FTC Act, nor any of the other
arguments commenters raised about the
Commission’s rulemaking authority
overcome the plain meaning of the Act
or Congress’s ratification of the
Commission’s power to make rules
197 Nat’l
Petroleum Refiners, 482 F.2d at 709.
example, while the Senate was
considering amendments to the FTC Act, Senator
Hart read excerpts of Nat’l Petroleum Refiners into
the record. See 120 Cong. Rec. 40712 (Dec. 18,
1974). These short excerpts included the court
acknowledging that it was considering whether the
Commission ‘‘is empowered to promulgate
substantive rules’’ that would ‘‘give greater
specificity and clarity to the broad standard of
illegality—‘unfair methods of competition’ . . .—
which the agency is empowered to prevent.’’ Id.
(quoting Nat’l Petroleum Refiners, 482 F.2d at 673).
Senator Hart then explained that the ‘‘procedural
requirements . . . respecting FTC rulemaking’’ in
the bill under consideration ‘‘are limited to unfair
or deceptive acts or practices rules.’’ Id. ‘‘These
provisions and limitations,’’ he explained, ‘‘are not
intended to affect the Commission’s authority to
prescribe and enforce rules respecting unfair
methods of competition.’’ Id. ‘‘Rules respecting
unfair methods of competition,’’ Senator Hart said,
‘‘should continue to be prescribed in accordance
with’’ the APA. Id.; see also Comment of Lev
Menand et al., FTC–2023–0007–20871 at 3–6
(recounting legislative history that preceded the
1975 amendments to the FTC Act).
199 See Barnhart v. Sigmon Coal Co., 534 U.S.
438, 457 (2002) (‘‘Floor statements from two
Senators [who were sponsors of the bill] cannot
amend the clear and unambiguous language of a
statute.’’).
198 For
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preventing unfair methods of
competition, as discussed in Part II.B.200
The Commission acknowledges that
individual members of the Commission
have, at times, disclaimed the
Commission’s authority to promulgate
rules regulating unfair methods of
competition.201 The statement of an
individual Commissioner does not
reflect the views of or bind ‘‘[t]he
Commission itself,’’ which has
concluded—just as it did when it issued
such rules in the past—that it does
possess such authority.202 In any event,
the Commission has reviewed these
statements, along with the many
comments it received, and does not
believe any of the arguments raised in
support of that position overcome the
plain meaning of the FTC Act
provisions.
2. Major Questions Doctrine
Many commenters assert that the
Commission lacks the authority to adopt
the final rule based on the major
questions doctrine. That doctrine, as the
Supreme Court recently explained in
West Virginia v. EPA, ‘‘teaches that
there are extraordinary cases . . . in
which the history and the breadth of the
authority that the agency has asserted,
and the economic and political
significance of that assertion, provide a
reason to hesitate before concluding that
Congress meant to confer such
authority.’’ 203 In such cases,
‘‘something more than a merely
plausible textual basis for the agency
action is necessary. The agency instead
must point to clear congressional
authorization for the power it
claims.’’ 204 Having considered the
factors that the Supreme Court has used
to identify major questions, the
Commission concludes that the final
rule does not implicate the major
questions doctrine. And even if that
doctrine did apply, the Commission
concludes that Congress provided clear
authorization for the Commission to
promulgate this rule.205
200 This includes arguments about the legislative
intent, structure, or post-enactment history of the
1914 FTC Act.
201 See, e.g., Nat’l Petroleum Refiners, 482 F.2d at
695–96 & n. 32, 38–39; NPRM at 3544 (dissenting
statement of Commissioner Wilson).
202 Nat’l Petroleum Refiners, 482 F.2d at 694; see
also 16 CFR 4.14(c) (‘‘Commission action’’ requires
‘‘the affirmative concurrence of a majority of the
participating Commissioners’’).
203 W. Va. v. EPA, 597 U.S. 697, 721 (2022)
(cleaned up).
204 Id. at 723 (cleaned up).
205 The Commission notes that some commenters
either implicitly or explicitly focused on the
Commission’s rulemaking authority, as opposed to
the Commission’s authority to define non-competes
as an unfair method of competition, as a major
question. The Commission has already addressed
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The agency authority underlying this
final rule rests on firm historical footing.
There is nothing novel about the
Commission’s assertion of authority to
promulgate legislative rules under
section 6(g).206 As explained in Part II.B,
the Commission has used this authority
for more than 60 years to promulgate
many rules defining unfair methods of
competition and/or unfair or deceptive
acts or practices.207 The Commission’s
use of this power sometimes garnered
significant attention, such as when it
made national news by requiring
cigarette warnings in the immediate
wake of the Surgeon General’s
groundbreaking report on the health
effects of smoking.208 And the
Commission’s rulemaking authority was
long ago ‘‘addressed’’—and affirmed—
‘‘by a court.’’ 209 Moreover, after that
high-profile rulemaking and judicial
affirmation, Congress considered—and
twice reaffirmed—the Commission’s
authority to issue legislative rules
defining unfair methods of competition
under section 6(g).210 Indeed, even
when Congress decided to displace the
FTC’s Cigarette Rule with legislation, it
left the Commission’s rulemaking
authority in place.211 Likewise, when
Congress added procedural steps the
Commission must take when
promulgating rules concerning unfair or
deceptive acts or practices, it expressly
allowed the Commission to complete
certain ongoing rulemakings, including
one that relied on section 6(g) to define
an unfair method of competition.212
This is not a situation where Congress
‘‘conspicuously and repeatedly’’
declined to grant the agency the claimed
power.213
Nor does the substance of the rule
represent any departure from the
the source of its rulemaking authority, see Part II.B.
But to be clear, the Commission concludes that
neither its rulemaking authority under section 6(g)
nor its authority to use that power to define noncompetes as an unfair method of competition
implicates the major questions doctrine, and that
even assuming either did, Congress has provided
express statutory authority for both.
206 W. Va. v. EPA, 597 U.S. at 725.
207 See Part II.B (discussing the Commission’s
history of promulgating rules under section 6(g)).
208 See Part II.B (discussing Cigarette Rule and
Holder Rule); see also ‘‘U.S. to Require Health
Warning for Cigarettes,’’ N.Y. Times (June 25, 1964)
at 1, 15 (tobacco industry indicating plans to
immediately challenge the Commission’s authority
to issue the regulation).
209 W. Va. v. EPA, 597 U.S. at 725; see Part II.B
(discussing decisions from the D.C. Circuit and
Seventh Circuit affirming the Commission’s
rulemaking power under section 6(g)).
210 See Part II.B (discussing the history and
content of sections 18 and 22 of the FTC Act).
211 See Federal Cigarette Labeling and Advertising
Act, Public Law 89–92, 79 Stat. 282 (July 27, 1965).
212 15 U.S.C. 57a(a)(2); see Part II.B (discussing
the Mail Order Rule).
213 W. Va. v. EPA, 597 U.S. at 724.
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Commission’s past practices. Since its
establishment in 1914, the Commission
has had the authority to determine
whether given practices constitute
unfair methods of competition. Rather
than trying to define all the many and
varied practices that are unfair,
Congress empowered the Commission to
respond to changing market conditions
and to bring specialized expertise to
bear when making unfairness
determinations.214 As noted in Part I.B,
the Commission has previously secured
consent orders premised on the use of
non-competes being an unfair method of
competition,215 and there is little
question that the Commission has the
authority to determine that noncompetes are unfair methods of
competition through adjudication.216
Indeed, one commenter who asserted
the rule would violate the major
questions doctrine expressly agreed that
the Commission could determine that a
specific non-compete is an unfair
method of competition through case-bycase adjudication.217 The Commission is
making the same kind of determination
here through rulemaking rather than
adjudication.218 And because the
rulemaking process allows all interested
parties a chance to weigh in, this
process ‘‘may actually be fairer to
parties than total reliance on case-bycase adjudication.’’ 219 This is thus not
a situation where the agency’s action
would fundamentally change the nature
of the regulatory scheme. Determining
whether a practice is an ‘‘unfair method
of competition’’ under section 5 has
been a core task of the Commission for
more than a century—and, indeed, goes
to the heart of its mandate.
Additionally, non-competes have
already been the subject of FTC scrutiny
and enforcement actions, so subjecting
214 See, e.g., FTC v. R.F. Keppel & Bro., 291 U.S.
304, 311 n.2, 314 (1934).
215 In those orders, the party agreed, inter alia, to
cease and desist from enforcing or attempting to
enforce existing non-competes and from entering
into or attempting to enter into new ones, and also
agreed to provide notice to affected employees that
they are no longer subject to a non-compete. See
Part I.B n.42–44 (citing recent Commission
investigations and consent orders involving noncompetes).
216 To the extent that any commenters argued the
Commission lacked authority over the entire subject
matter of non-compete agreements, the Commission
did not see any compelling explanation that an
agreement not to compete falls outside the meaning
of a ‘‘method of competition.’’
217 Comment of Int’l Ctr. For L. & Econs., FTC–
2023–0007–20753, at 75–76.
218 Nat’l Petroleum Refiners Ass’n v. FTC, 482
F.2d 672 at 685 (D.C. Cir. 1973) (recognizing that
the Commission may ‘‘choose[ ]to elaborate’’ section
5’s ‘‘comprehensive statutory standards through
rule-making or through case-by-case adjudication’’).
219 Id. at 681; see generally Part IX.C.2 (discussing
the value of rulemaking).
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them to rulemaking is a more
incremental—and thus less significant—
step than it would be for an agency to
wade into an area not currently subject
to its enforcement authority. And the
present rulemaking is consistent with
both Congress’s intent for the
Commission and the Commission’s
prior practice. Congress ‘‘empowered
and directed’’ the Commission ‘‘to
prevent persons, partnerships, or
corporations’’ within the Commission’s
jurisdiction ‘‘from using unfair methods
of competition in or affecting
commerce.’’ 220 Following that directive,
the Commission has previously used its
section 6(g) authority to promulgate
rules that reach industries across the
economy. For example, the Mail Order
Rule placed restrictions on any sale
conducted by mail,221 and the Negative
Option Rule requires certain disclosures
for some negative option plans. These
rules—promulgated nearly 50 or more
years ago—applied across the industries
within the FTC’s jurisdiction, yet no
court has held that they exceeded the
Commission’s authority.222 Indeed, the
Seventh Circuit upheld the Mail Order
Rule as a valid exercise of that
authority.223
Congress itself recognized that the
Commission’s authority will sometimes
affect firms across the economy. Indeed,
addressing unfair methods of
competition and unfair and deceptive
practices across industries (other than
the industries, activities, or entities
Congress expressly exempted) is the
core of the Commission’s mandate—and
the Commission has long pursued that
mandate through both rulemaking 224
and adjudication.225 Congress imposed
220 15
U.S.C. 45(a)(2).
Order Merchandise, 40 FR 49492 (Oct.
22, 1975); see 16 CFR part 435.
222 See Part II.B (listing rules promulgated by the
FTC exercising authority under sections 5 and 6(g)).
223 United States v. JS & A Grp., 716 F.2d 451,
454 (7th Cir. 1983).
224 See Part II.B.
225 The Commission’s adjudicatory power, like its
rulemaking power, stretches across the national
economy. For instance, the Commission has found
companies in a variety of industries participated in
price-fixing conspiracies that violated section 5 and
ordered them to cease and desist from such
practices following an adjudication. See, e.g.,
Eugene Dietzgen Co. v. FTC, 142 F.2d 321 (7th Cir.
1944) (scientific instruments); U.S. Maltsters Ass’n
v. FTC, 152 F.2d 161 (7th Cir. 1945) (malt
manufacturers); Keasbey & Mattison Co. v. FTC, 159
F.2d 940 (6th Cir. 1947) (asbestos insulation); Allied
Paper Mills v. FTC, 168 F.2d 600 (7th Cir. 1948)
(book paper manufacturers); Bond Crown & Cork.
Co. v. FTC, 176 F.2d 974 (4th Cir. 1949) (bottle cap
manufacturers). Price-fixing is just one example.
The Commission’s adjudicatory power also
supported a cease-and-desist order concerning a
food manufacturer’s resale practices more than 100
years ago. FTC v. Beech-Nut Packing, 257 U.S. 441
(1922). And it supported a cease-and-desist order
221 Mail
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certain requirements in section 22 on
any amendment to a Commission rule
promulgated under section 6 (or section
18) that would have certain substantial
effects on the national economy, the
price of goods or services, or regulated
entities and consumers.226 Congress
thus anticipated—and intended—that
the Commission’s rulemaking power
carried the potential to affect the
economy in considerable ways, and
Congress already considered and
specified the necessary steps and checks
to ensure the Commission’s exercise of
that power is appropriate. For all these
reasons, the final rule does not involve
a ‘‘major question’’ as the Supreme
Court has used that term.
Even if the final rule does present a
major question, the final rule passes
muster because the FTC Act provides
clear authorization for the Commission’s
action. In cases involving major
questions, courts expect Congress to
‘‘speak clearly’’ if it wishes to assign the
disputed power.227 Congress did so
when it ‘‘declared unlawful’’ in the FTC
Act ‘‘[u]nfair methods of competition’’
and empowered the Commission ‘‘to
make rules and regulations for the
purpose of carrying out the provisions
of th[e] Act.’’ 228 Congress ‘‘[i]n large
measure’’ left ‘‘the task of defining
‘unfair methods of competition’ . . . to
the Commission.’’ 229 That is precisely
what the Commission has done here, for
the reasons elaborated in Part IV.
Finally, there is no doubt that the
Commission has expertise in the field
(competition) it is regulating here.230
For these reasons, even if the final rule
involves a major question, Congress has
within the past few years enjoining a
pharmaceutical company from entering into reverse
payment settlement schemes. Impax Labs., Inc. v.
FTC, 994 F.3d 484 (5th Cir. 2021). In the century
between, the Commission has found section 5
violations based on false advertising, monopoly
maintenance, exclusive dealing, and more in
diverse sectors throughout the country.
226 15 U.S.C. 57b–3; see also Part II.B.
227 W. Va. v. EPA, 597 U.S. 697, 716, 723 (2002).
228 FTC Act of 1914, 38 Stat. at 721–22; see 15
U.S.C. 45(a), 46(g); see also Part II.A (discussing the
Commission’s rulemaking authority).
229 FTC v. Texaco, Inc., 393 U.S. 223, 225 (1968).
230 Cf. W. Va. v. EPA, 597 U.S. at 729 (noting the
Court’s view that the EPA had traditionally lacked
the expertise needed to develop the rule at issue);
Ala. Ass’n of Realtors v. HHS, 594 U.S. 758, at 764–
65 (2021) (questioning the link between the Center
for Disease Control and an eviction moratorium);
see also Part II.A (discussing Congress’s creation of
the Commission as an expert body); Parts IV.B and
IV.C (discussing the rationale for the rule and
explaining the negative effects non-competes have
on competition). The Commission also notes that
through, inter alia, the roundtables and
enforcement actions described in Part I.B, and
through this rulemaking process, it has acquired
expertise on non-competes specifically. The
Commission further notes that non-competes are,
inherently, a method of competition.
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clearly delegated to the Commission the
authority to address that question.
3. Non-Delegation Doctrine
Some commenters also objected that
Congress violated the non-delegation
doctrine by empowering the
Commission to promulgate rules
regulating unfair methods of
competition. The Commission disagrees.
The non-delegation doctrine provides
that ‘‘Congress generally cannot delegate
its legislative power to another
Branch.’’ 231 But the Constitution does
not ‘‘prevent Congress from obtaining
the assistance of its coordinate
Branches.’’ 232 ‘‘So long as Congress
shall lay down by legislative act an
intelligible principle to which the
person or body authorized to [exercise
the delegated authority] is directed to
conform, such legislative action is not a
forbidden delegation of legislative
power.’’ 233 Applying this rule, the
Supreme Court has ‘‘over and over
upheld even very broad delegations’’
including those directing agencies ‘‘to
regulate in ‘the public interest,’ . . . to
set ‘fair and equitable’ prices and ‘just
and reasonable’ rates,’’ and ‘‘to issue
whatever air quality standards are
‘requisite to protect the public
health.’ ’’ 234 ‘‘The Supreme Court has’’
also ‘‘explained that the general policy
and boundaries of a delegation ‘need not
be tested in isolation’ ’’ and ‘‘[i]nstead,
the statutory language may derive
content from the ‘purpose of the Act, its
factual background and the statutory
context in which they appear.’ ’’ 235
Here, Congress ‘‘declared unlawful’’
any ‘‘unfair methods of competition in
or affecting commerce’’ and
‘‘empowered and directed’’ the
Commission ‘‘to prevent’’ entities
within its jurisdiction ‘‘from using
unfair methods of competition.’’ 236
Congress also instructed the
Commission to ‘‘make rules and
regulations for the purpose of carrying
out the provisions’’ of the FTC Act.237
Congress’s stated purpose and policy in
section 5 provides the Commission with
231 Mistretta v. United States, 488 U.S. 361, 372
(1989).
232 Id.
233 Id. (alteration in original).
234 Gundy v. United States, 139 S. Ct. 2116, 2121
(2019) (citing Nat’l Broadcasting Co. v. United
States, 319 U.S. 190, 216 (1943); N.Y. Cent. Secs.
Corp. v. United States, 287 U.S. 12, 24 (1932);
Yakus v. United States, 321 U.S. 414, 422 (1944);
Fed. Power Comm’n v. Hope Natural Gas Co., 320
U.S. 591 (1944); and Whitman v. Am. Trucking
Ass’ns, 531 U.S. 457, 472 (2001)).
235 TOMAC, Taxpayers of Mich. Against Casinos
v. Norton, 433 F.3d 852, 866 (D.C. Cir. 2006)
(quoting Am. Power & Light Co. v. SEC, 329 U.S.
90, 104 (1946)).
236 15 U.S.C. 45(a)(1)–(2).
237 15 U.S.C. 46(g).
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an intelligible principle to guide its
section 6(g) rulemaking authority.238
Were there any doubt, the Supreme
Court has laid it to rest in A.L.A.
Schechter Poultry Corp. v. United
States.239 Schechter Poultry marked one
of two occasions ‘‘in this country’s
history’’ that the Supreme Court ‘‘found
a delegation excessive,’’ and ‘‘in each
case . . . Congress had failed to
articulate any policy or standard to
confine discretion.’’ 240 The Court
offered the FTC Act, however, as a
counterexample of proper Congressional
delegation. The Court recognized that
the phrase ‘‘unfair methods of
competition’’ in the FTC Act was ‘‘an
expression new in the law’’ without
‘‘precise definition,’’ but that Congress
had empowered the Commission to
‘‘determine[ ] in particular instances,
upon evidence, in the light of particular
competitive conditions and of what is
found to be a specific and substantial
public interest’’ whether a method of
competition is unfair.241 The FTC Act
stood in contrast, the Court explained,
to the National Industrial Recovery Act
(‘‘NIRA’’), which the Court held
included an unconstitutional
delegation.242
The Commission recognizes that
Schechter Poultry approved of the FTC
Act’s adjudicatory process for
determining unfair methods of
competition without commenting on the
Act’s rulemaking provision. But the
‘‘unfair method of competition’’
authority the Court approvingly cited in
Schechter Poultry is the same
intelligible principle the Commission is
applying in this rulemaking. And just as
the adjudication process provides for a
‘‘formal complaint, for notice and
hearing, for appropriate findings of fact
supported by adequate evidence, and for
judicial review,’’ 243 the APA
rulemaking process provides for a
public notice of proposed rulemaking,
the opportunity to ‘‘submi[t] . . .
written data, views, or arguments,’’
agency consideration of those
comments, and judicial review.244 If
Congress may permissibly delegate the
238 As the D.C. Circuit noted in Nat’l Petroleum
Refiners Ass’n v. FTC, ‘‘the Supreme Court has
ruled that the powers specified in Section 6 do not
stand isolated from the Commission’s enforcement
and law applying role laid out in Section 5.’’ 482
F.2d 672, 677 (D.C. Cir. 1973) (citing United States
v. Morton Salt Co., 338 U.S. 632 (1950)).
239 A.L.A. Schechter Poultry Corp. v. United
States, 295 U.S. 495 (1935).
240 Gundy, 588 U.S. at 2129 (internal quotation
omitted); cf. also Panama Refin. Co. v. Ryan, 293
U.S. 388 (1935) (finding impermissible delegation).
241 Schechter Poultry, 295 U.S. at 532–33.
242 Id. at 529–42.
243 Id. at 533.
244 5 U.S.C. 553, 702.
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authority to determine through
adjudication whether a given practice is
an unfair method of competition, it may
also permit the Commission to do the
same through rulemaking.245
For these reasons, the Commission
concludes that its authority to
promulgate rules regulating unfair
methods of competition is not an
impermissible delegation of legislative
authority.
4. Other Challenges to the Commission’s
Authority
Finally, a handful of comments raised
other, miscellaneous arguments
contending that the Commission lacks
authority to promulgate the rule. The
Commission has reviewed and
considered these comments and
concludes they do not undercut the
Commission’s authority to promulgate
the final rule.
The Commission received several
comments about the Commerce Clause.
That clause allows Congress ‘‘to regulate
Commerce with foreign Nations, and
among the several States, and with the
Indian tribes.’’ 246 Consistent with that
clause, the FTC Act empowers the
Commission to prevent unfair methods
of competition ‘‘in or affecting
commerce,’’ which the Act also defines
consistently with the Constitution.247
One commenter wrote to support the
rule and emphasized that non-competes
restrict the free flow of interstate
commerce. Others argued that the
proposed rule would violate the
Commerce Clause by regulating local
commerce. The Commission has
considered these comments and
concludes that it may promulgate the
final rule consistent with the Commerce
Clause. The final rule extends to the full
extent of the FTC’s jurisdiction, which
in turn extends no further than the
Commerce Clause permits. As the
Supreme Court has explained, the
phrase ‘‘in or affecting commerce’’ in
section 5 of the FTC Act is ‘‘coextensive
with the constitutional power of
Congress under the Commerce
Clause.’’ 248 In this final rule, the
Commission finds the use of non-
competes by employers substantially
affects commerce as that term is defined
in the FTC Act. The final rule is
therefore a lawful exercise of Congress’s
delegated power.249
Relatedly, one commenter objected
that the rule would violate the Tenth
Amendment, which provides that ‘‘[t]he
powers not delegated to the United
States by the Constitution, nor
prohibited by it to the States, are
reserved to the States respectively, or to
the people.’’ 250 But as just explained,
the Constitution grants Congress the
power to regulate interstate commerce,
and pursuant to that power Congress
granted the Commission authority to
prevent unfair methods of competition
in or affecting commerce. The
Commission is not intruding on any
power reserved to the States.
Some commenters objected that the
rule infringes on the right to contract.
One of these commenters acknowledged
that the Constitution’s Contracts Clause
does not apply to the Federal
government.251 Regardless, even
assuming the Constitution protects a
right to contract that can be asserted
against a Federal regulation, that right
sounds in substantive due process, and
the Commission must offer only a
rational basis for the rule.252 As relevant
here, the final rule advances the
Commission’s congressional mandate to
prevent unfair methods of competition
and will promote competition and
further innovation among its many
benefits.253 There is a rational
relationship between regulating noncompetes and these legitimate
government purposes.
One commenter argued that the
proposed rule was unconstitutionally
vague. This commenter’s objection
focused on the proposed provision
governing de facto non-competes. The
Commission is not adopting that
proposed language in the final rule.
Instead, the Commission has clarified
the scope of its definition of noncompete clause. Whether a specific
clause falls within the scope of the final
rule will necessarily depend on the
precise language of the agreement at
245 Nat’l Petroleum Refiners Ass’n v. FTC, 482
F.2d 672, 685 (D.C. Cir. 1973); cf. SEC v. Chenery
Corp., 332 U.S. 194, 202–03 (1947) (‘‘Some
principles must await their own development,
while others must be adjusted to meet particular,
unforeseeable situations. In performing its
important functions in these respects, therefore, an
administrative agency must be equipped to act
either by general rule or by individual order. To
insist upon one form of action to the exclusion of
the other is to exalt form over necessity.’’).
246 U.S. Const. art. I, sec. 8, cl. 3.
247 15 U.S.C. 44, 45(a)(1).
248 United States v. Am. Bldg. Maintenance
Indus., 422 U.S. 271, 277, n.6 (1975).
249 See Nat’l Fed’n of Indep. Bus. v. Sebelius, 567
U.S. 519, 549 (2012) (‘‘Congress’s power’’ under the
Commerce Clause ‘‘is not limited to regulation of
an activity that by itself substantially affects
interstate commerce, but also extends to activities
that do so only when aggregated with similar
activities of others.’’); see also Part I.B.2 (discussing
prevalence of non-competes) and Part IX.C.2
(addressing the need for a nationwide regulation
prohibiting non-competes).
250 U.S. Const. amend. X.
251 See U.S. Const. art. I, sec. 10, cl. 1.
252 See, e.g., L & H Sanitation, Inc. v. Lake City
Sanitation, Inc., 769 F.2d 517, 522 (8th Cir. 1985).
253 See Parts IV.B and IV.C, Part X.F.6.
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issue, but the text of the final rule
provides regulated parties with
sufficient notice of what the law
demands to satisfy any due process
vagueness concerns.
D. Compliance With the Administrative
Procedure Act (‘‘APA’’)
Some commenters also contended
that the Commission has not complied
with the Administrative Procedure Act
(‘‘APA’’).254 At a high level, the APA
requires prior public notice, an
opportunity to comment, and
consideration of those comments before
an agency can promulgate a legislative
rule.255 The Commission has engaged in
that process, which has led to this final
rule and the accompanying explanation.
Some comments failed to recognize the
NPRM was a preliminary step that did
not fossilize the Commission’s
consideration of arguments or weighing
of evidence. Moreover, the APA ‘‘limits
causes of action under the APA to final
agency action.’’ 256 It is this final rule,
not the NPRM, that constitutes final
agency action. Before adopting this final
rule, the Commission reviewed and
considered all comments received. In
many instances, the Commission has
made changes relative to the proposed
rule to address concerns that
commenters raised. In all cases,
however, the Commission has complied
with the APA.
E. The Commission’s Jurisdiction Under
the FTC Act
The Commission’s jurisdiction
derives from the FTC Act. Employers
that are outside the Commission’s
jurisdiction under the FTC Act are not
subject to the final rule. The
Commission clarifies in the definition of
person in § 910.1, that the rule applies
only to those within the Commission’s
jurisdiction. Some commenters sought a
more detailed accounting of the
254 This includes, for example, a commenter who
argued that the NPRM was not the product of
reasoned decision-making, asserting that the
Commission had failed to consider key aspects of
the rule or misconstrued evidence; commenters
who argued that the rule was arbitrary and
capricious for failing to consider less restrictive
alternatives; commenters who argued that the
NPRM failed to consider State policy or that the
Commission would be acting arbitrarily by not
passing a uniform rule; and commenters who
argued that the Commission had failed to consider
reliance interests. The Commission has addressed
the concerns underlying these comments in other
parts of this statement of basis and purpose.
255 5 U.S.C. 553; see also Elec. Priv. Info. Ctr. v.
DHS, 653 F.3d 1, 5 (D.C. Cir. 2011) (APA ‘‘generally
require[s] an agency to publish notice of a proposed
rule in the Federal Register and to solicit and
consider public comments upon its proposal.’’).
256 Trudeau v. FTC, 456 F.3d 178, 188–89 (D.C.
Cir. 2006) (internal quotation marks omitted); see 5
U.S.C. 704.
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Commission’s jurisdiction under the
FTC Act. The Commission addresses
those comments in this section.
Comments seeking an exclusion for
entities within the Commission’s
jurisdiction are addressed in Parts V.D.3
and V.D.4.
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1. Generally
Certain entities that would otherwise
be subject to the final rule may fall
outside the FTC’s jurisdiction under the
FTC Act. The FTC Act exempts certain
entities or activities from the
Commission’s enforcement jurisdiction,
which otherwise applies to ‘‘persons,
partnerships, or corporations.’’ 257 For
example, the Act exempts ‘‘banks’’ and
‘‘persons, partnerships, or corporations
insofar as they are subject to the Packers
and Stockyards Act.’’ 258 And the Act
excludes from its definition of
‘‘corporation’’ any entity that is not
‘‘organized to carry on business for its
own profit or that of its members.’’ 259
The NPRM explained that, where an
employer is exempt from coverage
under the FTC Act, the employer would
not be subject to the rule.260 The NPRM
also explained State and local
government entities—as well as some
private entities—may not be subject to
the rule when engaging in activity
protected by the State action
doctrine.261 Some commenters stated
that the Commission should restate,
clarify, interpret, or limit the reach of its
authority under the FTC Act in the rule.
In response, the Commission explains
that the final rule extends to covered
persons that are within the
Commission’s jurisdiction. The
Commission does not believe restating
or further specifying each jurisdictional
limit in the final rule’s text is necessary;
the FTC Act defines the limits of the
Commission’s jurisdiction and those
limits govern this rule. Moreover, the
Commission cannot here provide
guidance that applies to every fact and
circumstance. Whether an entity falls
under the Commission’s jurisdiction can
be a fact-specific determination. An
attempt by the Commission to capture
all potential interpretations of the laws
governing exclusions from the FTC Act
may create confusion rather than clarity.
In response to commenters who asked
the Commission to affirm that the final
rule does not bind agencies that regulate
firms outside the Commission’s
257 15 U.S.C. 45(a)(2); see also FTC v. AT&T
Mobility LLC, 883 F.3d 848, 853–56 (9th Cir. 2018)
(en banc).
258 15 U.S.C. 45(a)(2).
259 15 U.S.C. 44.
260 NPRM at 3510.
261 Id. (citing Parker v. Brown, 317 U.S. 341, 350–
51 (1943)).
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jurisdiction under the FTC Act, the
Commission affirms that the
Commission applies the final rule only
to entities that are covered by the FTC
Act.262
A State government agency
commenter suggested that the
Commission explicitly exempt State and
local governments from the rule. The
commenter pointed to conflicts-ofinterest policies used by some State
agencies to preclude former employees
from working on related projects or jobs
in the private sector, which the
commenter stated do not implicate the
policy concerns the FTC seeks to
address in the rule. The commenter also
noted the complexity of when the
Commission’s jurisdiction might extend
to State and local governments. The
Commission clarifies in the definition of
‘‘person’’ in § 910.1 that the final rule
applies only to a legal entity within the
Commission’s jurisdiction. The
Commission also explains in Part III.E
that the definition of ‘‘person’’ is
coextensive with the Commission’s
authority to issue civil investigative
demands. Nothing in this rule changes
the extent of the Commission’s
jurisdiction over State and local
governments. The Commission declines
to specify all circumstances under
which a governmental entity or quasigovernmental entity would or would not
be subject to the Commission’s
jurisdiction and, thus, this final rule. In
any event, with respect to the
government ethics policies referenced
by the commenter, to the extent the
commenter is referring to traditional
‘‘cooling off’’ policies that preclude
former government employees from
working on discrete, specific projects
that fell within the scope of their former
official governmental position to
address ethical concerns, such policies
would not meet the definition of ‘‘noncompete clause’’ in § 910.1 because they
do not prohibit, penalize or function to
prevent a worker from switching jobs or
starting a new business.
262 For example, a few community bank
commenters expressed concern that because the
Federal Deposit Insurance Corporation (‘‘FDIC’’)
can enforce the FTC Act against banks, the rule
could be applied by the FDIC to banks. The FTC
Act is the Commission’s organic statute, and
interpretive authority of the FTC Act rests with the
Commission. Whether other agencies enforce
section 5 or apply the rule to entities under their
own jurisdiction is a question for those agencies. At
the same time, as discussed in this Part II.E.1, the
Commission applies and enforces the rule only to
the extent of its jurisdiction.
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2. Jurisdiction Over Entities Claiming
Nonprofit Status Under the FTC Act or
the Internal Revenue Code
Commenters from the healthcare
industry argued that the Commission
should restate, clarify, interpret, or limit
the reach of its authority under the FTC
Act specifically for the healthcare
industry. They pointed to the
prevalence of healthcare organizations
registered under section 501(c) of the
Internal Revenue Code claiming taxexempt status as nonprofits.
Commenters contended that these
organizations are categorically outside
the Commission’s authority under the
FTC Act. In fact, under existing law,
these organizations are not categorically
beyond the Commission’s jurisdiction.
To dispel this misunderstanding, the
Commission summarizes the existing
law pertaining to its jurisdiction over
non-profits.
a. Comments Received
Business and trade industry
commenters from the healthcare
industry, including, for example,
hospitals, physician practices, and
surgery centers, focused on whether the
Commission has jurisdiction over
nonprofit organizations registered under
section 501(c)(3) of the Internal Revenue
Code in light of the FTC Act’s definition
of ‘‘corporation.’’ Section 501(c)(3)
exempts from taxation certain religious,
charitable, scientific, educational, and
other corporations, ‘‘no part of the net
earnings of which inure[] to the benefit
of any private shareholder or
individual.’’ 263 An entity is a
‘‘corporation’’ under the FTC Act only
if it is ‘‘organized to carry on business
for its own profit or that of its
members.’’ 264 Several industry
commenters argued the Commission
does not have jurisdiction over entities
that claim tax-exempt status as
nonprofits because they are, by
definition, not ‘‘organized to carry on
business for [their] own profit or that of
[their] members.’’ The Commission
presumes that commenters selfidentifying as or referring to
‘‘nonprofits,’’ ‘‘not-for-profits,’’ or other
similar terms without further
explanation are referencing entities
claiming tax-exempt status under
section 501(c)(3) or other provisions of
the Internal Revenue Code. Some
commenters contended that, to avoid
confusion, the rule should state it does
263 26 U.S.C. 501(c)(3). Other, less frequently
invoked paragraphs of section 501(c) also identify
corporations and organizations that qualify for taxexempt status. The distinctions between these
entities and those claiming tax-exempt status under
501(c)(3) are analyzed under the same standard.
264 15 U.S.C. 44.
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not apply to entities claiming taxexempt status as non-profits. At least
one commenter stated that the
Commission should clarify whether and
how the rule would apply to healthcare
entities claiming tax-exempt status as
nonprofits and then reopen the
comment period. One commenter
sought clarification on how ownership
interest in a for-profit entity or joint
venture with a for-profit partner by an
entity that claims tax-exempt status as a
nonprofit would affect the rule’s
applicability.
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b. The Final Rule
The final rule applies to the full scope
of the Commission’s jurisdiction. Many
of the comments about nonprofits
erroneously assume that the FTC’s
jurisdiction does not capture any entity
claiming tax-exempt status as a
nonprofit. Given these comments, the
Commission summarizes Commission
precedent and judicial decisions
construing the scope of the
Commission’s jurisdiction as it relates to
entities that claim tax-exempt status as
nonprofits and to other entities that may
or may not be organized to carry on
business for their own profit or the
profit of their members.
Congress empowered the Commission
to ‘‘prevent persons, partnerships, or
corporations’’ from engaging in unfair
methods of competition.265 To fall
within the definition of ‘‘corporation’’
under the FTC Act, an entity must be
‘‘organized to carry on business for its
own profit or that of its members.’’ 266
These FTC Act provisions, taken
together, have been interpreted in
Commission precedent 267 and judicial
decisions 268 to mean that the
Commission lacks jurisdiction to
prevent section 5 violations by a
corporation not organized to carry on
business for its own profit or that of its
members.
The Commission stresses, however,
that both judicial decisions and
Commission precedent recognize that
not all entities claiming tax-exempt
status as nonprofits fall outside the
Commission’s jurisdiction. As the
Eighth Circuit has explained, ‘‘Congress
took pains in drafting § 4 [15 U.S.C. 44]
to authorize the Commission to regulate
so-called nonprofit corporations,
265 15 U.S.C. 45(a)(2). The Commission focuses on
coverage as ‘‘corporations’’ in this section.
266 15 U.S.C. 44.
267 In the Matter of Coll. Football Ass’n, 117
F.T.C. 971, 992–999 (1990).
268 California Dental Ass’n v. FTC, 526 U.S. 756,
766 (1999); Cmty. Blood Bank of Kansas City Area,
Inc. v. FTC, 405 F.2d 1011, 1016 (8th Cir. 1969);
FTC v. Univ. Health, Inc., 938 F.2d 1206, 1214 (11th
Cir. 1991).
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associations and all other entities if they
are in fact profit-making
enterprises.’’ 269 The Commission
applies a two-part test to determine
whether a corporation is organized for
profit and thus within the Commission’s
jurisdiction. As the Commission has
explained, ‘‘[t]he not-for profit
jurisdictional exemption under Section
4 requires both that there be an adequate
nexus between an organization’s
activities and its alleged public
purposes and that its net proceeds be
properly devoted to recognized public,
rather than private, interests.’’ 270
Alternatively stated, the Commission
looks to both ‘‘the source of the income,
i.e., to whether the corporation is
organized for and actually engaged in
business for only charitable purposes,
and to the destination of the income,
i.e., to whether either the corporation or
its members derive a profit.’’ 271 This
test reflects the Eighth Circuit’s analysis
in Community Blood Bank of Kansas
City Area, Inc. v. FTC and ‘‘the
analogous body of federal law which
governs treatment of not-for-profit
organizations under the Internal
Revenue Code.’’ 272 Under this test, a
corporation’s ‘‘tax-exempt status is
certainly one factor to be considered,’’
but that status ‘‘does not obviate the
relevance of further inquiry into a
[corporation’s] operations and
goals.’’ 273
Merely claiming tax-exempt status in
tax filings is not dispositive. At the
same time, if the Internal Revenue
Service (‘‘IRS’’) concludes that an entity
does not qualify for tax-exempt status,
such a finding would be meaningful to
the Commission’s analysis of whether
the same entity is a corporation under
the FTC Act. Administrative
proceedings and judicial decisions
involving the Commission or the IRS 274
have identified numerous private
benefits that, if offered, could render an
entity a corporation organized for its
own profit or that of its members under
the FTC Act, bringing it within the
269 Blood Bank, 405 F.2d at 1018; see also, e.g.,
FTC v. Nat’l Comm’n on Egg Nutrition, 517 F.2d
485, 488 (7th Cir. 1975).
270 Coll. Football Ass’n, 117 F.T.C. at 998.
271 Id. at 994 (internal quotation and citation
omitted).
272 Id. at 994.
273 In the Matter of the Am. Med. Assoc., 94 F.T.C.
701, 1979 WL 199033, at *221 (FTC Oct. 12, 1979).
274 The Commission offers examples of decisions
from the IRS and Tax Court as examples that the
Commission may deem persuasive. Although
‘‘[r]ulings of the Internal Revenue Services are not
binding upon the Commission,’’ the Commission
has recognized that ‘‘a determination by another
Federal agency that a respondent is or is not
organized and operated exclusively for
eleemosynary purposes should not be disregarded.’’
Am. Med. Assoc., 1979 WL 199033 at *221.
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Commission’s jurisdiction. For instance,
the Commission has exercised
jurisdiction in a section 5 enforcement
action over a physician-hospital
organization because the organization
engaged in business on behalf of forprofit physician members.275 That
organization, which consisted of over
100 private physicians and one nonprofit hospital, claimed tax-exempt
status as a nonprofit.276 Similarly, the
Commission has exercised jurisdiction
over an independent physician
association claiming tax-exempt status
as a nonprofit. The association consisted
of private, independent physicians and
private, small group practices.277 That
association was organized for the
pecuniary benefit of its for-profit
members because it ‘‘contract[ed] with
payers, on behalf of its [for-profit]
physician members, for the provision of
physician services for a fee.’’ 278 Under
IRS precedent in the context of
purportedly tax-exempt nonprofit
hospitals and other related entities that
partner with for-profit entities, where
the purportedly nonprofit entity ‘‘has
ceded effective control’’ to a for-profit
partner, ‘‘conferring impermissible
private benefit,’’ the entity loses taxexempt status.279 The IRS has also
rejected claims of nonprofit tax-exempt
status for entities that pay unreasonable
compensation, including percentagebased compensation, to founders, board
members, their families, or other
insiders.280
These examples are illustrative. As
has been the case for decades, under
Commission precedent and judicial
275 In the Matter of Preferred Health Servs., Inc.,
FTC No. 41–0099, 2005 WL 593181, at *1 (Mar. 2,
2005).
276 Id. at *1.
277 In the Matter of Boulder Valley Individual
Prac. Assoc., 149 F.T.C. 1147, 2010 WL 9434809, at
*2 (Apr. 2, 2010).
278 Boulder Valley, 2010 WL 9434809, at *2. The
Commission has similarly exercised jurisdiction
where an entity claiming nonprofit tax-exempt
status provides pecuniary benefit to for-profit
entities or individuals. See, e.g., In the Matter of
Mem’l Hermann Health Network Providers, 137
F.T.C. 90, 92 (2004); Preferred Health, 2005 WL
593181, at *1–*2; Advoc. Health Partners, F.T.C.
No. 31–0021, 2007 WL 643035, at *3–*4 (Feb. 7,
2007); Conn. Chiropractic Ass’n, F.T.C. No. 71–
0074, 2008 WL 625339, at *2 (Mar. 5, 2008); Am.
Med. Ass’n v. FTC, 638 F.2d 443 (2d Cir. 1980),
aff’d, 455 U.S. 676 (1982).
279 Redlands Surgical Servs. v. Comm’r, 242 F.3d
904, 904–05 (9th Cir. 2001); see also St. David’s
Health Care Sys. v. United States, 349 F.3d 232, 239
(5th Cir. 2003).
280 See Fam. Tr. of Mass., Inc. v. United States,
892 F. Supp. 2d 149, 155–156 (D.D.C. 2012); I.R.S.
G.C.M. 39,674 (Oct. 23, 1987); Bubbling Well
Church of Universal Love, Inc. v. Comm’r, No.
5717–79X, 1980 WL 4453 (T.C. June 9, 1980)
(‘‘[E]xcessive payments made purportedly as
compensation constitute benefit inurement in
contravention of section 501(c)(3).’’).
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decisions construing the scope of the
Commission’s jurisdiction, any entity
satisfying the two-prong test falls within
the Commission’s jurisdiction. Such
entities would thus be bound by the
final rule.281
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F. The Legal Standard for Unfair
Methods of Competition Under Section
5
In section 5 of the FTC Act, ‘‘unfair
methods of competition in or affecting
commerce’’ are ‘‘declared unlawful.’’ 282
In enacting section 5, Congress
intentionally did not mirror either the
common law or the text or judicial
interpretations of the Sherman Act, but
instead adopted this new term.283 As
the Supreme Court has confirmed, this
different term reflects a distinct
standard.284 Under section 5, the
Commission assesses two elements: (1)
whether the conduct is a method of
competition, as opposed to a condition
of the marketplace, and (2) whether it is
unfair, meaning that it goes beyond
competition on the merits. The latter
inquiry has two components: (a)
whether the conduct has indicia of
unfairness and (b) whether the conduct
tends to negatively affect competitive
conditions. These two components are
weighed according to a sliding scale.
Indicia of unfairness include the
extent to which the conduct may be
coercive, exploitative, collusive,
abusive, deceptive, predatory, or
involve the use of economic power of a
similar nature.285 Indicia of unfairness
281 The Commission cannot predict precisely how
many entities claiming nonprofit tax-exempt status
may be subject to the final rule. The Commission
finds that the benefits of the final rule justify
implementing it no matter how many nonprofit
entities claiming tax-exempt status it ultimately
reaches—including under the unlikely assumption
that it does not reach any of them.
282 15 U.S.C. 45(a)(1).
283 The Clayton Antitrust Act (38 Stat. 730, ch.
323, Pub. L. 63–212, Oct. 15, 1914) was signed into
law weeks after the FTC Act of 1914, 38 Stat. 717.
284 See FTC v. Ind. Fed’n of Dentists, 476 U.S.
447, 454 (1986); FTC v. Sperry & Hutchinson, 405
U.S. 233, 243–44 (1972); FTC v. Brown Shoe Co.,
384 U.S. 316, 321 (1966); FTC v. Motion Picture
Advert. Serv., 344 U.S. 392, 394–95 (1953); FTC v.
R.F. Keppel & Bro., 291 U.S. 304, 309–10 (1934).
While some commenters argued the Commission
should apply the rule of reason in this rule, as
outlined in Parts II.A, II.B, II.C, and II.F, neither the
text of section 5, the Supreme Court and other
courts’ interpretation of section 5, nor the
legislative history support the conclusion that the
Commission should apply the rule of reason to
determine whether conduct violates section 5 as an
unfair method of competition. The Commission
outlines the legal standard for finding certain uses
of non-competes to be unfair methods of
competition in the final rule in this Part II.F.
285 See e.g., Sperry & Hutchinson Co., 405 U.S. at
243 (holding section 5 reaches conduct shown to
exploit consumers, citing R.F. Keppel & Bro., 291
U.S. at 313); Atl. Refin. Co. v. FTC, 381 U.S. 357,
369 (1965) (holding that the ‘‘utilization of
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may also be present if the conduct is
otherwise restrictive or exclusionary,
depending on the circumstances, such
as the nature of the commercial setting
and the current and potential future
effects of the conduct.286 Notably,
section 5 does not limit indicia of
unfairness to conduct that benefits one
or more firms and necessarily
disadvantages others. Instead, restrictive
and exclusionary conduct may also be
unlawful where it benefits specific firms
while tending to negatively affect
competitive conditions.287
The second prong, whether conduct
tends to negatively affect competitive
conditions, focuses on the nature and
tendency of the conduct. It does not
turn on whether the conduct directly
caused actual harm in the specific
instance at issue and therefore does not
require a detailed economic analysis or
current anticompetitive effects.288
economic power in one market to curtail
competition in another . . . . bolstered by actual
threats and coercive practices’’ was an unfair
method of competition); FTC v. Texaco, 393 U.S.
223, 228–29 (1968) (finding that use of ‘‘dominant
economic power . . . in a manner which tended to
foreclose competition’’ is an unfair method of
competition); E.I. du Pont de Nemours v. FTC
(Ethyl), 729 F.2d 128, 137, 140 (2d Cir. 1984)
(finding that unfair methods of competition
includes practices that are ‘‘collusive, coercive,
predatory, restrictive or deceitful’’ as well as
‘‘exclusionary’’).
286 See, e.g., Motion Picture Advert. Serv. Co., 344
U.S. at 395–96; Luria Bros. & Co. v. FTC, 389 F.2d
847, 860–61 (3d Cir. 1968). As the Supreme Court
has made clear, the inquiry into the nature of the
commercial setting does not, however, require
market definition or proof of market power. See,
e.g., Atl. Refin. Co., 381 U.S. at 371 (finding it
‘‘unnecessary to embark upon a full scale economic
analysis of competitive effect’’). On November 10,
2022, the Commission issued a policy statement
describing the key principles of general
applicability concerning whether conduct is an
unfair method of competition under section 5. FTC,
Policy Statement Regarding the Scope of Unfair
Methods of Competition Under Section 5 of the
Federal Trade Commission Act (Nov. 10, 2022)
(hereinafter ‘‘FTC Policy Statement’’). The FTC
Policy Statement cites a number of cases explaining
that section 5 does not require market definition or
proof of market power. Id. at 10.
287 See, e.g., Brown Shoe Co., 384 U.S. at 320
(‘‘Thus the question . . . is whether the Federal
Trade Commission can declare it to be an unfair
practice for Brown, the second largest manufacturer
of shoes in the Nation, to pay a valuable
consideration to hundreds of retail shoe purchasers
in order to secure a contractual promise from them
that they will deal primarily with Brown and will
not purchase conflicting lines of shoes from
Brown’s competitors. We hold that the Commission
has power to find, on the record here, such an
anticompetitive practice unfair . . . .’’)
288 Atl. Refin. Co., 381 U.S. at 371 (It is
‘‘unnecessary to embark upon a full scale economic
analysis of competitive effect.’’); Texaco, 393 U.S.
at 230 (‘‘It is enough that the Commission found
that the practice in question unfairly burdened
competition for a not insignificant volume of
commerce.’’); Union Circulation Co. v. FTC, 241
F.2d 652, 657 (2d Cir. 1957) (‘‘The agreements
should be struck down if their reasonable tendency,
as distinguished from actual past effect, is to injure
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Instead, the inquiry examines whether
the conduct has a tendency to
negatively affect competitive conditions,
including by raising prices, reducing
output, limiting choice, lowering
quality, reducing innovation, impairing
or excluding other market participants,
reducing the likelihood of potential or
nascent competition, reducing labor
mobility, suppressing worker
compensation or degrading working
conditions for workers. These concerns
may arise when the conduct is
examined in the aggregate along with
the conduct of others engaging in the
same or similar conduct.289 Section 5
does not require a separate showing of
market power or market definition.290
Nor does section 5 import the rule-ofreason analysis applied under other
antitrust laws, including in some
Sherman Act cases.291
The Commission weighs the two
elements—indicia of unfairness and
tendency to negatively affect
competitive conditions—on a sliding
scale. Where the indicia of unfairness
are clear, conduct may be an unfair
method of competition with only a
limited showing of a tendency to
negatively affect competitive
conditions.292 For example, conduct
that is coercive and exploitative evinces
facial unfairness and weighs heavily as
clear indicia of unfairness.293 Where
indicia of unfairness are less clear,
conduct may still violate section 5
where it tends to negatively affect
or obstruct competition. Under the Federal Trade
Commission Act, industry agreements and practices
have been enjoined without an actual showing of
injury to competition . . . .’’). See also Sperry &
Hutchinson Co., 405 U.S. at 244 (‘‘[U]nfair
competitive practices [are] not limited to those
likely to have anticompetitive consequences after
the manner of the antitrust laws.’’); Ethyl, 729 F.2d
at 138 (finding that evidence of actual harm is not
required); In re Coca-Cola Co., 117 F.T.C. 795, 915
n.25 (1994) (rejecting argument that section 5
violation requires showing of ‘‘anticompetitive
effects’’).
289 Motion Picture Advert. Serv. Co., 344 U.S. at
395; Union Circulation Co., 241 F.2d at 658 (‘‘The
tendency of the ‘no-switching’ agreements is to
discourage labor mobility, and thereby the
magazine-selling industry may well become static
in its composition to the obvious advantage of the
large, well-established signatory agencies and to the
disadvantage of infant organizations.’’).
290 Atl. Refin. Co., 381 U.S. at 371; Texaco, 393
U.S. at 230; L.G. Balfour Co. v. FTC, 442 F.2d 1, 19–
20 (7th Cir. 1971) (no proof of foreclosure of a
relevant market necessary in an exclusive dealing
contract case under section 5 (citing Brown Shoe)).
291 See Part II.A.
292 See, e.g., Ethyl, 729 F.2d at 137–39; FTC
Policy Statement, supra note 286, at 9.
293 See e.g., Sperry & Hutchinson Co., 405 U.S. at
243; Ethyl, 729 F.2d at 139, 140 (finding that unfair
methods of competition include practices that are
‘‘collusive, coercive, predatory, restrictive, or
deceitful’’ as well as ‘‘exclusionary’’); FTC Policy
Statement, supra note 286, at 7, 9.
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competitive conditions, but a stronger
showing of such tendency is required.
In many cases the Commission (and
courts) have held conduct to constitute
an unfair method of competition by
pointing to clear indicia of unfairness,
including coercive or exploitative
conduct, without conducting a detailed
economic analysis of its effects. In
Atlantic Refining Co. v. FTC and FTC v.
Texaco, Inc., the Supreme Court held
that the Commission established an
unfair method of competition where an
oil company used its economic power
over its gas stations to coerce them into
buying certain tires, batteries, or
accessories only from firms that paid the
oil company a commission.294 The
Court determined in Atlantic Refining
that ‘‘a full-scale economic analysis of
competitive effect’’ was not required
and the Commission needed only to
show that the conduct burdened ‘‘a not
insubstantial portion of commerce.’’ 295
The Court reiterated this standard in
Texaco holding that, even though the
impact was less harmful than the
conduct in Atlantic Refining, ‘‘the
anticompetitive tendencies of [the
challenged] system are clear, and . . .
the Commission was properly fulfilling
the task that Congress assigned it in
halting this practice in its
incipiency.’’ 296 As the Court observed,
‘‘[t]he Commission is not required to
show that a practice it condemns has
totally eliminated competition.’’ 297 In
FTC v. R.F. Keppel & Brother, Inc., the
Supreme Court held that the
Commission established an unfair
method of competition where a
manufacturer exploited the inability of
children to protect themselves in the
marketplace by marketing inferior goods
to them through use of a gambling
scheme.298 The Court considered the
extent of the practice and concluded
‘‘[the practice] is successful in diverting
trade from competitors’’ without
294 Atl. Refin. Co., 381 U.S. at 369–70; Texaco,
393 U.S. at 228–29.
295 Atl. Refin. Co., 381 U.S. at 371. See also
Texaco, 393 U.S. at 230 (finding that the practice
unfairly burdened competition for a not
insignificant volume of commerce); FTC v. R.F.
Keppel & Bro., 291 U.S. 304, 309 (1934) (‘‘A practice
so widespread and so far reaching in its
consequences is of public concern if in other
respects within the purview of the statute.’’).
296 Texaco, 393 U.S. at 230 (further noting that
‘‘[i]t is enough that the Commission found that the
practice in question unfairly burdened competition
for a not insignificant volume of commerce.’’).
297 Id. at 230. See also Shell Oil Co. v. FTC, 360
F.2d 470, 487 (5th Cir. 1966) (‘‘A man operating a
gas station is bound to be overawed by the great
corporation that is his supplier, his banker, and his
landlord.’’).
298 291 U.S. 304, 313.
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engaging in a full-scale economic
analysis.299
In other cases, the Commission (and
courts) have held exclusionary or
restrictive conduct was an unfair
method of competition based on
evidence of the conduct’s tendency to
negatively affect competitive conditions
without focusing on the indicia of
unfairness, including whether the
conduct is coercive or exploitative. But
an evidentiary showing or detailed
economic analysis that such conduct
generated actual anticompetitive effects
or would do so in the future still was
not required. For example, in Union
Circulation Company v. FTC, the
Second Circuit held the Commission
established an unfair method of
competition where a group of door-todoor subscription solicitation agencies
agreed not to hire workers who were
previously employed by another
signatory agency.300 The court looked to
whether the ‘‘reasonably foreseeable
effect’’ of the agencies’ conduct would
be to ‘‘impair or diminish competition
between existing [competitors]’’ or
prevent potential new rivals.301 In
finding the conduct was an unfair
method of competition, the court
concluded that ‘‘[t]he tendency of the
. . . agreements is to discourage labor
mobility, and thereby the magazineselling industry may well become static
in its composition to the obvious
advantage of the large, well established
signatory agencies and to the
disadvantage of infant
organizations.’’ 302 In FTC v. Brown
Shoe Co., the Supreme Court held that
an exclusive dealing arrangement under
which the Brown Shoe Company offered
shoe retailers ‘‘a valuable consideration
. . . to secure a contractual promise
from them that they will deal primarily
with Brown and will not purchase
299 291
U.S. at 308–09.
F.2d 652, 655 (2d Cir. 1957).
301 Id. at 658. Notably, the court also considered
facially coercive conduct by which the door-to-door
subscription agencies coerced magazine publishers
into not doing business with one of their
competitors because the competitor hired their
former workers. Id. at 655–56. The court upheld the
Commission’s order concluding this conduct was
an unfair method of competition under section 5.
The court did not conduct any related economic
analysis and simply concluded that the ‘‘illegal
scheme of coercion . . . is clearly unjustified.’’ Id.
302 Id. at 658; see also Nichols v. Spencer Intern.
Press, Inc., 371 F.2d 332, 334 (7th Cir. 1967)
(‘‘Granting that the antitrust laws were not enacted
for the purpose of preserving freedom in the labor
market, nor of regulating employment practices as
such, nevertheless it seems clear that agreements
among supposed competitors not to employ each
other’s employees not only restrict freedom to enter
into employment relationships, but may also,
depending upon the circumstances, impair full and
free competition in the supply of a service or
commodity to the public.’’)
300 241
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38359
conflicting lines of shoes from Brown’s
competitors’’ violated section 5
consistent with the Commission’s
authority ‘‘to arrest trade restraints in
their incipiency.’’ 303 Of course,
evidence of actual adverse effects on
competition meets the requirement to
show a tendency to negatively affect
competitive conditions. For example, in
FTC v. Motion Picture Advertising
Service Co., the Supreme Court held
that an exclusive dealing arrangement
violated section 5 where there was
‘‘substantial evidence’’ that the
contracts ‘‘unreasonably restrain
competition.’’ 304
Respondents in unfair method of
competition cases sometimes assert
purported justifications as an
affirmative defense. Some courts have
declined to consider justifications
altogether. However, where defendants
raise justifications as an affirmative
defense, the Commission and courts
have consistently held that pecuniary
benefit to the party responsible for the
conduct in question is not cognizable as
a justification.305 Additionally, to the
extent justifications are asserted, they
must be legally cognizable,306 nonpretextual,307 and any restriction used
to bring about the benefit must be
narrowly tailored to limit any adverse
impact on competitive conditions.308
303 FTC v. Brown Shoe Co., 384 U.S. 316, 320, 322
(1966).
304 FTC v. Motion Picture Advert. Serv. Co., 344
U.S. 392, 395–96 (1953); see also L.G. Balfour Co.
v. FTC, 442 F.2d 1, 14 (7th Cir. 1971) (holding that
a firm’s exclusive dealing contracts violated section
5 where such contracts were ‘anti-competitive’ ’’).
305 Atl. Refin. Co. v. FTC, 381 U.S. 357, 371 (1965)
(considering that defendant’s distribution contracts
at issue ‘‘may well provide Atlantic with an
economical method of assuring efficient product
distribution among its dealers’’ and holding that the
‘‘Commission was clearly justified in refusing the
participants an opportunity to offset these evils by
a showing of economic benefit to themselves’’); FTC
v. Texaco, 393 U.S. 223, 230 (1968) (following the
same reasoning as Atlantic Refining and finding
that the ‘‘anticompetitive tendencies of such system
[were] clear’’); Balfour, 442 F.2d at 15 (while
relevant to consider the advantages of a trade
practice on individual companies, this cannot
excuse an otherwise illegal business practice). For
provisions of the antitrust laws where courts have
not accepted justifications as part of the legal
analysis, the Commission will similarly not accept
justifications when these claims are pursued
through section 5.
306 See, e.g., FTC v. Ind. Fed. Dentists, 476 U.S.
447, 463 (1986); Fashion Originators’ Guild of Am.
v. FTC, 312 U.S. 457, 468 (1941); FTC v. Superior
Ct. Trial Lawyers Ass’n, 493 U.S. 411, 423–24
(1990).
307 See, e.g., Ind. Fed’n of Dentists, 476 U.S. at
464. See also United States v. Microsoft Corp., 253
F.3d 35, 62–64, 72, 74, 76–77 (D.C. Cir. 2001);
Eastman Kodak Co. v. Image Technical Tech. Svcs,
504 U.S. 541, 472, 484–85 (1992); Aspen Skiing Co.
v. Aspen Highlands Skiing Corp., 472 U.S. 585,
608–10 (1985).
308 NCAA v. Alston, 594 U.S. 69, 100–101 (2021);
Polygram Holding, Inc. v. FTC, 416 F.3d 29, 38
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III. Section 910.1: Definitions
Section 910.1 sets forth definitions of
several terms used in the final rule.
A. Definition of ‘‘Business Entity’’
The Commission adopts the definition
of ‘‘business entity’’ as proposed.
1. Proposed Definition
The Commission proposed to define
‘‘business entity’’ as ‘‘a partnership,
corporation, association, limited
liability company, or other legal entity,
or a division or subsidiary thereof.’’ 309
The term ‘‘business entity’’ was used in
two places: (1) in proposed § 910.3,
which contained an exception for
certain non-competes entered into in the
context of a sale of a business by a
substantial owner of, or substantial
member or substantial partner in, the
business entity,310 and (2) in proposed
§ 910.1(e), which defined ‘‘substantial
owner, substantial member, or
substantial partner’’ as an owner,
member, or partner holding at least a
25% ownership interest in a business
entity.
The Commission explained in the
NPRM that it proposed including
divisions and subsidiaries in the
definition of ‘‘business entity’’ to apply
the sale-of-a-business exception where a
person is selling a division or subsidiary
of a business entity.311 The Commission
stated the primary rationale for the saleof-business exception—to help protect
the value of a business acquired by a
buyer—also applies where a person is
selling a division or subsidiary of a
business entity.312
2. Comments Received
Two commenters specifically
addressed the definition of business
entity. One commenter suggested a new
definition using a functional test that
the commenter asserted would prevent
employers from structuring their
businesses as several smaller legal
entities in order to fall within the saleof-a-business exception. Another
commenter also suggested that the
definition be amended to explicitly
include ‘‘general partnerships’’ and
trusts.
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3. The Final Rule
The Commission adopts the definition
of ‘‘business entity’’ as proposed. The
(D.C. Cir. 2005); 2000 Collaboration Guidelines, sec.
3.36b. See also Union Circulation Co. v. FTC, 241
F.2d 652, 658 (2d Cir. 1957) (‘‘The agreements here
went beyond what was necessary to curtail and
eliminate fraudulent practices.’’).
309 NPRM, proposed § 910.1(a).
310 Id. at 3508.
311 Id. at 3509.
312 Id.
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Commission declines to adopt a
functional test for the definition of
‘‘business entity.’’ As described in
greater detail in Part V.A, the sale-of-abusiness exception in the final rule does
not contain a 25% ownership threshold,
so employers will not have an incentive
to structure their businesses as several
smaller legal entities in order to fall
within the sale-of-a-business exception.
The Commission also believes replacing
the current bright-line definition of
‘‘business entity’’ with a functional test
would make it more difficult for
workers and employers to know
whether a given non-compete is
enforceable in the context of the sale of
a business. The Commission concludes
adding the terms ‘‘general partnerships’’
and ‘‘trusts’’ to the definition is
unnecessary, because the phrase ‘‘other
legal entity’’ already includes those
entity types.
B. Definition of ‘‘Employment’’
The Commission proposed to define
‘‘employment’’ as ‘‘work for an
employer, as the term employer is
defined in § 910.1(c).’’ 313 That
provision defined ‘‘employer’’ as ‘‘a
person, as defined in 15 U.S.C. 57b–
1(a)(6) [section 20 of the FTC Act], that
hires or contracts with a worker to work
for the person.’’ 314 Section 20 defines
‘‘person’’ as ‘‘any natural person,
partnership, corporation, association, or
other legal entity, including any person
acting under color or authority of State
law.’’ The Commission intended the
proposed definition of ‘‘employer’’ to
clarify that an employment relationship
exists, for purposes of the final rule,
regardless of whether an employment
relationship exists under another law,
such as a Federal or State labor law.315
The final rule clarifies the definitions to
better reflect that intent.
While commenters generally did not
address the proposed definition of
‘‘employment,’’ many commenters
expressed concern that the proposed
definition of ‘‘employer’’ would exclude
workers hired by one entity to work for
another, such as workers hired through
a staffing agency. To avoid excluding
such workers, and consistent with the
Commission’s intent to cover workers
irrespective of whether they are
classified as in an ‘‘employer-employee’’
relationship under other State and
Federal laws, the final rule defines
‘‘employment’’ as ‘‘work for a person’’
and makes corresponding changes to the
definition of ‘‘employer,’’ described in
Part III.C. This definition of
proposed § 910.1(d).
proposed § 910.1(c).
315 Id. at 3510.
‘‘employment’’ better clarifies that an
employment relationship exists, for
purposes of the final rule, regardless of
whether an employment relationship
exists under another law, such as a
Federal or State labor law.
C. Proposed Definition of ‘‘Employer’’
The Commission proposed to define
employer as a ‘‘person, as defined in 15
U.S.C. 57b–1(a)(6) [section 20 of the
FTC Act], that hires or contracts with a
worker to work for the person.’’ 316
Section 20 defines ‘‘person’’ as ‘‘any
natural person, partnership,
corporation, association, or other legal
entity, including any person acting
under color or authority of State
law.’’ 317 The Commission clarified in
the NPRM that a person meeting the
definition of an employer under
proposed § 910.1(c) would be an
employer regardless of whether the
person meets another legal definition of
employer, such as a definition in
Federal or State labor law.318 In
response to concerns raised by
commenters, the final rule does not
adopt a definition of ‘‘employer.’’
1. Comments Received
Several commenters expressed
support for the proposed definition of
‘‘employer.’’ A few commenters
suggested changes to the definition of
‘‘employer’’ to maximize the final rule’s
coverage and close potential loopholes.
Worker and employer advocates noted
the proposed definition appeared to
exclude certain persons who are
commonly understood to be a worker’s
employer because it assumed that a
worker’s employer is the same legal
entity that hired or contracted with the
worker. These commenters contended
the proposed definition would not cover
arrangements such as when a worker is
employed through a contractual
relationship with a professional
employer organization or staffing
agency; under a short-term ‘‘loan-out
arrangement,’’ during which a worker
hired by one employer may work for
another employer; under contract with a
parent, subsidiary, or affiliate of the
business who hired them; or by persons
or entities who share common control
over the worker’s work. A few of these
commenters also stated that the
proposed definition creates a loophole
allowing evasion of the rule through
third-party hiring. Most commenters
that addressed this issue suggested
listing one or more such arrangements
in the definition of ‘‘employer’’ to
313 Id.,
316 Id.,
314 Id.,
317 15
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proposed § 910.1(c).
U.S.C. 57b–1(a)(6).
318 NPRM at 3510.
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ensure these kinds of arrangements are
covered.
One worker advocacy group argued
the term ‘‘hires or contracts’’ in the
proposed definition of ‘‘employer’’ is in
tension with the Commission’s stated
intent to broadly cover all workers,
including externs, interns, and
volunteers. This commenter suggested
the definition of ‘‘employer’’
incorporate language from the Fair
Labor Standards Act (‘‘FLSA’’)
definition of ‘‘employ,’’ which includes
to ‘‘suffer or permit to work.’’ 319 The
commenter suggested this language
because of its breadth, noting the
language originated in State laws
designed to reach businesses that use
third parties to illegally hire and
supervise children.
One industry trade organization
argued that, to minimize inconsistencies
with the FLSA, the Commission should
incorporate the FLSA’s definition of
‘‘employer.’’
2. Final Rule
After considering the comments, the
Commission has revised the definitions
of ‘‘non-compete clause’’ and ‘‘worker’’
as described in Parts III.D and III.G.
These revisions make the definition of
‘‘employer’’ unnecessary, so the
Commission is not finalizing a
definition of ‘‘employer.’’
These revisions clarify that the final
rule covers all workers regardless of
whether they work for the same person
that hired or contracted with them to
work. As explained in Part III.D, in the
definition of ‘‘non-compete clause,’’ the
Commission has revised the phrase
‘‘contractual term between an employer
and a worker’’ to read ‘‘term or
condition of employment’’ and has
revised the phrase ‘‘after the conclusion
of the worker’s employment with the
employer’’ to read ‘‘after the conclusion
of the employment that includes the
term or condition.’’ Furthermore, as
explained in Part III.G, in the definition
of ‘‘worker,’’ the Commission has
revised the phrase ‘‘a natural person
who works, whether paid or unpaid, for
an employer’’ to read ‘‘a natural person
who works or who previously worked,
whether paid or unpaid.’’
The Commission is adopting this
more general language, rather than
listing the exact kinds of contractual
arrangements and entities (e.g., staffing
agencies, affiliates, joint employers, etc.)
to avoid unnecessary or confusing
terminology, evasion of the final rule
through complex employment
relationships, and the need to specify
myriad fact-specific scenarios. The
language is designed to capture indirect
employment relationships as a general
matter without regard to the label used.
D. Definition of ‘‘Non-Compete Clause’’
Based on the comments received, the
Commission adopts a slightly modified
definition of ‘‘non-compete clause’’ in
§ 910.1. Section 910.1 defines a ‘‘noncompete clause’’ as a term or condition
of employment that prohibits a worker
from, penalizes a worker for, or
functions to prevent a worker from (A)
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 (B)
operating a business in the United
States after the conclusion of the
employment that includes the term or
condition. Section 910.1 further
provides that, for purposes of the final
rule, ‘‘term or condition of employment
‘‘includes, but is not limited to, a
contractual term or workplace policy,
whether written or oral.’’ Similar to the
proposed rule, the final rule applies to
terms and conditions that expressly
prohibit a worker from seeking or
accepting other work or starting a
business after their employment ends,
as well as agreements that penalize or
effectively prevent a worker from doing
the same.
1. Proposed Definition
The Commission’s proposed
definition of ‘‘non-compete clause’’
consisted of proposed § 910.1(b)(1) and
(b)(2). Proposed § 910.1(b)(1) would
have defined ‘‘non-compete clause’’ as
‘‘a contractual term between an
employer and a worker that prevents the
worker from seeking or accepting
employment with a person, or operating
a business, after the conclusion of the
worker’s employment with the
employer.’’ Proposed § 910.1(b)(2)
would have provided that the definition
in proposed § 910.1(b)(1) includes ‘‘a
contractual term that is a de facto noncompete clause because it has the effect
of prohibiting the worker from seeking
or accepting employment with a person
or operating a business after the
conclusion of the worker’s employment
with the employer.’’
The Commission explained that the
proposed definition of non-compete
clause would be limited to noncompetes between employers and
workers and would not apply to other
types of non-competes, for example,
non-competes between two
businesses.320 The Commission further
explained the definition would be
limited to post-employment restraints
(i.e., restrictions on what the worker
may do after the conclusion of the
worker’s employment) and would not
apply to concurrent-employment
restraints (i.e., restrictions on what the
worker may do during the worker’s
employment).321
In the NPRM, the Commission noted
that, rather than expressly prohibiting a
worker from competing against their
employer, some non-competes require
workers to pay damages if they compete
against their employer. The Commission
explained that courts generally view
these contractual terms as non-competes
and that proposed § 910.1(b)(1)
encompassed them.322
The Commission also expressed
concern that workplace policies—for
example, a term in an employee
handbook stating that workers are
prohibited from working for certain
types of firms or in certain fields after
their employment ends—could have the
same effects as a contractual noncompete even if they are not
enforceable, because workers may
believe they are bound by the policy.
The Commission sought comment on
whether the term ‘‘non-compete clause’’
should expressly include a provision in
a workplace policy.323
The Commission stated that proposed
§ 910.1(b)(1) was a generally accepted
definition of non-compete clause that
covers both express non-competes and
terms purporting to bind a worker that
have the same functional effect as noncompetes.324 The Commission stated
that the definition would generally not
apply to other types of restrictive
employment agreements that do not
altogether prevent a worker from
seeking or accepting other work or
starting a business after their
employment ends and do not generally
prevent other employers from
competing for that worker’s labor.325 At
the same time, the Commission
expressed concern about unusually
restrictive employment agreements that,
while not formally triggered by seeking
or accepting other work or starting a
business after their employment ends,
nevertheless restrain such an unusually
large scope of activity that they have the
same functional effect as noncompetes.326 The Commission noted
judicial opinions finding some such
321 Id.
322 Id.
323 Id.
324 Id.
at 3510.
at 3509.
325 Id.
319 29
U.S.C. 203(g).
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restrictive employment agreements to be
de facto non-competes.327
Proposed § 910.1(b)(2) accordingly
sought to clarify that the definition in
proposed § 910.1(b)(1) includes
contractual terms that are de facto noncompetes because they have the effect of
prohibiting the worker from seeking or
accepting employment with a person or
operating a business after the
conclusion of the worker’s employment
with the employer. It then provided two
illustrative, non-exhaustive examples of
contractual terms that may be such
functional non-competes: (1) an NDA
between an employer and a worker
written so broadly that it effectively
precludes the worker from working in
the same field after the conclusion of
the worker’s employment with the
employer; and (2) a training-repayment
agreement (‘‘TRAP’’) that requires the
worker to pay the employer or a thirdparty entity for training costs if the
worker’s employment terminates within
a specified time period, where the
required payment is not reasonably
related to the costs the employer
incurred to train the worker.328
2. Coverage of the Definition
a. Comments Received
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Most of the comments on the
definition of ‘‘non-compete clause’’
addressed whether, and under what
circumstances, the rule should apply to
functional non-competes.329 Many
commenters that generally supported
the NPRM agreed the definition of noncompete clause should cover other
restrictive employment agreements
when they function as non-competes.
These commenters argued that, when
restraints on labor mobility are banned,
companies switch to functionally
equivalent restraints. Some commenters
asked the Commission to adopt a
broader definition of functional noncompetes or to expand the rule to ban
327 Wegmann v. London, 648 F.2d 1072, 1073 (5th
Cir. 1981) (holding that liquidated damages
provisions in a partnership agreement were de facto
non-compete clauses ‘‘given the prohibitive
magnitudes of liquidated damages they specify’’);
Brown v. TGS Mgmt. Co., LLC, 57 Cal. App. 5th 303,
306, 319 (Cal. Ct. App. 2020) (holding that an NDA
that defined ‘‘confidential information’’ ‘‘so broadly
as to prevent [the plaintiff] in perpetuity from doing
any work in the securities field’’ operated as a de
facto non-compete clause and therefore could not
be enforced under California law, which generally
prohibits enforcement of non-compete clauses).
328 NPRM, proposed § 910.1(b)(2).
329 While the NPRM generally used the term ‘‘de
facto non-competes,’’ the final rule uses the term
‘‘functional non-competes.’’ The Commission
believes this term more clearly conveys that certain
terms are considered non-competes under the final
rule where they function to prevent workers from
seeking or accepting other work or starting a
business after their employment ends.
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additional types of restrictive
employment agreements altogether. A
few commenters asked the Commission
to broaden proposed § 910.1(b)(1) and
(2) by replacing the terms ‘‘prevent’’ and
‘‘prohibit’’ with ‘‘restrains’’ and
‘‘limits.’’
In contrast, many commenters who
generally opposed the NPRM stated that
proposed § 910.1(b)(2) was
overinclusive. Many such commenters
also asserted the definition was vague
and could lead to confusion and
significant litigation. Several comments
suggested clarifications, such as
including additional examples of
functional non-competes; creating safe
harbors for certain restrictive
employment covenants; replacing
proposed § 910.1(b)(2) with a standard
based on antitrust law’s ‘‘quick look’’
test; 330 or revising the provision to
focus on the ‘‘primary purpose’’ of a
restrictive employment covenant.
Several commenters argued the
Commission failed to cite evidence that
functional non-competes are anticompetitive. Other commenters
expressed concern that prohibiting
functional non-competes would
undermine the rule’s intent to permit
less restrictive alternatives to noncompetes.
At least one commenter argued that
proposed § 910.1(b)(2) should be
removed because it was redundant, as
the proposed definition of non-compete
clause in proposed § 910.1(b)(1) already
captured any term that prevents an
employee from seeking alternative
employment, without regard to how the
term is labeled. Some commenters who
generally supported the NPRM also
expressed concern that ambiguity in
proposed § 910.1(b)(2) could enable
employers to intimidate workers by
suggesting that restrictive employment
agreements used to evade a final rule are
not non-competes under the functional
test. Other commenters who generally
supported the rule asked for greater
specificity in proposed § 910.1(b)(2) to
prevent adverse judicial interpretations
that could undermine the effectiveness
of the rule.
Many commenters addressed issues
specific to other types of restrictive
employment agreements, including
NDAs (also sometimes referred to as
confidentiality agreements), TRAPs,
non-solicitation agreements, and garden
leave and severance agreements.
With respect to NDAs, some
commenters stated that the Commission
rightly identified overbroad NDAs as a
potential method of evasion of the rule
330 See, e.g., Cal. Dental Ass’n v. FTC, 526 U.S.
756, 770–71 (1999).
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and supported the Commission’s
recognition of overbroad NDAs as
functional non-competes. In contrast,
some commenters contended that by
covering functional non-competes, the
proposed rule would limit their ability
to use NDAs. Some commenters argued
that providing that overbroad NDAs
may be functional non-competes would
be inconsistent with the proposed rule’s
separate preliminary finding that NDAs
are less restrictive alternatives to noncompetes. Similarly, some commenters
contended that a functional test may
frustrate employers’ ability to use NDAs
to protect legitimate trade secrets or to
enjoin a former worker employed with
a competitor under the Defend Trade
Secrets Act of 2016, in part because they
would be concerned about potential
legal liability. Some commenters
contended that the example of an
overbroad NDA in proposed
§ 910.1(b)(2) would discourage the use
of NDAs, including the use of narrowly
tailored NDAs, and undermine
confidence in their enforceability. Some
commenters stated that reference to
cases, including Brown v. TGS
Management Co.331 and similar cases,
represent outliers that are likely to cause
more confusion than clarity.
Other commenters addressed the
proposed definition’s application to
TRAPs, which are agreements in which
the worker agrees to pay the employer
for purported training expenses if the
worker leaves their job before a certain
date. Several commenters asked the
Commission to ban all forms of TRAPs.
These commenters argued that
employers are increasingly adopting
TRAPs and that abusive TRAPs are
pervasive throughout the economy.
Some commenters asserted millions of
workers are likely bound by TRAPs.
Commenters stated TRAPs may impose
penalties that are disproportionate to
the value of training workers received or
require the worker to pay alleged
training expenses for on-the-job
training. Some commenters contended
TRAPs may be even more harmful than
non-competes, because while noncompetes prohibit or prevent workers
from seeking or accepting other work or
starting a business after they leave their
job, TRAPs can prevent workers from
leaving their job for any reason.
Some commenters expressed concern
that the example in proposed
§ 910.1(b)(2)(ii) of a TRAP that was a
functional non-compete was too narrow,
and that the Commission should not
imply that TRAPs with penalties that
are reasonably related to an employer’s
training expenses cannot be functional
331 See
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non-competes. One commenter asked
the Commission to adopt the standard
for TRAPs in the Uniform Restrictive
Employment Agreement Act.332
Another commenter suggested that the
Commission ban TRAPs below an
income threshold of $75,000. Another
commenter asked the Commission to
clarify that costs that are inherent in any
employer-employee relationship—such
as time spent by a supervisor training a
new employee how to perform routine
business procedures typical for their
position or role—should not be
considered costs that are ‘‘reasonably
related to the costs’’ of training.
At least one commenter urged the
Commission to treat as functional noncompetes other employment terms
similar to TRAPs such as equipment
loans, where employers provide
employees with a loan to purchase
equipment that the worker needs in
order to perform their job, and damages
provisions containing open-ended costs
related to the employee’s departure—
including hiring and training
replacements or vague harms such as
reputational damages, loss of good will
or lost profits. In contrast, some
commenters argued that TRAPs should
be excluded from coverage under
proposed § 910.1(b)(2) because they are
not unfair or anti-competitive.
Regarding non-solicitation
agreements—which prohibit a worker
from soliciting former clients or
customers of the employer—a few
commenters expressed concern that
overbroad non-solicitation agreements
may be permitted because they were not
listed in the regulatory text for proposed
§ 910.1(b)(2) as examples of functional
non-competes (although the
Commission described them in the
preamble to the proposed rule as
restrictive employment agreements that
may fall within the definition of noncompete clause if they restrain such an
unusually large scope of activity that
they are de facto non-compete
clauses).333 These commenters asked
the Commission to revise proposed
§ 910.1(b)(2) to expressly cover nonsolicitation agreements that prohibit
workers from doing business with
prospective or actual customers to an
extent that would effectively preclude
them from continuing to work in the
same field or that prevent a worker from
doing business with their former
employer’s client where the client
solicits the worker directly. Other
commenters, however, expressed
concern that the proposed rule could
undermine employers’ confidence in the
enforceability of non-solicitation
agreements and asked that the final rule
clarify that non-solicitation agreements
are generally not prohibited, or exclude
them altogether.
Some comments addressed no-hire
clauses, which bar former workers from
hiring their former colleagues. One
employment lawyer stated that these are
less restrictive than non-compete
clauses. Other commenters stated that
no-hire clauses can still limit careers or
make it hard for new businesses to find
staff. Some commenters expressed
concerns with no-business or nondealing clauses, which bar former
workers from doing business with
former clients or customers even if the
clients or customers sought them out.
These commenters stated such
agreements limit the options of clients
and customers.
Many commenters raised questions
about forfeiture-for-competition clauses,
which they stated are often a component
of deferred compensation arrangements
for executives. Commenters stated that
deferred compensation plans often
include forfeiture clauses, or
contingencies on receiving the promised
compensation, to incentivize their
recipients to act in ways that benefit the
employer. These commenters stated that
agreements not to compete for a period
of time after employment ends are a
common feature of forfeiture clauses.
Some commenters stated that such
forfeiture-for-competition clauses are
non-competes and have the same
negative effects as non-competes
because they are contingent on
competition—they require workers to
give up bonus pay or other postemployment benefits if they work for a
competing employer or start a
competing business, and they keep
other employers from being able to hire
those workers. Other commenters stated
forfeiture-for-competition clauses are a
common and important component of
deferred compensation arrangements for
highly compensated employees and
senior executives.334 Other commenters
argued the clauses allow workers to
choose between receiving the deferred
compensation and forfeiting it if they
choose to work for a competitor, and
thus they are not non-competes. Other
commenters urged the Commission to
either clarify that forfeiture-forcompetition clauses are not noncompetes or to carve them out
explicitly.
332 See ULC, Uniform Restrictive Employment
Agreement Act (2021), sec. 14.
333 NPRM at 3509.
334 Commenters also provided purported business
justifications for forfeiture-for-competition clauses,
which are addressed in Part IV.D.2.
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38363
Many commenters also addressed the
application of the rule to garden leave
agreements. In using the term ‘‘garden
leave,’’ commenters seemed to be
referring to a number of different types
of agreements. Some commenters
referred to garden leave agreements as
those in which, before a worker left
their job, they remained employed and
received full pay for a specified period
of time but their access to co-workers
and company facilities was restricted. In
contrast, other commenters considered
‘‘garden leave’’ an arrangement to make
payments to a worker after their
employment concluded. Commenters
used different terminology to refer to
these kinds of agreements, including
severance pay, partial pay, and full pay
akin to administrative leave, in
exchange for an agreement not to
compete. Some commenters argued it is
coercive for a worker to sign a noncompete in exchange for severance pay
and argued garden leave arrangements
are non-competes because they limit a
worker’s options to work for a
competitor. Some commenters asked the
Commission to adopt a durational limit
for garden leave. At least one
commenter also urged the Commission
to clarify that an employer cannot
unilaterally terminate garden leave.
Other commenters requested
clarification that garden leave was not a
non-compete on the basis that garden
leave does not create a legal obligation
on the part of the worker to refrain from
competing. Some commenters requested
a specific exclusion for garden-leave
arrangements. They argued that by
forcing employers to pay workers,
garden leave would reduce the overuse
of non-competes. One talent industry
commenter argued that the rule should
expressly allow for ‘‘fee tails,’’ which
require talent agents to pay a portion of
future commissions to former
employers.
b. The Final Rule
After considering the comments, the
Commission has slightly modified the
definition of non-compete clause to
clarify its scope. In the final rule,
§ 910.1 defines ‘‘non-compete clause’’ as
a term or condition of employment that
either ‘‘prohibits’’ a worker from,
‘‘penalizes’’ a worker for, or ‘‘functions
to prevent’’ a worker from (A) 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 (B) operating a business in
the United States after the conclusion of
the employment that includes the term
or condition.
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Pursuant to the term ‘‘prohibits,’’ the
definition applies to terms and
conditions that expressly prohibit a
worker from seeking or accepting other
work or starting a business after their
employment ends. Examples of such
agreements would be a contractual term
between a national sandwich shop
chain and its workers stating that, for
two years after the worker leaves their
job, they cannot work for another
sandwich shop within three miles of
any of the chain’s locations,335 or a
contractual term between a steelmaker
and one of its executives prohibiting the
executive from working for any
competing business anywhere in the
world for one year after the end of the
executive’s employment.336 The vast
majority of existing agreements covered
by the final rule fall into this category
of agreements that expressly prohibit a
worker from seeking or accepting other
work or starting a business after their
employment ends.
Pursuant to the term ‘‘penalizes,’’ the
definition also applies to terms and
conditions that require a worker to pay
a penalty for seeking or accepting other
work or starting a business after their
employment ends. One example of such
a term is a term providing that, for two
years after the worker’s employment
ends, the worker may not engage in any
business within a certain geographic
area that competes with the employer
unless the worker pays the employer
liquidated damages of $50,000.337
Because such an agreement penalizes
the worker for seeking or accepting
other work or for starting a business
after the worker leaves their job, it
would be a non-compete clause under
§ 910.1. Indeed, where an agreement
restricts who a worker can work for or
their ability to start a business after they
leave their job, State courts generally
characterize the agreement as a noncompete, regardless of whether the
agreement contains an express
335 This example is based on the agreements
described in Jamieson, supra note 32. The company
agreed to remove the non-competes in 2016 as part
of a settlement. Office of the Att’y Gen. of the State
of N.Y., Press Release, A.G. Schneiderman
Announces Settlement With Jimmy John’s To Stop
Including Non-Compete Agreements In Hiring
Packets (June 22, 2016), https://ag.ny.gov/pressrelease/2016/ag-schneiderman-announcessettlement-jimmy-johns-stop-including-noncompete.
336 This example is based on AK Steel Corp. v.
ArcelorMittal USA, LLC, 55 NE3d 1152, 1156 (Ohio
Ct. App. 2016).
337 This example is based on Press-A-Dent, Inc. v.
Weigel, 849 NE2d 661, 668–70 (Ind. Ct. App. 2006)
(holding that the agreement was an unlawful noncompete).
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prohibition or requires the worker to
pay liquidated damages.338
Another example of a term that
‘‘penalizes’’ a worker, under § 910.1, is
an agreement that extinguishes a
person’s obligation to provide promised
compensation or to pay benefits as a
result of a worker seeking or accepting
other work or starting a business after
they leave their job. One example of
such an agreement is a forfeiture-forcompetition clause, which, similar to
the agreement with liquidated damages
described previously, imposes adverse
financial consequences on a former
employee as a result of the termination
of an employment relationship,
expressly conditioned on the employee
seeking or accepting other work or
starting a business after their
employment ends. An additional
example of a term that ‘‘penalizes’’ a
worker under § 910.1 is a severance
arrangement in which the worker is
paid only if they refrain from
competing. The Commission also notes
that a payment to a prospective
competitor to stay out of the market may
also violate the antitrust laws even if it
is not a non-compete under this rule.339
The common thread that makes each
of these types of agreements noncompete clauses, whether they
‘‘prohibit’’ or ‘‘penalize’’ a worker, is
that on their face, they are triggered
where a worker seeks to work for
another person or start a business after
they leave their job—i.e., they prohibit
or penalize post-employment work for
another employer or business. As
elaborated in Part IV, such noncompetes are inherently restrictive and
exclusionary conduct, and they tend to
negatively affect competitive conditions
in both labor and product and service
markets by restricting the mobility of
workers and preventing competitors
from gaining access to those workers.
Pursuant to the term ‘‘functions to
prevent,’’ the definition of non-compete
clause also applies to terms and
conditions that restrain such a large
scope of activity that they function to
prevent a worker from seeking or
accepting other work or starting a new
business after their employment ends,
although they are not expressly
338 See, e.g., Wichita Clinic, P.A. v. Louis, 185
P.3d 946, 951 (Kan. Ct. App. 2008); Grayhawk
Homes, Inc. v. Addison, 845 SE2d 356 (Ga. Ct. App.
2020); Salewski v. Pilchuck Veterinary Hosp., Inc.,
359 P.3d 884 (Wash. Ct. App. 2015).
339 See., e.g., Palmer v. BRG of Ga., Inc., 498 U.S.
46, 49–50 (1990) (‘‘[A]greements between
competitors to allocate territories to minimize
competition are illegal’’ (citing United States v.
Topco Assocs., Inc., 405 U.S. 596 (1972)); FTC v.
Actavis, Inc., 570 U.S. 136, 154 (2013) (‘‘payment
in return for staying out of the market’’ may violate
the antitrust laws).
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triggered by these specific undertakings.
This prong of the definition does not
categorically prohibit other types of
restrictive employment agreements, for
example, NDAs, TRAPs, and nonsolicitation agreements. These types of
agreements do not by their terms
prohibit a worker from or penalize a
worker for seeking or accepting other
work or starting a business after they
leave their job, and in many instances
may not have that functional effect,
either. However, the term ‘‘functions to
prevent’’ clarifies that, if an employer
adopts a term or condition that is so
broad or onerous that it has the same
functional effect as a term or condition
prohibiting or penalizing a worker from
seeking or accepting other work or
starting a business after their
employment ends, such a term is a noncompete clause under the final rule.
In response to the comments alleging
that covering ‘‘de facto’’ or ‘‘functional’’
non-competes is overinclusive or vague,
the Commission notes that the
definition’s three prongs—‘‘prohibit,’’
‘‘penalize,’’ and ‘‘function to prevent’’—
are consistent with the current legal
landscape governing whether a
particular agreement is a non-compete.
In addition to generally accepted
definitions of non-competes
encompassing the ‘‘prohibits’’ prong of
the definition, terms that ‘‘penalize’’
workers for seeking or accepting other
work or starting a business after they
leave their job (for example, by
requiring them to pay liquidated
damages) are typically considered noncompetes under State law.340 And the
‘‘functions to prevent’’ prong of the
definition is likewise consistent with
legal decisions holding that restrictive
employment agreements other than noncompetes may be analyzed under the
State law test applicable to noncompetes where they function similarly
to non-competes.341 As the First Circuit
stated in a recent opinion, ‘‘[O]verly
broad nondisclosure agreements, while
not specifically prohibiting an employee
from entering into competition with the
former employer, raise the same policy
concerns about restraining competition
as noncompete clauses where, as here,
they have the effect of preventing the
defendant from competing with the
plaintiff.’’ 342 The fact that whether a
given restrictive covenant rises to the
level of being a functional non-compete
will turn on the facts and circumstances
340 See
supra note 338 and accompanying text.
e.g., Brown v. TGS Mgmt. Co., LLC, 57
Cal. App. 5th 303, 306, 316–19 (Cal. Ct. App. 2020);
Wegmann v. London, 648 F.2d 1072, 1073 (5th Cir.
1981); TLS Mgmt. & Mktg. Servs. v. RodriguezToledo, 966 F.3d 46, 59–60 (1st Cir. 2020).
342 TLS Mgmt. & Mktg. Servs., 966 F.3d at 57.
341 See,
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of particular covenants and the
surrounding market context does not
render this aspect of the final rule
overinclusive or vague. Such covenants
would be subject to case-by-case
adjudication for whether they constitute
an unfair method of competition even in
the absence of the final rule.
In response to the comments alleging
the Commission failed to cite evidence
that functional non-competes harm
competition, the Commission disagrees.
This final rule is based on a robust
evidentiary record that includes
significant empirical evidence and
thousands of public comments, as well
as the Commission’s longstanding
expertise in evaluating competition
issues. Based on this record, the
Commission finds that non-competes
are restrictive and exclusionary conduct
that tends to negatively affect
competitive conditions in labor markets
and markets for products and
services.343 In addition, the Commission
finds that, with respect to workers other
than senior executives, non-competes
are exploitative and coercive.344 The
Commission finds that the functional
equivalents of non-competes—because
they prevent workers from engaging in
the same types of activity—are likewise
restrictive and exclusionary conduct
that tends to negatively affect
competitive conditions in a similar way.
In response to the commenters who
expressed concern that prohibiting
functional non-competes would
undermine the rule’s intent to permit
reasonable substitutes, the Commission
stresses that, as described throughout
this Part III.D, the ‘‘functions to
prevent’’ prong of the definition of noncompete clause captures only
agreements that function to prevent a
worker from seeking or accepting other
work or starting a business after they
leave their job—not appropriately
tailored NDAs or TRAPs that do not
have that functional effect.
While many commenters requested
the Commission state expressly in the
final rule whether various specific
restrictive employment agreements
satisfy the definition of non-compete
clause, the Commission declines to
adopt a definition that attempts to
capture or carve out every edge case.
Rather, the final rule focuses on
providing a clear, understandable, and
generally applicable definition of noncompete clause that reflects the need for
case-by-case consideration of whether
certain restrictive covenants rise to the
level of being functional noncompetes—which is fully consonant
343 See
Parts IV.B and IV.C.
344 See Part IV.B.2.b.
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with the legal landscape employers
generally face today. The Commission
nevertheless here responds to comments
regarding the restrictive clauses that
commenters contended should be
expressly addressed in the final rule.
As noted in this Part III.D, restrictive
employment agreements other than noncompetes—such as NDAs, nonsolicitation agreements, and TRAPs—do
not by their terms or necessarily in their
effect prevent a worker from seeking or
accepting work with a person or
operating a business after the worker
leaves their job. For example, a gardenvariety NDA in which the worker agrees
not to disclose certain confidential
information to a competitor would not
prevent a worker from seeking work
with a competitor or from accepting
such work after the worker leaves their
job. Put another way, an NDA would not
be a non-compete under § 910.1 where
the NDA’s prohibitions on disclosure do
not apply to information that (1) arises
from the worker’s general training,
knowledge, skill or experience, gained
on the job or otherwise; or (2) is readily
ascertainable to other employers or the
general public.345
However, NDAs may be non-competes
under the ‘‘functions to prevent’’ prong
of the definition where they span such
a large scope of information that they
function to prevent workers from
seeking or accepting other work or
starting a business after they leave their
job. Examples of such an agreement may
include an NDA that bars a worker from
disclosing, in a future job, any
information that is ‘‘usable in’’ or
‘‘relates to’’ the industry in which they
work.346 Such an agreement would
effectively prevent the worker from
working for another employer in that
industry. A second example would be
an NDA that bars a worker from
disclosing any information or
knowledge the worker may obtain
during their employment whatsoever,
including publicly available
information.347 These agreements are so
broadly written that, for practical
purposes, they function to prevent a
worker from working for another
employer in the same field and are
therefore non-competes under § 910.1.
345 This example is based on sec. 9 of the Uniform
Restrictive Employment Agreement Act, supra note
332.
346 This example is based on Brown v. TGS
Mgmt., 57 Cal. App. 5th at 316–19 (‘‘Collectively,
these overly restrictive provisions [in the NDA at
issue] operate as a de facto noncompete provision;
they plainly bar Brown in perpetuity from doing
any work in the securities field.’’).
347 This example is based on TLS Mgmt. & Mktg.
Servs., 966 F.3d at 57 (holding that the NDA was
unenforceable).
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Under the final rule’s definition of
non-compete clause, the same inquiry
applies to non-solicitation agreements.
Non-solicitation agreements are
generally not non-compete clauses
under the final rule because, while they
restrict who a worker may contact after
they leave their job, they do not by their
terms or necessarily in their effect
prevent a worker from seeking or
accepting other work or starting a
business. However, non-solicitation
agreements can satisfy the definition of
non-compete clause in § 910.1 where
they function to prevent a worker from
seeking or accepting other work or
starting a business after their
employment ends. Whether a nonsolicitation agreement—or a no-hire
agreement or a no-business agreement,
both of which were referenced by
commenters, as discussed previously—
meets this threshold is a fact-specific
inquiry. The Commission further notes
that—like all the restrictive employment
agreements described in this Part III.D—
non-solicitation agreements, no-hire,
and no-business agreements are subject
to section 5’s prohibition of unfair
methods of competition, irrespective of
whether they are covered by the final
rule.
Depending on the facts and
circumstances, a TRAP can also
function to prevent a worker from
working for another firm or starting a
business. For example, one commenter
cited a TRAP that required entry-level
workers at an IT staffing agency who
were earning minimum wage or nothing
at all during their training periods to
pay over $20,000 if they failed to
complete a certain number of billable
hours.348 The commenter also cited a
TRAP requiring nurses to work for three
years or else repay all they have earned,
plus paying the company’s ‘‘future
profits,’’ attorney’s fees, and arbitration
costs.349 These types of TRAPs may be
functional non-competes because when
faced with significant out-of-pocket
costs for leaving their employment—
dependent on the context of the facts
and circumstances—workers may be
forced to remain in their current jobs,
effectively prevented from seeking or
accepting other work or starting a
business.
In response to the comments, the
Commission declines at this time to
either categorically prohibit all TRAPs
related to leaving employment, or to
exempt such provisions altogether. The
Commission agrees with comments
raising substantial concerns about the
348 Comment of Jonathan F. Harris, Dalie
´ Jime´nez,
& Jonathan Glater, FTC–2023–0007–20873 at 4.
349 Id. at 6–7.
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potential effects of such agreements on
competitive conditions. As noted in the
summary of the comments, commenters
cited TRAPs that impose penalties
disproportionate to the value of training
workers received and/or that claimed
training expenses for on-the-job
training. However, the evidentiary
record before the Commission
principally relates to non-competes,
meaning on the present record the
Commission cannot ascertain whether
there are any legitimate uses of TRAPs
that do not tend to negatively affect
competitive conditions. When TRAPs
function to prevent a worker from
seeking or accepting other work or
starting a business after the employment
associated with the TRAP, they are noncompetes under § 910.1.
The Commission notes that clauses
requiring repayment of a bonus when a
worker leaves their job would not be
non-competes under § 910.1 where they
do not penalize or function to prevent
a worker from seeking or accepting work
with a person or operating a business
after the worker leaves their job. For
example, a provision requiring the
repayment of a bonus if the worker
leaves before a certain period of time
would not be a non-compete under
§ 910.1 where the repayment amount is
no more than the bonus that was
received, and the agreement is not tied
to who the worker can work for, or their
ability to start a business, after they
leave their job. Similarly, a term or
condition under which a worker loses
accrued sick leave when their
employment ends would not function to
prevent a worker from seeking or
accepting work with a person or
operating a business after the worker
leaves their job.
With respect to garden leave
agreements, as noted previously,
commenters used the term ‘‘garden
leave’’ to refer to a wide variety of
agreements. The Commission declines
to opine on how the definition of noncompete clause in § 910.1 would apply
in every potential factual scenario.
However, the Commission notes that an
agreement whereby the worker is still
employed and receiving the same total
annual compensation and benefits on a
pro rata basis would not be a noncompete clause under the definition,350
because such an agreement is not a post350 The term and practice of ‘‘garden leave’’
appears to have a British origin and is recognized
by the Government of the United Kingdom. See
Gov.UK, Handing in your notice, https://
www.gov.uk/handing-in-your-notice/gardeningleave (‘‘Your employer may ask you not to come
into work, or to work at home or another location
during your notice period. This is called ‘gardening
leave’.’’).
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employment restriction. Instead, the
worker continues to be employed, even
though the worker’s job duties or access
to colleagues or the workplace may be
significantly or entirely curtailed.
Furthermore, where a worker does not
meet a condition to earn a particular
aspect of their expected compensation,
like a prerequisite for a bonus, the
Commission would still consider the
arrangement ‘‘garden leave’’ that is not
a non-compete clause under this final
rule even if the employer did not pay
the bonus or other expected
compensation. Similarly, a severance
agreement that imposes no restrictions
on where the worker may work
following the employment associated
with the severance agreement is not a
non-compete clause under § 910.1,
because it does not impose a postemployment restriction.
The Commission declines a
commenter’s request to replace the term
‘‘prevent’’ with ‘‘restrains’’ or ‘‘limits.’’
Commenters generally did not express
concern about the term ‘‘prevent’’ and
the Commission is concerned that
different language could greatly expand
the scope of the definition and reduce
its clarity.
The Commission also declines to
adopt alternative de facto tests raised by
commenters, such as a version of the
‘‘quick look’’ test. As described in Part
II.F, the legal standard under section 5
of the FTC Act is distinct from that of
the Sherman Act. The Commission also
declines to adopt a test that would
consider the primary purpose of a
restrictive employment agreement. The
Commission believes that it can be
difficult to establish an employer’s
subjective ‘‘purpose’’ in entering into an
agreement. In addition, such a test could
allow extremely overbroad agreements
that dramatically restrict a worker’s
ability to compete against the
employer—and have the negative effects
described in Parts IV.B and IV.C—as
long as the employer entered into the
agreement without the subjective intent
to restrict competition.
The Commission agrees with the
commenter who stated that proposed
§ 910.1(b)(2) was redundant because
proposed § 910.1(b)(1) was already a
functional definition. In the final rule,
the Commission has revised the text of
the definition of non-compete clause to
address confusion among commenters
about whether proposed § 910.1(b)(2)
clarified the definition or extended it.
In response to the commenters
requesting that the Commission clarify
the circumstances under which the
definition would apply to various other
types of restrictive employment
agreements, the Commission declines at
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this time to enumerate every
circumstance that may arise. As noted,
a restrictive employment covenant may
be a non-compete clause under § 910.1
if it expressly prohibits a worker from,
or penalizes a worker for, seeking or
accepting other work or starting a
business, or if it does not do so
expressly but is so broad or onerous in
scope that it functionally has the same
effect of preventing a worker from doing
the same.
3. International Application of the Rule
a. Comments Received
The Commission received several
comments expressing concern about
whether the final rule would apply to
non-competes that restrict work outside
the U.S. In response, the final rule’s
definition of non-compete clause
clarifies that it applies only to work in
the U.S. or operating a business in the
U.S.
Some commenters raised concerns
about the cross-border movement of
workers. A research center commenter
asserted there is a global shortage of
science and technology workers and
stated that the final rule’s adoption
could exacerbate the U.S. shortage by
allowing other countries to more easily
poach U.S. workers. An academic
commenter argued that banning noncompetes might deter foreign investors
from sending workers to the U.S. if the
final rule would invalidate their noncompetes.
Some commenters argued that legal
systems in the People’s Republic of
China or other jurisdictions provide
insufficient protection for U.S.
companies’ trade secrets, confidential
information, or patent rights, and
contended employers need noncompetes as ex ante protection. These
commenters generally say that trade
secrets litigation is more challenging in
some jurisdictions outside the U.S., for
example because of less extensive
discovery processes, less frequent use of
preliminary injunctions, insufficient
remedies, and a lower propensity to
prosecute criminal intellectual property
cases. An academic commenter argued
that some courts may have fewer
protections for confidential information
compared to the U.S., so a suit
concerning only a non-compete is less
likely to reveal trade secrets through the
course of litigation and thus more
effectively prevent technologies from
leaking to other governments and
protecting U.S. national security
interests. However, the comments
provided limited evidence on noncompetes and trade secret protection
outside the U.S., and collectively only
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discussed evidence from a few
jurisdictions. One commenter noted that
legal information and data from some
jurisdictions may not be fully accurate
because not all court decisions are
public.
Two commenters highlighted the
domestic semiconductor industry and
the CHIPS Act of 2022, arguing the
Chinese government seeks to acquire IP
related to semiconductors and
semiconductor experts with relevant
knowledge and information. Those
comments expressed concern that a ban
on non-competes would damage the
semiconductor industry, which relies on
skilled workers and trade secrets, by
weakening trade secrets protection and
disincentivizing investment. Another
commenter argued the proposed rule
would undermine export controls
designed to prevent foreign countries
from acquiring U.S. technology and
knowledge by allowing workers to move
to foreign competitors. One commenter
argued the proposed rule conflicts with
an October 2022 Bureau of Industry and
Security (‘‘BIS’’) export control
rulemaking, stating that the rulemaking
limits worker mobility in certain
industries from the U.S. to the People’s
Republic of China. Another commenter
suggested the proposed rule would
violate the World Trade Organization’s
Agreement on Trade-Related Aspects of
Intellectual Property Rights (TRIPS),
which requires that persons ‘‘shall have
the possibility of preventing information
lawfully within their control from being
disclosed to, acquired by, or used by
others without their consent . . . .’’ 351
Finally, one commenter argued that by
making it more difficult for businesses
to protect against international theft of
their intellectual property, the rule is at
odds with the purposes of the Protecting
American Intellectual Property Act of
2022.352
Some of these commenters made
recommendations for the final rule. A
law firm suggested that the final rule
prevent evasion by barring employers
from selecting the law of non-U.S.
jurisdictions to govern employment
contracts with U.S.-based workers. A
trade association requested that the final
rule cover only agreements subject to
the law of a U.S. State. An academic
commenter suggested revisions to the
text of the proposed rule to ensure the
final rule applies only within the U.S.
The commenter also recommended
stating that a non-compete restricting
351 Agreement on Trade-Related Aspects of
Intellectual Property Rights, Apr. 15, 1994,
Marrakesh Agreement Establishing the World Trade
Organization, Annex 1C, sec. 7, art. 39, para. 2, 33
I.L.M. 81 (as amended Jan. 23, 2017).
352 50 U.S.C. 1709.
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work outside the U.S. is not a per se
unfair method of competition and
providing guidance on how employers
should evaluate international noncompetes, using factors such as the
business justification for the noncompete and the impact on the worker.
The commenter recommended applying
the law of the jurisdiction where the
worker seeks to be employed.
b. The Final Rule
In response to commenters’ concerns,
in this final rule the Commission adopts
changes to the definition of ‘‘noncompete clause’’ that expressly limit the
definition of non-compete to terms or
conditions that prevent workers from
seeking or accepting work in the U.S. or
operating a business in the U.S. The
final rule does not apply to noncompetes if they restrict only work
outside the U.S. or starting a business
outside the U.S.
This revision clarifies for stakeholders
the scope of the final rule and confirms
it does not prohibit employers from
using non-competes that restrict work
outside the U.S., in compliance with
those jurisdictions’ own laws. The
Commission understands that, as a
commenter noted, some companies
operating or competing globally already
draft non-competes that comply with
the laws of multiple jurisdictions and,
thus, amending their non-competes to
reflect this application of the final rule
would not pose a significant challenge
for those entities.
The Commission’s revision clarifying
the final rule’s application to work or
starting a business only in the U.S. also
addresses the concerns from some
commenters about key U.S. workers and
technology flowing overseas, because
the final rule does not ban noncompetes that restrict workers from
working or starting a business outside
the U.S. It also clarifies that the final
rule would not invalidate non-competes
entered into by foreign companies with
foreign workers unless they restrict a
worker’s ability to work or start a
business inside the U.S. Other questions
about the final rule’s application to
cross-border or non-U.S. employment
are also addressed by the Foreign Trade
Antitrust Improvements Act, codified at
15 U.S.C. 45(a)(3).
The Commission agrees with the
academic commenter that, for noncompetes that apply outside the U.S.,
the law of the relevant jurisdiction
should govern any issue other than
restricting work or starting a business in
the U.S. However, the Commission
declines to adopt a balancing test for
non-competes restricting a worker’s
ability to work or start a business
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38367
outside the U.S., as a bright-line rule
that applies only to work or starting a
business in the U.S. is more
administrable. In addition, the
Commission declines to add language in
the final rule stating that it does not
apply to overseas employers or to noncompetes not subject to U.S. State law.
The final rule may apply to overseas
employers if the non-compete purports
to restrict work or starting a business in
the U.S. and the reviewing court applies
U.S. law.
The empirical evidence cited in the
NPRM focused on the U.S., primarily
consisting of studies based on the effects
of changes in State laws in the U.S. The
comments provided limited evidence on
non-competes and trade secret
protection outside the U.S., leaving
many issues and most jurisdictions
unaddressed. The Commission also
notes, as one commenter did, that legal
information and data from some
jurisdictions may not be fully accurate
because not all court decisions are
public. On the current record, the
Commission cannot reach conclusions
on whether other jurisdictions have
sufficient alternatives to non-competes,
the scope of any potential risk, and
many of the other issues raised. As a
result, the Commission limits
application of the final rule to work in
the U.S., where the Commission has
ample evidence on non-competes’
negative effects.
One commenter argued the rule
conflicts with BIS’s October 2022 export
control rulemaking, which restricts the
ability of U.S. persons to support
development or production at certain
semiconductor facilities in the People’s
Republic of China without a license
from BIS.353 While the revision
addresses the commenter’s underlying
concern about protection of sensitive
technology from other governments by
not banning non-competes that restrict
the movement of workers to and in
other jurisdictions, neither the NPRM
nor the final rule is inconsistent with
the BIS rule. The final rule will not
affect BIS’s ability to grant or decline to
grant a license. With respect to the
commenter that suggested the rule
would violate TRIPS, the Commission
has found that U.S. law provides
alternative means of protecting trade
secrets,354 and TRIPS does not require
enforcement of non-competes.
With respect to the commenter that
stated that the final rule should include
353 Implementation of Additional Export Controls:
Certain Advanced Computing and Semiconductor
Manufacturing Items; Supercomputer and
Semiconductor End Use; Entity List Modification,
Interim Final Rule, 87 FR 62186 (Oct. 13, 2022).
354 See Part IV.D.2.
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a choice-of-law provision to prevent
evasion, there is an existing body of law
in the U.S. governing choice of law and
conflict of law issues. Accordingly, the
Commission declines to add any
provisions concerning choice of law or
conflict of law to the final rule. Rather,
such questions are left to the relevant
jurisdiction, whether that is a U.S. State,
the Federal government, or another
jurisdiction, as determined by
applicable law.
4. Other Issues Relating to the Definition
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a. Comments Received
While most commenters focused on
the proposed definition’s application to
functional non-competes or
international application, some
commenters addressed other issues
relating to the proposed definition.
Several commenters stated that the
definition should cover workplace
policies or handbooks, to minimize
confusion and make clear that
employers are prohibited from
including non-competes in workplace
policies or handbooks, even if such
clauses are unenforceable because they
are not formal binding contracts. Some
commenters stated that such policies or
handbooks can affect a worker’s
decision to leave their job to work with
a competitor or start their own
businesses. Others stated the same about
oral agreements. One commenter stated
that the definition should not cover
workplace policies because they apply
only during, not after, employment.
A few commenters said the
Commission should state explicitly in
the definition of ‘‘non-compete clause’’
that restrictions on concurrent
employment, such as prohibitions on
‘‘moonlighting’’ with competitors, are
excluded. Other commenters urged the
Commission to expand the definition to
include restraints on concurrent
employment because workers often
need to take additional jobs during
economic downturns, and low-wage
workers generally need to take on
additional jobs.
An organized labor commenter argued
that no-raid agreements, which the
commenter described as agreements
between labor organizations not to
attempt to organize workers already
under representation by another union,
should be exempted from the definition.
An industry trade organization asked
the Commission to clarify whether the
definition would apply to non-competes
in agreements between motor carriers
and brokers in the trucking industry. In
addition, a few commenters stated that
proposed § 910.1(b)(1) was too broad or
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potentially ambiguous without pointing
to any specific features of the definition.
b. The Final Rule
To address the concerns raised by
commenters about workplace policies
and handbooks, the definition of noncompete clause in § 910.1 uses the
phrase ‘‘a term or condition of
employment’’ instead of ‘‘contractual
term.’’ The definition further clarifies
that term or condition of employment
includes ‘‘a contractual term or
workplace policy, whether written or
oral.’’ The Commission finds that
employers have used restrictions in
handbooks, workplace policies, or other
vehicles that are not formal written
contracts to successfully prevent
workers from seeking or accepting other
employment or starting a new business.
The Commission finds, consistent with
the views expressed by commenters,
that such restrictions in handbooks,
workplace policies, or other such
vehicles have the same tendency to
negatively affect competitive conditions
as a formal binding contract term. To
provide that such conduct is covered by
the definition of non-compete clause,
this language clarifies that the definition
of non-compete clause is not limited to
clauses in written, legally enforceable
contracts and applies to all forms a noncompete might take, including
workplace policies or handbooks and
informal contracts. Given the comments
expressing concern about oral
representations, the Commission
clarifies in the definition of noncompete clause that clauses that purport
to bind a worker are covered, whether
written or oral, and provides in
§ 910.2(a)(1) and (2) that it is an unfair
method of competition to make
representations that a worker is subject
to a non-compete. (However, as
explained in Part V.C, such
representations are not prohibited
where the person has a good-faith basis
to believe that the final rule is
inapplicable.)
The Commission declines to extend
the reach of the final rule to restraints
on concurrent employment. Although
several commenters raised this issue,
the evidentiary record before the
Commission at this time principally
relates to post-employment restraints,
not concurrent-employment restraints.
The fact that the Commission is not
covering concurrent-employment
restraints in this final rule does not
represent a finding or determination as
to whether these terms are beneficial or
harmful to competition. The
Commission relatedly clarifies that
fixed-duration employment contracts,
i.e., contracts between employers and
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workers whereby a worker agrees to
remain employed with an employer for
a fixed term and the employer agrees to
employ the worker for that period, are
not non-compete clauses under the final
rule because they do not restrain postemployment conduct.
While the final rule does not extend
to restraints on concurrent employment,
the Commission has made a technical
edit to the definition of non-compete to
clarify how it relates to seeking and
accepting employment. Proposed
§ 910.1(b) defined non-compete clause
as a contractual term that ‘‘prevents the
worker from seeking or accepting
employment with a person . . . after the
conclusion of the worker’s employment
with the employer.’’ Because, as a
technical matter, non-competes can also
prevent workers from seeking or
accepting future employment with
another person before their work for
their previous employer has concluded,
the Commission has clarified the
relevant language to read ‘‘that prevents
a worker from 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’’ and
‘‘that prevents a worker from operating
a business in the United States after the
conclusion of the employment that
includes the term or condition’’
(emphases added).
In addition, in response to comments
expressing concern about evasion of the
rule through third-party hiring,355 the
Commission has revised the phrase
‘‘after the conclusion of the worker’s
employment with the employer’’ to read
‘‘after the conclusion of the employment
that includes the term or condition.’’
The Commission recognizes that noncompetes can cover workers who are
hired by one party but work for another,
such as workers hired through staffing
agencies. The Commission intends for
the final rule to apply to such noncompetes, and for this revision to
eliminate any ambiguity as to whether
such clauses are covered by the
definition of non-compete clause in
§ 910.1.
With respect to the comment about
union no-raid agreements, the
Commission notes that the definition
would apply only to the extent the
agreement is a ‘‘term or condition of
employment’’ and only if the agreement
‘‘prevents a worker from 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
355 These comments are described in greater
detail in Part III.G.
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condition’’ or ‘‘operating a business in
the United States after the conclusion of
the employment that includes the term
or condition.’’ 356 The Commission’s
understanding is that union no-raid
agreements are not terms and conditions
of employment that prevent workers
from seeking or accepting work or
operating a business.
With respect to the comment asking
whether the definition would apply to
non-competes in agreements between
motor carriers and brokers in the
trucking industry, the Commission
notes as a general matter that the
definition would not apply to noncompetes between businesses, but the
Commission declines to opine on
specific factual circumstances.
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E. Definition of ‘‘Person’’
The proposed rule did not separately
define the term ‘‘person.’’ Instead,
proposed § 910.1(c)—the proposed
definition of ‘‘employer’’—stated that an
employer ‘‘means a person, as defined
in 15 U.S.C. 57b–1(a)(6), that hires or
contracts with a worker to work for the
person.’’ The statutory provision crossreferenced in proposed § 910.1(c) is
section 20(a)(6) of the FTC Act, which
defines ‘‘person’’ for purposes of the
Commission’s authority to issue civil
investigative demands. Section 20(a)(6)
defines ‘‘person’’ as ‘‘any natural
person, partnership, corporation,
association, or other legal entity,
including any person acting under color
or authority of State law.’’ No comments
were received concerning the use of
‘‘person’’ in proposed § 910.1(c).
As explained in Part III.C, the
Commission has removed the defined
term ‘‘employer’’ from the regulatory
text of the final rule. However, the
regulatory text still uses the term
‘‘person.’’ For example, § 910.2(a)(1)
prohibits a ‘‘person’’ from, among other
things, entering into a non-compete
clause. As a result, the Commission has
adopted a separate definition of the term
‘‘person.’’ Section 910.1 defines
‘‘person’’ as ‘‘any natural person,
partnership, corporation, association, or
other legal entity within the
Commission’s jurisdiction, including
any person acting under color or
authority of State law.’’ This text
consists of the proposed definition from
section 20(a)(6), plus the phrase ‘‘within
the Commission’s jurisdiction,’’ which
clarifies that only persons within the
Commission’s jurisdiction are subject to
the final rule.
356 § 910.1.
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F. Definitions Related to Senior
Executives
With respect to existing noncompetes, i.e., non-competes entered
into before the final rule’s effective date,
the Commission adopts a different
approach for ‘‘senior executives’’ than
for other workers. Existing noncompetes with senior executives can
remain in force; the final rule does not
cover such agreements.357 For workers
who are not senior executives, existing
non-competes are no longer enforceable
after the final rule’s effective date.358
The Commission describes its rationale
for the final rule’s differential treatment
of senior executives in Part IV.C.
Section 910.1 defines the term ‘‘senior
executive’’ as well as related terms.
Because the Commission’s rationale for
the final rule’s differential treatment of
senior executives provides important
context for these definitions, the
Commission describes these definitions
in Part IV.C.4.
G. Definition of ‘‘Worker’’
1. Proposed Definition
In the NPRM, the Commission
proposed to define ‘‘worker’’ in
proposed § 910.1(f) as ‘‘a natural person
who works, whether paid or unpaid, for
an employer.’’ 359 Proposed § 910.1(f)
also stated that ‘‘the term [worker]
includes, without limitation, an
employee, individual classified as an
independent contractor, extern, intern,
volunteer, apprentice, or sole proprietor
who provides a service to a client or
customer.’’ 360
In the NPRM, the Commission
explained it intended the term ‘‘worker’’
to include not only employees, but also
individuals classified as independent
contractors, as well as other kinds of
workers.361 The Commission explained
that, under proposed § 910.1(f), the term
‘‘worker’’ would include any natural
person who works, whether paid or
unpaid, for an employer, without regard
to whether the worker is classified as an
‘‘employee’’ under the FLSA or any
other statute that draws a distinction
between ‘‘employees’’ and other types of
workers.362
The Commission stated in the NPRM
that it was concerned that if the rule
were to define workers as ‘‘employees’’
according to, for example, the FLSA
definition, employers may misclassify
employees as independent contractors
to evade the rule’s requirements.363 The
Commission explained it had no reason
to believe non-competes that apply to
workers who are treated as independent
contractors under the FLSA or interns
tend to negatively affect competitive
conditions to a lesser degree than noncompetes that apply to employees, and
that such non-competes may, in fact, be
more harmful to competition, given that
these other types of workers tend to
have shorter working relationships.364
In addition, the Commission explained
that the purported business
justifications for applying non-competes
to independent contractors would not
be different or more cognizable from
those related to employees.365
Proposed § 910.1(f) also stated the
term worker ‘‘does not include a
franchisee in the context of a franchiseefranchisor relationship.’’ 366 The
Commission explained that the
relationship between a franchisor and
franchisee may in some cases be more
analogous to the relationship between
two businesses than the relationship
between an employer and a worker, and
that the evidentiary record before the
Commission related primarily to noncompetes arising solely out of
employment.367 The Commission
therefore stated that it believed it would
be appropriate to clarify that a
franchisee—in the context of a
franchisor-franchisee relationship—is
not a ‘‘worker’’ for purposes of proposed
§ 910.1(f).368
Proposed § 910.1(f) further clarified,
however, that the term worker ‘‘includes
a natural person who works for the
franchisee or franchisor,’’ and that
‘‘non-competes between franchisors and
franchisees remain subject to [F]ederal
antitrust law as well as all other
applicable law.’’ 369 The Commission
explained that these laws include State
laws that apply to non-competes in the
franchise context.370 The Commission
also clarified that it was not proposing
to find that non-competes between
franchisors and franchisees are
beneficial to competition.371
2. Comments Received
Several commenters stated that they
agreed with the proposed definition of
‘‘worker’’ because it applies to all
workers without regard to their
classification. Many of these
363 Id.
364 Id.
365 Id.
357 See
Part IV.C.3.
358 See § 910.2(a)(1)(i).
359 NPRM, proposed § 910.1(f).
360 Id.
361 Id. at 3511.
362 Id.
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366 Id.
at 3511, 3520.
367 Id.
368 Id.
369 Id.
at 3511.
370 Id.
371 Id.
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commenters specifically urged the
Commission to adopt a final definition
that includes all categories of workers
regardless of whether they are classified
as employees, including independent
contractors, ‘‘gig’’ workers, and others.
These commenters pointed to the
Commission’s preliminary finding that
non-competes are widely used across
the economy. They cited employers’
frequent misclassification of workers as
independent contractors, agreeing with
concerns raised in the NPRM that, if
‘‘worker’’ excludes independent
contractors, employers may misclassify
workers as independent contractors to
avoid complying with the rule. Many
commenters stated that millions of
workers are misclassified as
independent contractors, including a
disproportionate number of women,
people of color, and low-income
workers. These commenters expressed
concern that, if the rule excluded
independent contractors from coverage,
it would fail to benefit these groups, for
whom non-competes may be
particularly exploitative and coercive.
On the other hand, several
commenters suggested removing bona
fide independent contractors and sole
proprietors from the definition of
‘‘worker.’’ Two industry groups
contended that there is a lack of data
regarding the prevalence and effects of
non-competes among independent
contractors as opposed to other kinds of
workers and that, as a legal matter, the
evidence is insufficient to justify
including independent contractors as
‘‘workers’’ under the rule. A few
industry organizations also contended
that, because they have more control
over their work and generally work for
more than one employer, independent
contractors have greater bargaining
power than other workers. One
academic commenter suggested that
non-competes between employers and
independent contractors are more akin
to agreements between businesses than
agreements between employers and
workers. A few of these industry
organizations also contended that noncompetes are justified because
independent contractors provide
services outside the scope of their
employers’ expertise and thus have
greater access to sensitive information
than other workers. Other industry
organizations contended that small
businesses employ more independent
contractors than their larger rivals.
These commenters stated that, to protect
small businesses from being impacted
disproportionately by the rule, the
definition of ‘‘worker’’ should exclude
independent contractors. Finally, a few
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industry trade organizations and an
academic commenter stated that
independent contractors should be
excluded from coverage under the rule
to avoid ‘‘free riding,’’ in which a
contractor working for one firm can use
that firm’s assets—like tools or
databases—to benefit another firm.
Several commenters suggested
changes to the definition of ‘‘worker’’ to
maximize the rule’s coverage and close
potential loopholes. One worker
advocacy group noted that, combined
with the proposed definition of
‘‘employer,’’ the proposed definition of
‘‘worker’’—a natural person who works
‘‘for an employer’’—appeared to exclude
workers who work for a person other
than the person who hired or contracted
with them to work. The commenter
noted that workers are often employed
indirectly—by way of a contractual
relationship with a staffing agency, an
affiliate of their common-law employer,
or some entity other than their commonlaw employer—and that non-competes
are often imposed on workers by the
non-hiring party. In order to ensure
these workers are covered by the rule,
the commenter suggested that the
definition of ‘‘worker’’ should also cover
a person who works ‘‘directly or
indirectly’’ for an employer and that the
definition specifically include ‘‘a person
who works for the employer under an
arrangement with a professional
employer organization, statutory
employer, wholly owned entity of
which the person is the sole or principal
employee or service provider, loan-out
arrangement or similar arrangement.’’
The same commenter also argued that
employers often impose non-competes
on workers who own a portion of the
business while not applying the same
restriction to outside investors who do
not work for the company, and that such
worker-owner non-competes should be
treated as employment-related noncompetes. In order to ensure these
workers are covered by the rule, the
commenter suggested that ‘‘worker’’
should also include ‘‘a person who
holds direct or indirect equity or other
interest in the employer and who
provides services to or for the benefit of
the employer.’’ Another commenter
suggested that, for clarity, ‘‘worker’’
should specifically exclude a
‘‘substantial owner, member or partner’’
as defined in the sale-of-business
exception.
Several State attorneys general, local
government commenters, academic
commenters, and a worker advocacy
group warned that categorically
excluding franchisees from the
definition of ‘‘worker’’ would lead
employers to misclassify workers as
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franchisees to evade the rule’s
requirements. Some commenters
suggested incorporating the ‘‘ABC’’
test—a common law test designed to
determine whether a worker is an
employee based on fact-specific
conditions—into the definition of
‘‘worker’’ to prevent evasion.372
Some commenters requested that the
Commission revise the definition of
‘‘worker’’ to exclude or include certain
workers from coverage under the rule.
These comments are addressed in Part
IV.C (comments requesting an exclusion
for senior executives) and in Part V.D
(comments requesting exclusions for
other categories of workers).
3. The Final Rule
After considering the comments, the
Commission revised the definition of
‘‘worker’’ in three ways to clarify that
the term covers all current and former
workers, regardless of which entity
hired or contracted with them to work,
and regardless of a worker’s title or
status under any other applicable law.
First, the Commission added ‘‘or who
previously worked’’ to the basic
definition of ‘‘worker’’ as ‘‘a natural
person who works.’’ This revision is
designed to clarify that former workers
are considered ‘‘workers’’ under the
final rule, such as where an employer is
required to notify a former worker that
their non-compete is no longer
enforceable.373
Second, the Commission removed
‘‘for an employer’’ from the definition.
This revision is designed to ensure that
the final rule covers workers who are
hired by one party but work for another,
closing the unintended loophole
identified by commenters regarding
third-party hiring.
Third, the Commission added
‘‘without regard to the worker’s title or
the worker’s status under any other
State or Federal laws’’ prior to the list
of examples of different categories of
workers that the definition covers. This
change is designed to make more
explicit that the term ‘‘worker’’ includes
all workers regardless of their titles,
status under other laws, or the details of
the contractual relationship with their
employer.
The Commission has made two
additional changes to the definition for
clarity. First, the Commission has
revised the phrase ‘‘individual classified
as an independent contractor’’ to
‘‘independent contractor.’’ Second, the
Commission has added ‘‘a natural
person who works for a franchisee or
372 See, e.g., Dynamex Operations W. v. Superior
Ct., 4 Cal. 5th 903, 955–957 (Cal. 2018).
373 See § 910.2(b).
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franchisor’’ to the non-exclusive list of
examples of types of workers that would
be covered by the definition. This
language is simply moved from
elsewhere in the definition. Third, the
Commission has removed the sentence
reading ‘‘[n]on-competes between
franchisors and franchisees would
remain subject to Federal antitrust law
as well as all other applicable law’’ from
the definition to avoid the implication
that only such non-competes remain
subject to Federal antitrust law and
other applicable law.
The Commission declines to specify
that a ‘‘worker’’ includes an owner who
provides services to or for the benefit of
their business because the definition
already encompasses the same.
The Commission is not persuaded by
commenters’ arguments that
independent contractors or sole
proprietors are inherently different from
other kinds of workers with respect to
non-competes, and therefore declines to
exclude them from the definition of
‘‘worker.’’ Commenters did not present
persuasive evidence that non-competes
that apply to independent contractors or
sole proprietors tend to negatively affect
competitive conditions to a lesser
degree—or are restrictive, exclusionary,
exploitative, or coercive to a lesser
degree—than non-competes that apply
to other workers. As noted by
commenters who supported including
independent contractors, non-competes’
tendency to negatively affect
competitive conditions by restricting
workers’ ability to change jobs or start
businesses is not contingent on whether
the worker is an employee or an
independent contractor. While some
commenters contended that
independent contractors have more
independence and more access to
intellectual property than other workers,
commenters did not provide evidence
that this is the case. Moreover, even
were this to be true, it would not justify
an exclusion, because the Commission
generally declines to exclude workers
based on their access to intellectual
capital or their independence for the
reasons explained in Part V.D.
Furthermore, whether a worker is an
employee or an independent contractor
does not impact employers’ ability to
exploit imbalances of bargaining power
or limit employers’ ability to use less
restrictive alternatives to non-competes
to protect their intellectual property.
While commenters who supported
excluding independent contractors
contended that independent contractors
have more bargaining power than other
workers, this contention is not backed
by evidence. While some economists
hypothesize that, theoretically,
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independent contractors may have more
bargaining power vis-a`-vis employers
than employees do, they do not provide
empirical evidence to support that
assertion. Furthermore, as described by
a report from the Treasury Department
that was based on an extensive literature
review, independent contractors may
have less bargaining power than
employees in many respects.374
The Commission is also not
persuaded that non-competes are
necessary to prevent ‘‘free riding’’ by
independent contractors who use one
firm’s assets to benefit another. The
final rule prohibits agreements that
restrain a worker from working after the
scope of employment has ended and
does not prohibit agreements which
prevent a worker from working for two
firms simultaneously. In addition, any
‘‘free riding’’ may be addressed through
less restrictive means, including
through agreements prohibiting an
independent contractor from using
assets provided by one firm to benefit
another.
Nor is the Commission persuaded that
small businesses will be
disproportionately harmed by a rule
which prohibits non-competes for
independent contractors. Commenters
did not provide evidence to support
their assertion that small businesses
employ more independent contractors
than larger ones.
The Commission agrees with the
commenters who contended that
excluding independent contractors may
have the effect of excluding
misclassified workers, who may be
among the most vulnerable to
exploitation and coercion. The recent
overview by the U.S. Department of
Labor (‘‘DOL’’) of the evidence on
misclassification led it to conclude that
although the prevalence of
misclassification of employees as
independent contractors is unclear,
there is evidence that it is nonetheless
‘‘substantial’’ and has a disproportionate
effect on workers who are people of
color or immigrants because of the
disparity in occupations most affected
by misclassification, which include jobs
in construction, trucking, delivery,
home care, agriculture, personal care,
ride-hailing services, and janitorial and
building services.375 The Commission
also agrees with commenters’
contentions that excluding independent
contractors from the definition of
374 U.S. Treasury Dep’t, Report, The State of
Labor Market Competition (Mar. 7, 2022)
(hereinafter ‘‘Treasury Labor Market Competition
Report’’).
375 Employee or Independent Contractor
Classification Under the Fair Labor Standards Act,
89 FR 1638, 1735 (Jan. 10, 2024).
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38371
‘‘worker’’ could increase employers’
incentive to misclassify workers as
independent contractors. Indeed,
misclassification is often motivated by
attempts to evade the application of
laws.
Because there is no reason to believe
non-competes that apply to independent
contractors or sole proprietors tend to
negatively affect competitive conditions
to a lesser degree, or are restrictive,
exclusionary, exploitative, or coercive to
a lesser degree, than non-competes that
apply to employees—and in light of
substantial evidence of widespread
employee misclassification—the
Commission declines to exclude
independent contractors from the
definition of ‘‘worker.’’ For this reason,
the Commission also declines to
incorporate the ‘‘ABC’’ test or other tests
designed to differentiate between
independent contractors and employees.
IV. Section 910.2: Unfair Methods of
Competition
A. Introduction
1. Overview of the Commission’s
Findings and Determinations
In the NPRM, the Commission
proposed to categorically ban employers
from using non-competes with all
workers, including existing agreements.
However, the Commission sought
comment on whether it should adopt
different standards for non-competes
with senior executives, and, if so, how
it should define senior executives.376
Based on the totality of the evidence,
including its review of the empirical
literature, its review of the full comment
record, and its expertise in identifying
practices that harm competition, the
Commission in this final rule finds that
non-competes with all workers are an
unfair method of competition—although
its rationale differs with respect to
workers who are and are not senior
executives.
The final rule provides that it is an
unfair method of competition—and
therefore a violation of section 5—for
employers to, inter alia, enter into noncompetes with workers on or after the
final rule’s effective date.377 The
Commission thus adopts a
comprehensive ban on new noncompetes with all workers. With respect
to existing non-competes, i.e., noncompetes entered into before the final
rule’s effective date, the Commission
adopts a different approach for senior
executives 378 than for other workers.
376 NPRM
at 3519.
§ 910.2(a)(1)(i) and § 910.2(a)(2)(i).
378 See § 910.1 (defining ‘‘senior executive’’).
377 See
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Existing non-competes with senior
executives can remain in force; the final
rule does not cover them.379 For
workers who are not senior executives,
existing non-competes are no longer
enforceable after the final rule’s
effective date.380 Employers must
provide such workers with existing noncompetes notice that the non-competes
will not be enforced after the final rule’s
effective date.381
Specifically, with respect to workers
who are not senior executives, the
Commission determines that it is an
unfair method of competition for a
person to enter into or attempt to enter
into a non-compete clause; enforce or
attempt to enforce a non-compete
clause; or represent to the worker that
the worker is subject to a non-compete
clause.382 The Commission finds that
with respect to these workers, these
practices are unfair methods of
competition in several independent
ways:
• The use of non-competes is
restrictive and exclusionary conduct
that tends to negatively affect
competitive conditions in labor markets.
• The use of non-competes is
restrictive and exclusionary conduct
that tends to negatively affect
competitive conditions in product and
service markets.
• The use of non-competes is
exploitative and coercive conduct that
tends to negatively affect competitive
conditions in labor markets.
• The use of non-competes is
exploitative and coercive conduct that
tends to negatively affect competitive
conditions in product and service
markets.
In contrast, with respect to senior
executives, the Commission determines
that it is an unfair method of
competition for a person to enter into or
attempt to enter into a non-compete
clause; enforce or attempt to enforce a
non-compete clause entered into after
the effective date; or represent that the
senior executive is subject to a noncompete clause, where the non-compete
clause was entered into after the
effective date. The Commission does not
find that non-competes with senior
executives are exploitative and coercive.
With respect to senior executives, the
Commission finds that non-competes
are unfair methods of competition in
two independent ways:
• The use of non-competes is
restrictive and exclusionary conduct
that tends to negatively affect
379 See
Part IV.C.3.
§ 910.2(a)(1)(ii) and § 910.2(a)(1)(iii).
381 See § 910.2(b).
382 See § 910.2(a)(1).
380 See
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competitive conditions in product and
service markets.
• The use of non-competes is
restrictive and exclusionary conduct
that tends to negatively affect
competitive conditions in labor markets.
The final rule allows existing noncompetes with senior executives to
remain in force. Because the harm of
these non-competes is principally that
they tend to negatively affect
competitive conditions (rather than
exploiting or coercing the executives
themselves), and due to practical
concerns with extinguishing existing
non-competes for such executives, the
final rule prohibits employers only from
entering into or enforcing new noncompetes with senior executives.
Parts IV.B and IV.C set forth the
findings that provide the basis for the
Commission’s determinations that the
foregoing practices are unfair methods
of competition under section 5 for these
two categories of workers,
respectively.383 In these sections, the
Commission also describes and
responds to comments regarding the
preliminary findings in the NPRM that
informed its preliminary determinations
related to unfair methods of
competition.
2. Analytical Framework for Assessing
Empirical Evidence
Before turning to the basis for its
findings, the Commission describes the
analytical framework it has applied in
assessing the empirical evidence on
non-competes. In the NPRM, the
Commission discussed the existing
empirical literature on non-competes
and its assessment of those studies,
including its preliminary view of which
studies were more robust and thus
should be given more weight.384 In
response, some commenters argued the
Commission gave too much weight to
certain studies or too little weight to
others.385
The Commission notes that the
methodologies of empirical studies on
383 In addition to the findings described in Parts
IV.B and C, the Commission finds that the use of
non-competes by employers substantially affects
commerce as that term is defined in section 5 and
burdens a not insubstantial portion of commerce.
The findings in Parts IV.B and C apply with respect
to senior executives and other workers, whether
considered together or respectively. The evidence
establishes that non-competes affect labor mobility,
workers’ earnings, new business formation, and
innovation, including empirical evidence
specifically identifying cross-border effects with
respect to earnings, see infra notes 464–468 and
accompanying text, and innovation, see infra note
563 and accompanying text.
384 See NPRM at 3484–93.
385 The Commission discusses comments
addressing specific studies in Parts IV.B, IV.C, and
IV.D.
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the effects of non-competes vary widely.
In this final rule, based on the
Commission’s longstanding expertise
assessing empirical evidence relating to
the effects of various practices on
competition, the Commission gives
more weight to studies with
methodologies that it finds are more
likely to yield accurate, reliable, and
precise results. In evaluating studies,
the Commission utilized the following
five principles that reflect best practices
in the economic literature.
First, the Commission gives more
weight to studies examining the effects
of a change in legal status or a change
in the enforceability of non-competes,
and less weight to studies that simply
compare differences between workers
who are subject to non-competes and
those who are not. Studies that look at
what happens before and after a change
in State law that affects the
enforceability of non-competes provide
a reliable way to study the effects of the
change. This is especially true when
only the enforceability of non-competes
changes, and not other factors affecting
firms and workers. If other substantial
changes do not also occur around the
same time, this study design often
allows the researcher to infer that the
change caused the effects—since the
likelihood that confounding variables
are driving the effects or outcomes is
minimal.386
In contrast, other studies of the use of
non-competes compare a sample of
workers who are subject to noncompetes with a sample of workers who
are not subject to non-competes. The
shortcoming of these studies is that they
cannot easily differentiate between
correlation and causation. For example,
if such a study shows that workers with
non-competes earn more, there could be
many confounding reasons for this
result. For example, employers may be
more likely to enter into non-competes
with workers who earn more. In
contrast, a study showing that workers’
earnings increase or decrease when non386 In Parts IV.B and C, the Commission describes
how these ‘‘enforceability’’ studies show that
increased enforceability of non-competes results in
various harms, such as reduced earnings, new
business formation, and innovation. Notably, the
available evidence also shows that workers are
chilled from engaging in competitive activity even
where a non-compete is likely unenforceable—for
example, because they are unaware of the law or
unable to afford a legal battle against the employer.
See Part IV.B.3.a.i. The fact that many workers may
not adjust their behavior in response to changes in
State-level enforceability of non-competes suggests
that the final rule could result in even greater
effects than those observed in the research,
particularly because it would require employers to
provide workers with notice that their non-compete
is no longer in effect, which would help correct for
workers’ lack of knowledge of the law. See
§ 910.2(b).
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competes are made more or less
enforceable provides much stronger
evidence regarding the effect of noncompetes, in isolation. Researchers
studying non-competes are aware of this
bias and frequently caution that
estimates of the correlation between
outcomes and the use of non-competes
should not be misinterpreted as
causal.387
Second, the Commission gives more
weight to studies examining the effects
of changes in non-compete
enforceability and less weight to studies
that simply compare economic
outcomes between States where noncompetes are more enforceable and
States where non-competes are less
enforceable. This latter category of
studies is known as ‘‘cross-sectional
studies of enforceability.’’ Like studies
based on the use of non-competes, these
cross-sectional studies of enforceability
cannot easily differentiate between
correlation and causation. This is
because differences between States that
are unrelated to non-competes and their
enforceability can easily pollute
comparisons. For example, noncompetes are less enforceable in
California than in Mississippi, and the
cost of living is higher in California than
in Mississippi. However, the difference
in the cost of living is likely to be due
to underlying differences between the
economies and geographies of the two
States, rather than being attributable to
non-competes. In contrast, studies
examining how changes in
enforceability of non-competes affect
various outcomes—studies that look at
what happens within States before and
after a change in State law that affects
the enforceability of non-competes—
allow researchers to infer that the
change caused the effects.388
Despite having this limitation, the
Commission believes that crosssectional studies of enforceability are
still superior to the ‘‘use’’ studies
described under the first principle. This
is because although comparisons of
different States may have unreliable
results due to confounding variables—
depending on which States are
387 See, e.g., Starr, Prescott, & Bishara, supra note
68 at 73 (‘‘Our analysis of the relationships between
noncompete use and labor market outcomes . . . is
best taken as descriptive and should not be
interpreted causally.’’); Johnson & Lipsitz, supra
note 80 at 711 (‘‘These regressions [of firm
investment on non-compete use] should be
interpreted as correlations rather than causation,
since the decisions to make these investments and
use [non-competes] are made jointly.’’).
388 Matthew S. Johnson, Kurt J. Lavetti, & Michael
Lipsitz, The Labor Market Effects of Legal
Restrictions on Worker Mobility, Nat’l Bureau of
Econ. Rsch. 2 (2023) (‘‘. . . cross-sectional variation
in enforceability might be correlated with other
unobserved differences across states.’’).
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compared—‘‘use’’ studies are inherently
unreliable due to confounding effects.
For example, because employers enter
into non-competes more often with
highly paid workers, all ‘‘use’’ studies
related to worker earnings are
inherently unreliable, although studies
that utilize data on the use of noncompetes but employ a design that
plausibly identifies a causal effect may
be less unreliable.
Third, the Commission gives more
weight to studies assessing changes in
the enforceability of non-competes in
multiple States. This reduces the
possibility that the observed change in
economic outcomes was driven by an
idiosyncratic factor unique to a
particular State. For example, assume
State X changed its laws to make noncompetes less enforceable, and new
business formation subsequently
increased compared with other States.
However, around the same time it
changed its non-compete law, State X
also enacted legislation to provide
attractive tax incentives to
entrepreneurs. It would be difficult to
isolate the effect of the change in noncompete law from the effect of the tax
law change. For this reason, the
Commission gives more weight to
studies that analyze the effects of
multiple changes in enforceability. For
example, if a study shows that,
compared with other States that did not
change their non-compete laws, new
business formation rose not only in
State X, but also in several other States
that changed their laws to make noncompetes less enforceable, the
Commission would be more confident
inferring that changes in non-compete
law caused these effects.
Fourth, the Commission gives more
weight to studies that use sophisticated,
nuanced measures of enforceability,
such as non-binary measures of noncompete enforceability that capture
multiple dimensions of non-compete
enforceability. This fourth guiding
principle ensures accuracy and
granularity in the measurement of noncompete enforceability.
A variety of different factors affect the
enforceability of non-competes from
State to State, including (among others)
the permissible geographic scope and
duration of non-competes and how high
the employer’s burden of proof is to
establish that a non-compete is
enforceable. Given the different factors
involved, the overall level of noncompete enforceability from State to
State falls along a spectrum; it is not as
simple as whether non-competes are
enforceable or not. Thus, scales which
use binary measures miss nuance
between States. This is true for
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enforceability overall (e.g., scales which
simply assign States to ‘‘enforcing’’ or
‘‘non-enforcing’’ categories) and for
elements of enforceability (e.g., scales
which assess whether a non-compete is
enforceable if a worker is fired with a
yes or no answer). While no scale is
perfect, scales which allow for
multidimensionality and granularity
measure non-compete enforceability
(and thus the effects that stem from it)
with a higher degree of accuracy.389
Fifth, the Commission gives more
weight to studies in which the outcome
studied by the researchers is the same
as the outcome the Commission is
interested in or is an effective proxy for
the outcome the Commission is
interested in. It gives less weight to
studies that use ineffective proxies. For
example, some outcomes are relatively
easy to study. There is extensive data on
workers’ earnings at the State level, so
researchers can simply use this data to
study how changes in non-compete
enforceability affect workers’ earnings
in a State. Other outcomes, however,
may be more challenging to quantify
directly, and thus researchers may use
proxies for understanding the effect they
are studying. For example, there is no
single metric that measures innovation
in the economy. For this reason, to learn
about how non-competes affect
innovation, a researcher might study the
effect of changes in non-compete
enforceability on the number of patents
issued in the State as a proxy for
innovation. However, proxies can
sometimes be ineffective or inapt. For
example, a study that analyzes the effect
of non-compete enforceability on the
number of patents issued is generally a
weaker proxy for innovation than a
study that also takes into account the
quality of patents issued. For this
reason, the Commission gives more
weight to studies that measure the exact
outcome of interest or studies that use
effective proxies.
While these five guiding principles
are important indicators of the relative
strength of empirical studies evaluated
by the Commission for the purpose of
this final rule, the Commission’s
assessment of empirical studies was
holistic and relied on its economic
expertise. In addition to the guiding
principles described in this Part IV.A.2,
the Commission’s holistic, expert
assessment of the empirical evidence
also included considering
characteristics of studies important in
any context, such as data quality,
statistical precision, and other factors.
389 Jonathan M. Barnett & Ted Sichelman, The
Case for Noncompetes, 87 U. Chi. L. Rev. 953
(2020).
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In some instances, the Commission
cites studies beyond those discussed in
the NPRM. The Commission cites such
studies only where they check or
confirm analyses discussed in the
NPRM, or where the Commission is
responding to comments raising them.
The Commission’s findings do not rest
on these studies, however, and they are
not necessary to support its findings.
B. Section 910.2(a)(1): Unfair Methods
of Competition—Non-Competes With
Workers Other Than Senior Executives
The Commission now turns to the
basis for its findings that non-competes
with workers other than senior
executives are an unfair method of
competition. As explained in Part II.F,
under section 5, the Commission
assesses two elements: (1) whether the
conduct is a method of competition, as
opposed to a condition of the
marketplace, and (2) whether it is
unfair, meaning that it goes beyond
competition on the merits. The latter
inquiry has two components: (a)
whether the conduct has indicia of
unfairness, and (b) whether the conduct
tends to negatively affect competitive
conditions. These two components are
weighed according to a sliding scale.
Non-competes with workers other
than senior executives satisfy all the
elements of the section 5 inquiry.390 As
described in Part IV.B.2, such noncompetes are facially unfair because
they are restrictive and exclusionary,
and because they are exploitative and
coercive. And as described in Part
IV.B.3, such non-competes tend to
negatively affect competitive conditions
in labor markets and markets for
products and services. As explained in
Part II.F, the legal standard for an unfair
method of competition under section 5
requires only a tendency to negatively
affect competitive conditions. The
inquiry does not turn on whether the
conduct directly caused actual harm in
a specific instance. Here, the tendency
of non-competes to impair competition
is obvious from their nature and
function. And even if this tendency
were not facially obvious, the evidence
confirms that non-competes do in fact
have a negative effect on competitive
conditions.
The Commission finds that the
empirical research described in this Part
IV.B supports findings related to
workers other than senior executives.391
390 For the sake of readability, in this Part IV.B,
the Commission refers to non-competes with
workers other than senior executives as ‘‘noncompetes.’’
391 Some of the studies described in Part IV.B
analyze non-competes between employers and
workers across the labor force. Other studies
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1. The Commission Finds That NonCompetes Are a Method of Competition,
Not a Condition of the Marketplace
With respect to the first element,
whether the conduct is a method of
competition, the Commission
preliminarily found in the NPRM that
non-competes are a method of
competition under section 5 because
they are specific conduct undertaken by
an actor in a marketplace, as opposed to
merely a condition of the
marketplace.392 No commenters
disagreed with this finding, and the
Commission reaffirms its preliminary
finding that non-competes are a method
of competition.
2. The Commission Finds That NonCompetes Are Facially Unfair Conduct
The Commission finds that noncompetes are facially unfair conduct
under section 5 because they are
restrictive and exclusionary. The
Commission further finds that noncompetes are facially unfair under
section 5 because they are exploitative
and coercive.
a. Non-Competes Are Restrictive and
Exclusionary Conduct
Under section 5, indicia of unfairness
may be present where conduct is
restrictive or exclusionary, provided
that the conduct also tends to negatively
affect competitive conditions.393 In the
NPRM, the Commission explained that
non-competes are restrictive conduct.394
No commenters disputed this analysis,
and the Commission reaffirms its
preliminary finding that non-competes
are restrictive.
The restrictive nature of noncompetes is evident from their name
and function: non-competes restrict
competitive activity. They do so by
restricting a worker’s ability to seek or
accept other work or start a business
after the worker leaves their job, and by
restricting competitors from hiring that
worker. Because non-competes facially
restrict competitive activity, courts have
long held they are restraints of trade and
proper subjects for scrutiny under the
antitrust laws.395
analyze non-competes with particular populations
of workers. In each of the studies described in Part
IV.B, non-competes with workers other than senior
executives represented a large enough segment of
the sample that the study supports findings related
to the effects of non-competes for such workers.
Studies that focus primarily on non-competes for
senior executives are described in Part IV.C, which
explains the Commission’s findings related to noncompetes with senior executives.
392 NPRM at 3504.
393 See Part II.F.
394 NPRM at 3500.
395 See, e.g., Am. Tobacco Co., 221 U.S. 106, 181–
83 (1911) (holding that several tobacco companies
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The restrictions that non-competes
impose on workers are often substantial.
Non-competes can severely restrict a
worker’s ability to compete against a
former employer. For most workers, the
most natural alternative employment
options are jobs in the same geographic
area and in the same field. These are the
very jobs that non-competes typically
prevent workers from taking.
Furthermore, for most workers, the most
practical entrepreneurship option is
starting a business in the same field.
This is the very opportunity that noncompetes typically prevent workers
from pursuing. Moreover, the record
before the Commission reflects that noncompetes are often so broad as to force
a worker to sit out of the labor market
altogether.
In the NPRM, the Commission used
the term ‘‘restrictive’’ to encompass both
restrictive and exclusionary conduct.396
In this final rule, in addition to finding
that they are restrictive conduct, the
Commission separately finds that noncompetes are exclusionary conduct
because they tend to impair the
opportunities of rivals. Where a worker
is subject to a non-compete, the ability
of a rival firm to hire that worker is
impaired. In addition, where many
workers in a market are subject to noncompetes, the ability of firms to expand
into that market, or entrepreneurs to
start new businesses in that market, is
impaired.
For the foregoing reasons, the
Commission finds that the use of noncompetes with workers other than
senior executives is facially unfair
under section 5 because it is conduct
that is restrictive or exclusionary.
b. Non-Competes Are Exploitative and
Coercive Conduct
Conduct may violate section 5 where
it is exploitative or coercive and tends
to negatively affect competitive
conditions.397 Indeed, where conduct is
exploitative or coercive, it evidences
violated Sections 1 and 2 of the Sherman Act due
to the collective effect of six of the companies’
practices, one of which was the ‘‘constantly
recurring’’ use of non-competes); Newburger, Loeb
& Co., Inc., 563 F.2d 1057, 1082 (2d Cir.)
(‘‘Although such issues have not often been raised
in the federal courts, employee agreements not to
compete are proper subjects for scrutiny under
section 1 of the Sherman Act. When a company
interferes with free competition for one of its former
employee’s services, the market’s ability to achieve
the most economically efficient allocation of labor
is impaired. Moreover, employee-noncompetition
clauses can tie up industry expertise and
experience and thereby forestall new entry.’’)
(internal citation omitted).
396 NPRM at 3500 (‘‘Non-competes also restrict
rivals from competing against the employer to
attract their workers.’’).
397 See Part II.F.
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clear indicia of unfairness, and less may
be necessary to show a tendency to
negatively affect competitive
conditions.398
In the NPRM, the Commission
preliminarily found that non-competes
with workers other than senior
executives were exploitative and
coercive because in imposing them on
workers, employers take advantage of
their unequal bargaining power.399 The
Commission also preliminarily found
that non-competes are exploitative and
coercive at the time of the worker’s
potential departure, because they force
a worker to either stay in a job the
worker wants to leave or force the
worker to bear other significant harms
and costs, such as leaving the workforce
or their field for a period of time;
relocating to a different area; violating
the non-compete and facing the risk of
expensive and protracted litigation; or
attempting to pay the employer to waive
the non-compete.400
The Commission received an
outpouring of comments on the question
of whether non-competes were
exploitative or coercive. Thousands of
workers described non-competes as
pernicious forces in their lives that took
advantage of their lack of bargaining
power and forced them to make choices
detrimental to their finances, their
careers, and their families. Above all,
the predominant themes that emerged
from the comments were powerlessness
and fear.
Thousands of workers reported
feeling powerless to avoid noncompetes, either because the worker
needed the job or because non-competes
were pervasive in the worker’s field.
Hundreds of workers reported noncompetes were unilaterally imposed on
them. Workers overwhelmingly reported
that they did not bargain over noncompetes, did not receive compensation
for non-competes, and were not
represented by counsel in connection
with non-competes, with only rare
exceptions.
And hundreds of workers reported
that even where they wanted a job with
better pay or working conditions, or to
strike out on their own, the fear of
litigation from a deep-pocketed
employer or the fear of being without
work prevented them from doing so.
Hundreds of workers described how this
fear coerced them into remaining in jobs
with poor conditions or pay, including
dangerous or toxic work environments;
into leaving an industry or profession
that they invested, trained, studied, or
398 See
id.
at 3502–04.
400 Id. at 3504.
16:27 May 06, 2024
i. Non-Competes With Workers Other
Than Senior Executives Are Unilaterally
Imposed
The Commission finds that employers
almost always unilaterally impose noncompetes, exploiting their superior
bargaining power to impose—without
any meaningful negotiation or
compensation—significant restrictions
on workers’ abilities to leave for better
jobs or to engage in competitive activity.
The Commission finds that employers
have significantly more bargaining
power than workers. Most workers,
especially workers other than senior
executives, depend on income from
their jobs to get by—to pay their rent or
mortgage, pay their bills, and put food
on the table. The loss of a job or a job
opportunity can severely damage
workers’ finances and is far more likely
to have serious financial consequences
for a worker than the loss of a worker
or a job candidate would have for most
employers.
The Treasury Department, in a report
based on an extensive literature review,
finds that firms generally have
considerable labor market power.401 The
report states that concentration in
particular industries and locations can
increase employers’ labor market
power.402 However, the report explains
that, even in the absence of
concentration, firms have significant
labor market power due to a variety of
factors.
401 Treasury Labor Market Competition Report,
supra note 374 at i–ii.
402 Id. at i.
399 NPRM
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were experienced in, damaging or
derailing their careers; into moving
away from their home, uprooting or
separating their families; or into
enduring long-distance commutes,
which made it harder to care for and
spend precious time with their loved
ones. Many workers described how this
fear hung above them even if they
thought the non-compete was overbroad
and probably unenforceable under State
law, because having to defend a lawsuit
from an employer for any length of time
would devastate their finances.
Based on the entirety of the record, for
the following reasons, the Commission
finds non-competes with workers other
than senior executives are exploitative
and coercive because they are
unilaterally imposed by a party with
superior bargaining power, typically
without meaningful negotiation or
compensation, and because they trap
workers in worse jobs or otherwise force
workers to bear significant harms and
costs.
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As the report notes, some of these
factors are inherent in the firm-worker
relationship. The report states that
workers are at an informational
disadvantage relative to firms, often not
knowing what other workers earn or the
competitive wages for their labor.403
The report states further that workers
often have limited or no ability to
switch locations and occupations
quickly and may lack the financial
resources to support themselves while
they search for jobs that pay more and
better match their skills and abilities.404
According to the report, these
conditions often enable firms to exert
market power even in labor markets that
are not highly concentrated.405
In addition to factors inherent to the
employer-worker relationship, the
report concludes that firms use a wide
range of practices to restrain
competition for workers, including
sharing wage information and
conspiring to fix wages with other firms;
agreeing not to hire other firms’
workers; and adopting non-competes,
mandatory arbitration agreements, and
overbroad NDAs.406 The report also
states that practices such as outsourcing
and worker misclassification have
further diminished workers’ market
power.407 Overall, the report finds that
employers’ labor market power has
resulted in a 20% decrease in wages
relative to the level in a fully
competitive market.408
The Commission finds that employers
are able to exploit their considerable
labor market power—and indeed
routinely do so—with respect to noncompetes imposed on workers other
than senior executives. Employers are
repeat players likely to have greater
experience and skill at bargaining than
individual workers in the context of
negotiating employment terms such as
non-competes.409 Research has found
that employers present non-competes in
standard-form contracts,410 which
workers are unlikely to read,411 and that
403 Id.
404 Id.
405 Id.
406 Id.
407 Id.
at ii.
408 Id.
409 See, e.g., Samuel Stores, Inc. v. Abrams, 108
A. 541, 543 (Conn. 1919); Sunder Energy, LLC v.
Jackson, 305 A.3d 723, 753 (Del. Ct. Chancery
2023).
410 Starr, Prescott, & Bishara, supra note 68 at 72
(‘‘Taken together, the evidence in this section
indicates that employers present (or employees
receive) noncompete proposals as take-it-or-leave-it
propositions.’’).
411 See, e.g., Todd D. Rakoff, Contracts of
Adhesion: An Essay in Reconstruction, 96 Harv. L.
Rev. 1173 (1983); Russell Korobkin, Bounded
Rationality, Standard-Form Contracts, and
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workers rarely bargain over noncompetes and rarely seek the assistance
of counsel in reviewing noncompetes.412 Many workers also lack
the legal training or legal knowledge
necessary to understand whether a
particular non-compete is enforceable or
the consequences of entering into a noncompete. The available evidence
indicates that many workers are not
aware of the applicable law governing
non-competes or their rights under
those laws.413 Research has also found
that employers exploit their power over
workers by providing them with noncompetes after they have accepted the
job offer—and in many cases, on or after
their first day of work—when the
worker’s negotiating power is at its
weakest, since the worker may have
turned down other job offers or left their
previous job.414
The comment record provides strong
support for the Commission’s finding
that non-competes are coercive and
exploitative because they are typically
unilaterally imposed by employers on
workers other than senior executives.
Illustrative examples of the comments
the Commission received include the
following:
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• I am a practicing OB/GYN physician in
Shreveport, LA. . . . I was put into a nonnegotiable, vague non-compete with NO
expiration date. . . . I needed a job. I was in
a large amount of debt with accumulating
interest during my four years of residency
with a minimal salary. Honestly, I could not
afford an attorney. So naively I trusted that
the people that had been training me for the
past 4 years would not take advantage of me
in a contract. I did not have the ability to
seek advice on ‘‘how’’ to negotiate a contract
with my mentors since my mentors were the
ones who wrote the contract.415
• As [a] physician who recently negotiated
a new contract, I support FTC changes to the
non-compete rules. . . . All three
institutions [I considered working for] had
unreasonable and onerous non-competes.
Essentially making it impossible to get
another job in the entire state of NJ—not just
a few mile radius but two thirds of the
state. . . . Non-competes are never
negotiable even when hiring a lawyer to
review and negotiate the contract. Hospitals
refused to negotiate on the majority of the
contract citing it is [an] across the board
provision that cannot be altered.416
• I’m a worker that has had to consider
whether to take a job that requires signing a
no-compete agreement . . . . Several times
Unconscionability, 70 U. Chi. L. Rev. 1203, 1217
(2003).
412 Starr, Prescott, & Bishara, supra note 68 at 72.
413 J.J. Prescott & Evan Starr, Subjective Beliefs
About Contract Enforceability, Forthcoming, J. L.
Stud. 10–11 (2022).
414 Marx (2011), supra note 81 at 706.
415 Individual commenter, FTC–2023–0007–4414.
416 Individual commenter, FTC–2023–0007–
10547.
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in my career, after weeks of interviewing and
salary negotiation, I’ve found myself facing a
required no-compete agreement that would
drastically limit my future career options and
negotiating power. Several times I’ve
accepted these agreements because I had
already turned down competing offers and
found myself with limited options.417
• I’m a project manager at an Interior
Design & Home Staging company in
Manhattan; we’re the largest staging company
on the East Coast. After I accepted my job
offer and went in to file paperwork, I was
very briefly walked through what this noncompete means (the details were not made
entirely clear; I believe they left it
intentionally murky) and it was buried deep
in the new employee rules and regulations
packet I needed to read and sign at my
onboarding. I personally am very against
these agreements because, as mine states, I
cannot work with ‘‘a competing staging
company’’ or for any of the clients of my
current company. Again, we’re the largest
staging firm on the east coast and have a lot
of clients (we do over 100 stagings per year).
Essentially, I am completely shut out of
working in the industry in NYC as there are
only a handful of other staging companies
that can pay me a living wage to do so.418
• You might say that we might be able to
negotiate out of a non-compete in our
contract, but that is simply not true. In my
hospital, I was already established, owning a
house and having kids in school in a spouse
in a career when the Hospital came forward
and sit on my next contract renewal that I
had no choice, but to sign a noncompete.
They had me over a barrel. At my next
contract negotiation, I try to negotiate out of
the noncompete, with less salary or less
benefits, and it was a nonstarter. There is
zero tolerance for negotiating out of the
noncompete.419
• At the end of 2018, as a Manager at a
small business (150 employees) in a niche
technology industry, I was offered shares in
our company as we were acquired by a
Private Equity firm. . . . I worked with a
company-provided attorney on an
Employment Agreement. This agreement
offered a 6-month severance with a 1-year
non-compete period, which I negotiated
down to a 6-month non-compete to match the
severance period. Later that month, I was
sent an additional, previously unseen 120page Share Agreement that governed how I
would vest the shares I had earned. I didn’t
realize it at the time, but buried toward the
end of this document was another noncompete that had a much longer timeframe
dictated—1 year from when I no longer held
any shares. As it would potentially take up
to 6 years for the company to sell again, that
meant an incredibly long and indefinite
sounding time period. I was given only one
business day to review this agreement, and
was sent a signature packet the following
day. I honestly thought I was signing my
417 Individual commenter, FTC–2023–0007–
12428.
418 Individual commenter, FTC–2023–0007–
12480.
419 Individual commenter, FTC–2023–0007–
14706.
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Employment Agreement negotiated with a
company attorney, not the share agreement
that neither myself nor the attorney had
reviewed, and which I had only received the
day prior.420
• Desperate to obtain an entry level job in
the Accounting field in which I am currently
obtaining my Associate’s degree, I was
presented with an offer of employment and
a non-compete agreement contract to sign.
Because I needed to pay rent, I signed it.421
• On the first day of my husband’s
employment, without prior notice, an
extensive 2 year non-compete clause was put
in his employment contract and while it was
noted within the clause he could seek
counsel, when you are in the middle of your
first day of work it’s not practical. In
addition, for most people, if it is your first
experience with a non-compete, you likely
do not have the funds to pay a $750 per hour
lawyer to advise and negotiate on your
behalf, nor realize the possible long-term
consequences.422
Many commenters agreed with the
Commission’s preliminarily finding that
employers generally have considerable
labor market power. Even commenters
opposing the NPRM did not generally
dispute the notion that there is unequal
bargaining power between employers
and workers. Many workers stated that
non-competes are pervasive in their
industry, meaning they could not find a
job without one. Many commenters
stated that high wages or skills do not
automatically translate into more
bargaining power or sufficiently
mitigate the harms from non-competes,
especially in concentrated markets or
markets where so many employers use
non-competes that workers effectively
have no choice but to sign them.
Commenters also said that
underrepresented groups may have even
less bargaining power to negotiate noncompetes and are less likely to have the
resources for litigation, which could
have an increased deterrent effect on
worker mobility.
Hundreds of commenters stated that
workers are rarely, if ever, able to
negotiate their non-competes because
non-competes are typically presented in
a take-it-or-leave-it fashion. These
comments spanned both lower-wage
workers and workers in high-wage
industries.423 Workers often stated that
they were ‘‘forced’’ to sign a non420 Individual
commenter, FTC–2023–0007–2347.
commenter, FTC–2023–0007–2600.
422 Individual commenter, FTC–2023–0007–5933.
423 Industries that the Commission considered as
higher wage industries included but were not
limited to engineers, entertainment (namely on-air
talent), entrepreneurs, financial services, dentists,
physicians, sales workers, tech industry workers,
and veterinarians. Industries were assessed as high
wage based on BLS occupational wage data. BLS,
Occupational Employment and Wage Statistics,
https://www.bls.gov/oes/tables.htm (based on the
May 2022 National XLS table).
421 Individual
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compete. Very few workers said they
were able to decline signing a noncompete and still be hired or employed.
An employment law firm also agreed
with the Commission and stated that
non-competes are rarely subject to
negotiation.
Confirming the research described in
this Part IV.B.2.b.i, many workers—
including highly paid and highly skilled
workers—stated that they did not
receive notice that they would be
required to sign a non-compete until
after accepting a job offer. Some workers
said they were told of the non-compete
after accepting the job but before
starting work. Many workers who
described when they were notified of a
non-compete said it was on their first
day of work or even later. Many workers
stated that they were required to sign
their non-compete after a merger or
acquisition—i.e., after they were already
on the job but there was a change in
ownership of the company. For
example, a trade organization stated that
it is common for the purchaser of a
business to impose non-competes on its
workers, which may trap workers in an
organization different from the one they
originally agreed to work for. An
employment law firm commented that
even highly paid or highly skilled
workers do not always receive notice of
non-competes with the employment
offer.
Many workers also stated that noncompetes are often hidden or obscured.
Several workers said their non-compete
was buried in other paperwork or
confusingly worded or vague. Some
commenters stated that their employer
refused to allow them to have a copy of
their non-compete. Many workers said
their employers gave them misleading
or incorrect information about the terms
or enforcement of non-competes. Each
of the above categories included not
only workers from low-wage industries,
but also workers from high-wage
industries. While these practices appear
to be commonplace, based on the
comments, the Commission also notes
that even workers who knew about noncompetes before accepting the job
offer—and who did not report being
misled about the non-compete—did not
report bargaining or negotiating over it.
Only a small number of workers
reported any negotiating over noncompetes. For example, a sales worker
said they were able to negotiate a noncompete, though that worker still
supported the proposed rule. A surgeon
group stated hospitals were willing to
negotiate over non-competes, but that
hospitals use the non-competes as a
negotiating tactic to drive down surgeon
salaries.
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Few workers who submitted
comments reported being compensated
for signing a non-compete. Among those
workers who did report receiving
compensation, most still said they
considered their non-competes to be
exploitative or coercive. For example,
some workers said they were laid off
and then required to sign a non-compete
as a condition for receiving severance. A
few workers said their employer had
threatened to withhold their
commissions and/or pay on departure if
they did not sign a non-compete. One
worker reported never receiving the
compensation associated with a noncompete, because they were terminated
two months after signing.
In addition, the Commission finds
that employers frequently impose noncompetes even when they are
unenforceable under State law. An
economist suggested that non-competes
may be used in States in which they are
unenforceable because the employer
hopes the State’s policy might change,
or the employer might be able to forumshop to apply the law of another
jurisdiction more favorable to noncompetes. Some commenters stated that
firms may remind workers they are
subject to a non-compete upon
departure even when those noncompetes are unenforceable because
they hope that workers and competitors
will abide by them.
These comments that employers often
use unenforceable non-competes are
supported by research finding that
employers frequently use non-competes
even when they are unenforceable
under State law.424 This research
suggests that employers may believe
workers are unaware of their legal
rights, or that employers may be seeking
to take advantage of workers’ lack of
knowledge of their legal rights or the
challenges workers face enforcing their
rights.
A far smaller number of
commenters—a group that included
many businesses and trade
organizations, and very few workers—
argued that non-competes were not
exploitative or coercive. An industry
organization said non-competes are
understandable to a layperson with
respect to their geographic scope, time
in effect, and industry to which they
apply, while an alternative trade secret
case would be more complex. But even
if workers understand the basic terms of
non-competes, that does not alter the
Commission’s core concern that noncompetes are exploitative and coercive
because they take advantage of unequal
bargaining power between employers
and workers and force workers to stay
in jobs they want to leave or otherwise
bear significant harms or costs. It also
does not alter the Commission’s concern
that non-competes tend to negatively
affect competitive conditions. Moreover,
the Commission notes that the available
evidence indicates that many workers
are not aware of the applicable law
governing non-competes or their rights
under those laws.425 In addition, many
commenters stated that non-competes
were not disclosed to them before they
started their job. Furthermore, the
Commission addresses why trade secret
law is a less restrictive alternative for
protect employers’ legitimate interests
in Part IV.D.2.
A few commenters stated that unequal
bargaining power does not constitute an
unfair method of competition. In
response, the Commission notes that it
does not find that unequal bargaining
power itself is an unfair method of
competition; rather, unequal bargaining
power informs its analysis of
exploitation and coercion.
The comment record indicates that
while some highly paid workers may
seek the assistance of counsel when
negotiating non-competes, many do not.
Commenters did not present studies or
other quantitative evidence that
undermines the finding in Starr,
Prescott, & Bishara that less than 8% of
workers seek assistance of counsel in
connection with non-competes.426 The
Commission thus finds that the vast
majority of workers lack assistance of
counsel in connection with entering
non-competes. The Commission
believes that its definition of senior
executives, discussed in Part IV.C.4,
captures those workers who are most
likely to seek assistance of counsel. To
the extent any other individual workers
seek assistance of counsel and/or are
able to actually bargain over noncompetes sufficient that a given noncompete is not exploitative and
coercive, the Commission still finds that
such non-competes are unfair methods
of competition for the independent
reason that they are restrictive and
exclusionary conduct that tends to
negatively affect competitive conditions.
Overall, the comments provide strong
support for the Commission’s finding
that, with respect to workers other than
senior executives, employers almost
always unilaterally impose noncompetes—exploiting their superior
bargaining power to significantly restrict
workers’ abilities to leave for better jobs
or engage in competitive activity.
425 See
424 Starr,
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supra note 413 and accompanying text.
Prescott, & Bishara, supra note 68 at 72.
426 Starr,
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ii. Non-Competes With Workers Other
Than Senior Executives Trap Workers in
Jobs or Force Them to Otherwise Bear
Significant Harms and Costs
The Commission finds that noncompetes are exploitative and coercive
because they force workers to either stay
in jobs they want to leave or bear other
significant harms and costs, such as
leaving the workforce or their field for
a period of time; relocating out of their
area; or violating the non-compete and
facing the risk of expensive and
protracted litigation. In addition, the
Commission finds non-competes exert a
powerful in terrorem effect: they trap
workers in jobs and force them to bear
these harms and costs even where
workers believe the non-competes are
overbroad and unenforceable, due to
workers’ fear that having to defend a
lawsuit from their employer for any
length of time would devastate their
finances or ruin their professional
reputations.
The comment record provides strong
support for this finding. Many workers
submitted comments supportive of the
Commission’s preliminary finding that
non-competes coerce workers into
remaining in their current jobs. Many
workers reported staying in their jobs
because they feared harm to their
careers if they were forced out of their
field; feared having to relocate or endure
a lengthy commute due to a noncompete; or feared their non-competes
would cause them to be unemployed if
they left. Several workers reported they
were unable to take a specific desired
job because of a non-compete. Many
workers recounted how non-competes
trapped them in jobs with poor working
conditions or where they were subject to
illegal conduct, including sexual
harassment.427 Some workers said they
were subject to particularly broad, even
global, non-competes, meaning leaving
their field was their only option if they
left their current job. These comments
spanned both lower-wage workers and
workers in high-wage industries.
Illustrative examples of the comments
the Commission received include the
following:
• I am a journalist who has been forced to
move across the country three times, and
leave my field entirely for one year, in order
to comply with stringent non-compete
agreements. . . . In [one] situation, I was
stuck working for abusive management who
fostered a toxic and abusive workplace, and
I had to work there for more than a year until
I could find a job in another city entirely
because they had threatened to sue me under
the non-compete if I left and worked for
another local station. . . . [E]ven if these
clauses are unenforceable, as we’ve all heard
before, who can afford the legal
representation to go up against a corporation
and their lawyers when the lawsuit threat
comes? My life would have been very
different if I weren’t trapped by noncompetes at points in my career.428
• As a veterinarian I support the
elimination of non-compete agreements. In
our profession they still are overwhelmingly
the normal expectation with contracts. . . .
[C]ompanies use the fear of litigation to
enforce them. As veterinary medicine very
quickly becomes more corporate owned,
basically they pit us as a singular employee
against large corporations that have
substantial means both financially and
legally. No reasonable employee wants to
take on that battle or even can financially
take on that battle. So regardless if the
clauses are ‘unenforceable’ they are enforced
via intimidation. . . . When [my] job was a
terrible fit and my boss ultimately ended up
‘not renewing my contract’ I was still left
with a noncompete. This basically eliminated
my ability to work within a reasonable
distance of our home. I ended up commuting
an hour and 15 minutes one way for 10
months until my husband, myself, and my
very young child were able to move closer to
my new job. While it was likely legally
unreasonable in nature, I did not have the
resources financially to even consider the
legal battle that would have had to happen
for reconsideration and I desperately needed
an income to continue to pay the student
debt that comes with being a young doctor.
Furthermore I had a baby that needed my
focus as well.429
• I was fired unjustly 11/2021 for
declining the Covid vaccine. My medical and
religious exemptions were both denied. In
addition to this, I was required by my former
employer contract to abide by the two-year
10 mile restrictive covenant. This greatly
hindered my ability to find employment, and
I was out of work for approximately three
months. I could only find part-time work for
a fraction of my former salary. Had I not had
the noncompete clause, I could have found
a full-time job almost immediately.430
• Unfortunately, the average dental school
graduate has nearly $300,000 in student loan
debt, and most new dentists are unable to
make their practice-ownership dreams a
reality immediately after residency. Thus, we
rely on entry-level associate dentist positions
to gain experience, pay off debt, and become
fiscally/professionally prepared to become
practice owners. Much to my dismay, upon
interviewing for my first associate dentist
position, I quickly realized how noncompetes are being used in the dental
profession to prevent vulnerable young
dentists like myself from taking the next step
in our careers. . . . Although dental
associate positions come with relatively high
compensation, it doesn’t make this issue any
less problematic.431
• My daughter had an inter-state noncompete enforced as a minimum wage
428 Individual
commenter, FTC–2023–0007–0747.
commenter, FTC–2023–0007–2855
430 Individual commenter, FTC–2023–0007–7561.
431 Individual commenter, FTC–2023–0007–8858.
medical scribe. Originally she was working
with a medical scribe company in Indiana
prior to Covid. Due to COVID and graduating
from college she then moved to our home in
Oregon. She applied for a medical scribe job
in Oregon with a company that did not
provide any scribe services in Indiana. But
her original scribe company had 1 ‘‘office’’
they were providing scribe services to in
Salem, Oregon. My daughter had applied
with the local scribe company to provide
services but when examined further found
that her original scribe company from
Indiana was going to enforce a $5000 noncompete buy-out fee on her to provide the
services in Salem, Oregon that were within
the sphere of restriction for her ‘‘new’’ local
scribe opportunity.432
Many commenters explained that
non-competes forced them to relocate
and described the toll the relocation
took on their families. Other
commenters stated that their families
have been forced to live apart, or they
had been separated from elderly
relatives, due to a non-compete forcing
the relocation of one of the family
members. Many commenters described
how long commutes undertaken to
avoid non-competes increased
transportation costs and caused the
worker to lose precious time with their
families.
The comment record bolsters the
Commission’s finding that employers
wield non-competes to coerce and
exploit workers into refraining from
competitive activity even where noncompetes are unenforceable. Many
workers explained that they—and others
in their industry—abided by noncompetes, even where they believed the
non-compete was overbroad and likely
unenforceable. According to a law firm
specializing in executive compensation,
even workers who can afford counsel
may be unwilling to mount a long and
uncertain legal battle to challenge a noncompete. The firm said employers
almost always have deeper pockets and
more access to counsel than individual
workers, making workers more reluctant
to litigate. Commenters further stated
that employers may be able to deduct
litigation costs as a business expense,
giving them the wherewithal to enforce
their non-competes.
Many workers with non-competes
stated that they feared legal action from
their employer or enormous legal fees if
they left their current job, and most of
those workers said they could not afford
litigation. Workers also stated that they
are reluctant to engage in litigation
against an employer because it would
harm their reputation in their industry.
Many workers reported being
threatened with litigation over a non-
429 Individual
427 These comments are addressed in greater
detail in Part IV.B.3.a.iii.
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compete when they attempted to leave
an employer. Some commenters said
their non-competes contained
additional clauses making litigation
more difficult, such as attorneys’ feeshifting provisions or forced arbitration.
Other workers feared having to pay
financial penalties or feared having their
compensation clawed back if their
employer claimed they violated the noncompete. Each of the above comment
categories included numerous
comments from workers in high-wage
industries.
Commenters asserted that employers
have several advantages in litigation,
further increasing the risk of challenging
a non-compete. A commenter said even
an extremely overbroad non-compete
may be enforceable because a court can
modify it to reduce its scope or
duration. An employment attorney said
employers who use overbroad noncompetes to stifle competition suffer
few if any negative consequences for
doing so. The employment attorney
further said that most employers do well
even in a legal regime that nominally
disfavors non-competes, due to the
chilling effect of the threat of litigation.
One researcher cited in the NPRM stated
that non-competes have a powerful
chilling effect because State laws
generally do not prohibit employers
from requiring employees to sign
overbroad non-competes. Accordingly,
the researcher recommended that noncompetes be banned rather than
restricted in scope, thereby preventing
the possibility of lawsuits (and the
threat thereof).
No commenters submitted studies or
empirical evidence to contradict or
otherwise call into question the research
cited in the NPRM finding employers
frequently use non-competes even when
they are unenforceable under State law.
Many commenters said they perceived
non-competes to be a tool used to
intimidate workers, and others
specifically said they had been
intimidated when their employers took
legal action against other workers who
left. These comments spanned workers
in both lower-wage and high-wage
industries.
The comments reflected that fields
with high compensation levels were not
immune from coercion and exploitation,
and that, to the contrary, specialization
can increase employers’ ability to coerce
and exploit workers. For example, some
commenters said highly trained and/or
specialized workers face heightened
challenges in finding a job that does not
violate a non-compete without
relocating or become entirely
unemployable, given the smaller
number of such specialized jobs
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available. One commenter said that
many workers are compensated highly
because they are in a small field or have
a niche skillset, meaning non-competes
significantly limit their ability to find
another job in their field. Some
commenters in professions requiring
advanced education also submitted
comments stating that significant
student loan debt decreased their
bargaining power or increased the
financial risk of attempting to change
jobs. An employment law firm stated
that highly paid or highly skilled
workers in roles that are not limited to
a single industry or business, such as
finance or human resources, are more
likely to be able to find employment in
another industry, while those with
training and expertise in a particular
industry or type of business are at a
greater risk of unemployment. Some
medical organizations and others
pointed out that non-competes can be
particularly exploitative and coercive
for professions such as physicians that
require State licenses, credentials, and
insurance, making relocation even more
difficult.
A far smaller number of commenters
claimed non-competes are not
exploitative or coercive and do not trap
workers in jobs or force workers to bear
significant harms or costs. Several
commenters argued that, because noncompetes are often not exploitative and
coercive at the time of contracting, they
are also not exploitative and coercive at
the time workers seek to leave their jobs.
According to these commenters, to the
extent a non-compete is bargained for
and fairly compensated, that same noncompete does not become exploitative
and coercive at the time of departure. In
response, the Commission notes that
commenters overwhelmingly reported
workers rarely bargain in connection
with, or receive compensation for, noncompetes,433 and the mere existence of
compensation does not automatically
make that compensation fair.
Some business and business
association commenters contended that
workers with higher earnings can more
easily forgo wages to wait out noncompetes, and thus do not feel forced to
stay in their jobs. These commenters
also argued that non-competes for these
workers are often tied to equity or
severance, which the worker can choose
to forego if they want to compete. These
comments are contrary to the extensive
comment record indicating that even
workers with higher earnings cannot
afford to forgo compensation and feel
forced to stay in jobs they want to leave
due to non-competes. To the extent any
433 See
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such individual workers bargained for
or received compensation for a noncompete, the Commission still finds that
such non-competes are unfair methods
of competition for the independent
reason that they are restrictive and
exclusionary conduct that tends to
negatively affect competitive conditions.
Overall, the comments provide strong
support for the Commission’s finding
that non-competes are exploitative and
coercive because they trap workers in
jobs or force them to bear significant
harms and costs.
For the foregoing reasons, the
Commission finds that non-competes
with workers other than senior
executives are exploitative and coercive
and thus facially unfair under section 5.
3. The Commission Finds That NonCompetes Tend To Negatively Affect
Competitive Conditions
Based on the Commission’s expertise
and after careful review of the
rulemaking record, including the
empirical research and the public
comments, the Commission finds that
non-competes tend to negatively affect
competitive conditions in labor markets
for the reasons explained in this Part
IV.B.3.a. (As explained in Part IV.B.3.b,
the Commission further finds that noncompetes tend to negatively affect
competitive conditions in markets for
products and services.)
As explained in Part II.F, the legal
standard for an unfair method of
competition under section 5 requires
only a tendency to negatively affect
competitive conditions. The inquiry
does not turn on whether the conduct
directly caused actual harm in a specific
instance. Here, the tendency of noncompetes to impair competition is clear
from their nature and function. In any
event, the evidence confirms that noncompetes do in fact have a negative
effect on competitive conditions.
The Commission turns now to the
significant evidence of harm to
competition in labor markets from noncompetes, including evidence of
suppressed labor mobility, suppressed
earnings, and reduced job quality.
a. Non-Competes Tend to Negatively
Affect Competitive Conditions in Labor
Markets
The Commission finds that noncompetes tend to negatively affect
competitive conditions in labor markets
by inhibiting efficient matching between
workers and employers.
Labor markets function by matching
workers and employers. In a
competitive labor market, workers
compete for jobs by offering their skills
and time (i.e., their labor services) to
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employers, and employers in turn
compete for those labor services by
offering better pay, benefits, or other
elements of job satisfaction.434 A worker
who is seeking a better job—more pay,
better hours, better working conditions,
more enjoyable work, or whatever the
worker may be seeking—can enter the
labor market by looking for work.
Prospective employers can compete for
the worker’s services, and the worker’s
current employer may also compete by
seeking to retain the worker—e.g., by
offering a raise, promotion, or other
enticement.435 Ultimately, the worker
chooses the job that best meets their
objectives, and the employer chooses
the worker who best meets theirs. In
general, the more jobs and the more
workers that are available—i.e., the
more competing options the worker and
employer each have—the stronger the
match will be.
Thus, a key component of a
competitive labor market is voluntary
labor mobility. Choice—the ability of
market participants to satisfy their
preferences where possible—facilitates
competition. In the labor market,
voluntary labor mobility reflects both
the choices or preferences of workers
and that of rival competitors.
However, non-competes introduce a
major friction that tends to impair the
competitive functioning of labor
markets. Non-competes inhibit the
efficient matching between workers and
employers via the competitive process
because, even if a competing employer
offers a better job and the worker wants
to accept that better job, the noncompete will prevent the worker from
accepting it if the new job is within the
scope of the non-compete (or if the
worker is unsure or afraid it may be).
Meanwhile, the employer who would
like to hire the worker is prevented from
competing to attract that talent. The
result is less competition among
employers for the worker’s services and
less competition among workers for
available jobs. Since the worker is
prevented from taking many jobs that
would otherwise be available, the
worker may decide not to look for a job
at all. Or the worker may enter the labor
market but take a job in which they are
less productive, such as when a noncompete forces a worker to leave their
field of expertise and training.
In this way, non-competes frustrate
competitive processes in labor markets.
In competitive markets, the
‘‘unrestrained interaction of competitive
forces’’ yields a variety of benefits such
434 See Treasury Labor Market Competition
Report at 3–4.
435 See id.
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as lower prices for consumers, better
wages and working conditions for
workers, and higher quality products.436
In contrast, when ‘‘[i]ndividual
competitors lose their freedom to
compete’’ in the labor market, the
importance of worker preference in
setting the level of wages and working
conditions is reduced, which is ‘‘not
consistent with [the] fundamental goal
of antitrust law.’’ 437 The restraint
imposed by non-competes on the
interaction of competing employers and
competing workers directly undercuts
the functioning of the competitive
process in determining wages and
working conditions. Accordingly, noncompetes facially harm the competitive
process and tend to negatively affect
competitive conditions in labor markets.
Evidence that non-competes have in fact
had actual detrimental impacts on
outcomes of the competitive process—
such as workers’ earnings, new business
formation, and innovation—
demonstrate that non-competes do in
fact harm competition.
The Commission notes that the actual
effect of any one individual noncompete on the overall level of
competition in a particular labor market
may be marginal or impossible to
discern statistically. However, as
explained in Part I.B.2, non-competes
are prevalent across the U.S. labor force.
The empirical literature and other
record evidence discussed in this
section reflect that non-competes, in the
aggregate, negatively affect competitive
conditions in labor markets—resulting
in harm not only to workers subject to
non-competes and the employers
seeking to hire them, but also workers
and employers who lack non-competes.
The Commission finds that evidence
of the effects of non-competes on
workers’ labor mobility and earnings is
sufficient to support its finding that
non-competes tend to negatively affect
competitive conditions in labor
markets.438 In addition, the Commission
believes that this finding is further
bolstered by strong qualitative evidence
that non-competes reduce job quality.439
The Commission’s findings relating to
labor mobility and earnings are
principally based on the empirical
evidence described in Parts IV.B.3.a.i
and ii. However, the comments provide
strong qualitative evidence that bolsters
these findings. Furthermore, the
Commission notes that the legal
436 See N. Pac. Ry. Co. v. United States, 356 U.S.
1, 4 (1958).
437 See NCAA v. Bd. of Regents of Univ. of Okla.,
468 U.S. 85, 106–07 (1984).
438 See Part IV.B.3.a.i–ii.
439 See Part IV.B.3.a.iii.
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standard for an unfair method of
competition under section 5 requires
only a tendency to negatively affect
competitive conditions; empirical
evidence of actual harm is not necessary
to establish that conduct is an unfair
method of competition. In the case of
non-competes, however, there is
extensive empirical evidence, as well as
extensive corroborating public
comments, that non-competes
negatively affect competitive conditions
in labor markets.
i. Non-Competes Suppress Labor
Mobility
Evidence of Suppressed Labor Mobility
The Commission finds that noncompetes tend to negatively affect
competitive conditions in labor markets
by suppressing labor mobility, which
inhibits efficient matching between
workers and employers. The evidence
indicates that non-competes reduce
labor mobility. Several empirical studies
find that non-competes limit the
movement of workers between firms
and reduce the pool of labor available to
existing employers and potential
entrants.440
In the NPRM, the Commission
described the empirical research on
non-competes and labor mobility.441
The Commission stated that, across the
board, studies of non-competes and
labor mobility find decreased rates of
mobility, measured by job separations,
hiring rates, job-to-job mobility, implicit
mobility defined by job tenure, and
within-industry and between-industry
mobility.442 Based on that body of
empirical evidence and its review of the
record as a whole following the
comment period, the Commission finds
that non-competes reduce labor
mobility.
Several empirical studies find that
non-competes reduce labor mobility.
Some of these studies analyze the effects
of non-competes on labor mobility
across the labor force.
A study by Johnson, Lavetti, and
Lipsitz examined the impact on labor
mobility of all legal changes in the
enforceability of non-competes from
1991 to 2014 across the entire labor
force.443 This study finds that
440 As the Commission stated in the NPRM, it
does not view reduced labor mobility as a harm in
and of itself. See NPRM at 3490. Instead, the
Commission finds that the empirical evidence
showing non-competes reduce labor mobility is
powerful evidence that non-competes do indeed
restrict labor market competition by inhibiting the
movement of workers between firms—and therefore
efficient matching between workers and firms.
441 NPRM at 3489.
442 Id.
443 Johnson, Lavetti, & Lipsitz, supra note 388.
This study was updated in 2023. The updated
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substantial decreases in non-compete
enforceability cause a significant
increase in job-to-job mobility in
industries that use non-competes at a
high rate.444
Evan Starr’s study comparing workers
in occupations that use non-competes at
a high versus low rate finds that a State
moving from mean enforceability to no
enforceability would cause a decrease in
employee tenure for workers in high-use
occupations of 8.2%, compared with
those in low-use occupations. Tenure in
this study serves as a proxy for mobility,
since tenure is the absence of prior
mobility.445 This use of a proxy means
the outcome of interest is not precisely
measured, and the study is less robust
than those that examine changes in legal
enforceability of non-competes. The
study’s findings are, however,
consistent with the other studies finding
that non-competes reduce labor
mobility.
Starr, Prescott, and Bishara’s study of
non-compete use likewise finds that
having a non-compete was associated
with a 35% decrease in the likelihood
that a worker would leave for a
competitor.446 While this finding is
based on the use of non-competes (and
is accordingly given less weight), the
authors also survey workers, who report
that the cause of their reduced mobility
is their non-compete. The study finds
that the mechanism underlying reduced
mobility is not whether non-competes
are legally enforceable or not, but rather,
it is the worker’s belief about the
likelihood that their employer would
seek to enforce a non-compete. Workers
who did not believe that employers
would enforce non-competes in court
were more likely to report they would
be willing to leave for a competitor.447
This study thus not only supports the
Commission’s finding that the use of
non-competes impacts labor mobility,
but also supports the Commission’s
finding that non-competes can exert an
in terrorem effect on labor mobility even
where they are unenforceable.448 This
supports the need to ensure that
version of the study reports results slightly
differently than the 2022 version cited in the
NPRM, but the analysis and results themselves do
not meaningfully change. Accordingly, the update
to Johnson, Lavetti, and Lipsitz does not materially
affect the Commission’s analysis of the study.
444 Id. at 21.
445 Evan Starr, Consider This: Training, Wages,
and the Enforceability of Covenants Not to
Compete, 72 I.L.R. Rev. 783 (2019). The value is
calculated as 8.2% = 0.56/6.46, where 0.56 is the
reported impact on tenure and 6.46 is mean tenure
in the sample.
446 Evan Starr, J.J. Prescott, & Norman Bishara,
The Behavioral Effects of (Unenforceable)
Contracts, 36 J. L., Econ., & Org. 633, 652 (2020).
447 Id. at 664.
448 See Part IV.B.2.b.ii.
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workers are aware of the prohibition on
non-competes.449
Other studies analyze how noncompetes affect the labor mobility of
specific populations of workers. A study
by Jessica Jeffers finds that decreases in
non-compete enforceability were
associated with a substantial increase in
departure rates of workers, especially
for other employers in the same
industry.450 This study’s sample is
limited to knowledge workers (i.e.,
workers whose primary asset is
applying their mental skills to tasks),
and the study uses a binary—rather than
continuous—measure of non-compete
enforceability. It does, however,
examine several changes in the
enforceability of non-competes to
generate its results, making it fairly
robust.
In addition, two recent studies
examined subgroups of the population
that were affected by State law changes
and find major effects on those
populations’ labor force mobility.
Balasubramanian et al., in 2022, focused
on Hawaii’s ban of non-competes for
high-tech workers and find that the ban
increased mobility by 12.5%.451 Lipsitz
and Starr, in 2022, focused on Oregon’s
ban of non-competes for hourly workers
and find that mobility increased by
17.3%.452
Comments Pertaining to Labor Mobility
Evidence and Commission Responses
The Commission’s finding that noncompetes suppress labor mobility is
principally based on the empirical
evidence described in this Part
IV.B.3.a.i. However, the comments
provide strong qualitative evidence that
bolsters this finding.
Many commenters agreed with the
Commission’s preliminary finding that
non-competes suppress labor mobility
and stated that this reduction in labor
mobility leads to less labor market
competition and poorer wages and
working conditions.
In response to the NPRM’s discussion
of this literature, some commenters
questioned the adequacy of the studies.
For example, one commenter stated that
449 See Part IV.E (describing the final rule’s notice
requirement).
450 Jessica S. Jeffers, The Impact of Restricting
Labor Mobility on Corporate Investment and
Entrepreneurship, 37 Rev. Fin. Stud. 1 (2024). The
2024 version of Jeffers’ paper finds a decline in the
departure rate of 7% of the sample mean, and a
decline in the within-industry departure rate of
10%.
451 Natarajan Balasubramanian, Jin Woo Chang,
Mariko Sakakibara, Jagadeesh Sivadasan, & Evan
Starr, Locked In? The Enforceability of Covenants
Not to Compete and the Careers of High-Tech
Workers, 57 J. Hum. Res. S349, S351 (2022).
452 Lipsitz & Starr, supra note 72 at 157.
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the available research is either limited
to specific sectors of the economy,
limited geographically, or limited by
small sample sizes. Some commenters
claimed the empirical research lacked
appropriate counterfactuals.
The Commission acknowledges that
some of the studies focus on specific
industries or specific geographies, and
that the studies vary in the
methodologies the authors rely on.
These arguments do not undermine the
utility of the studies, particularly given
that they all find that non-competes
reduce labor mobility. Moreover, the
Commission finds that each of the
studies discussed in this Part IV.B.3.a.i
conduct their analyses against
appropriate counterfactuals. And while
there may be some variation in the
magnitude of the effect on mobility
among industries, several of the
empirical studies find economy-wide
effects. That evidence shows that noncompetes restrict the movement of
workers to a significant degree.
Additionally, the record is replete
with examples of commenters who
recounted personal stories that accord
with the empirical literature. The
Commission received comments from
several thousand individual workers
stating that their mobility is or has been
restricted by a non-compete. While
some commenters who opposed the
proposed rule disputed that noncompetes prevent workers from finding
other jobs in their industry, the
Commission finds the weight of the
evidence clearly demonstrates a
significant effect on labor mobility.
The Commission further notes that
many commenters’ submissions
substantiated its finding that noncompetes can have an in terrorem effect
on labor mobility even where they
would not ultimately be enforceable in
court.453 As many commenters
explained, the high costs and
complexities of non-compete litigation
can have a chilling effect on workers
and thus reduce worker mobility
regardless of whether a court would
enforce the non-compete. For this
reason, the very existence of a noncompete is likely to deter workers from
switching jobs or starting their own
business, even if it would ultimately not
be enforced. This supports the
Commission’s view that not only should
non-competes’ enforcement be
prohibited, it is also important to
provide a readily understandable,
453 See
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uniform Federal approach, and notice to
workers of unenforceability.454
Some commenters who generally
opposed the rule questioned the virtue
of labor mobility, arguing that when
colleagues leave, remaining workers can
experience increased workloads or harm
to their employer. However, this
comment ignores the benefits that will
also accrue from those same firms
having more ready access to incoming
potential colleagues as well. The
Commission also notes that unfair
conduct cannot be justified on the basis
that it provides the firm undertaking the
conduct with pecuniary benefits.455
Some commenters argued labor
mobility has generally been increasing
in the U.S. labor market. Setting aside
whether this is true, it is not probative
of whether the practice of using noncompetes reduces labor mobility or
negatively affects labor market
competition.
For these reasons, the empirical
evidence that non-competes suppress
labor mobility supports the
Commission’s finding that noncompetes tend to negatively affect
competitive conditions in labor markets.
ii. Non-Competes Suppress Workers’
Earnings
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Evidence of Suppressed Earnings
The Commission finds that noncompetes suppress workers’ earnings as
a result, in part, of decreased labor
mobility, supporting the Commission’s
finding that non-competes tend to
negatively affect competitive conditions
in labor markets. As the NPRM
explained, many studies find increased
enforceability of non-competes reduces
earnings for workers across the labor
market generally; for specific types of
workers; and even for workers not
454 See Part IX.C. See also supra note 386
(explaining that studies assessing changes in
enforceability of non-competes likely underestimate
the effects of non-competes, given that workers may
refrain from seeking or accepting work or starting
a business even if the non-compete is likely
unenforceable, and explaining the importance of
notice to workers).
455 Atl. Refin. Co. v. FTC, 381 U.S. 357, 371 (1965)
(considering that defendant’s distribution contracts
at issue ‘‘may well provide Atlantic with an
economical method of assuring efficient product
distribution among its dealers’’ and holding that the
‘‘Commission was clearly justified in refusing the
participants an opportunity to offset these evils by
a showing of economic benefit to themselves’’); FTC
v. Texaco, 393 U.S. 223, 230 (1968) (following the
same reasoning as Atlantic Refining and finding
that the ‘‘anticompetitive tendencies of such a
system [were] clear’’); L.G. Balfour Co. v. FTC, 442
F.2d 1, 15 (7th Cir. 1971) (‘‘While it is relevant to
consider the advantages of a trade practice on
individual companies in the market, this cannot
excuse an otherwise illegal business practice.’’).
Justifications that are not cognizable under other
antitrust laws are also not cognizable under section
5.
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subject to non-competes.456 Several
major empirical studies of how changes
in non-compete enforceability affect
workers’ earnings show that increased
enforceability of non-competes
suppresses workers’ earnings.
A study conducted by Johnson,
Lavetti, and Lipsitz finds that noncompetes limit workers’ ability to
leverage favorable labor markets to
receive greater pay.457 The authors find
that when non-competes are more
enforceable, workers’ earnings are less
responsive to low unemployment rates,
which workers typically leverage to
negotiate pay raises. The authors
estimate that a nationwide ban on noncompetes would increase average
earnings by approximately 3–14%.458 Of
the studies of how non-competes affect
earnings, this study has the broadest
coverage. It spans the years 1991 to
2014, examines workers across the labor
force, and uses all known common law
and statutory changes in non-compete
enforceability to arrive at its estimates.
This study is very robust, as it satisfies
all of the principles outlined in Part
IV.A.2.
The same study also finds that noncompetes increase racial and gender
wage gaps by disproportionately
suppressing the wages of women and
non-White workers. While the study
estimates that earnings of White men
would increase substantially if a
nationwide ban on non-competes is
enacted, the comparable earnings
increase for workers in other
demographic groups would be up to
twice as large, depending on the
characteristics of the group.459 The
authors estimate that making noncompetes unenforceable would close
racial and gender wage gaps by
meaningful amounts, although the
mechanism behind this effect is
unclear.460
456 NPRM
at 3486–88.
Lavetti & Lipsitz, supra note 388 at
457 Johnson,
37.
458 Id. at 3. The NPRM reported an increase in
average earnings of 3.3–13.9%. Those numbers
were taken from an earlier version of the Johnson,
Lavetti, and Lipsitz paper. The updated paper finds
an increase in average earnings of 3.2–14.2%. The
change does not materially affect the paper’s
findings or the Commission’s analysis of the paper.
459 Id. at 42. The 2023 version of the paper by
Johnson, Lavetti, and Lipsitz reports earnings
increases of 1.3% for White men, and increases
between 1.5–3.2% for workers in other
demographic groups, corresponding to a change in
non-compete enforceability equal to the difference
between the 75th and 25th percentiles. These
differences are statistically significant for Black
men and non-White, non-Black women.
460 Id. The 2023 version of the paper reports that
the earnings gaps would close by 1.5–3.8% given
a change in non-compete enforceability equal to the
difference between the 75th and 25th percentiles.
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Furthermore, a study conducted by
Evan Starr estimates that earnings fall
by about 4% where a State shifts its
policy from non-enforcement of noncompetes to a higher level of
enforceability.461 This study covers a
sample which is broadly representative
of the entire labor force from 1996 to
2008. Unlike many of the other studies
described in this Part IV.B.3, this study
does not use a change in enforceability
of non-competes to analyze the impact
of enforceability. Rather, it examines the
differential impact of enforceability on
workers in occupations that use noncompetes at a high rate versus workers
in occupations that use non-competes at
a low rate. As described in Part IV.A.2,
studies comparing differential usage of
non-competes are generally less
informative than studies examining
changes in enforceability, although in
this particular study the comparison
between workers in high- and low-use
occupations may effectively control for
State-level differences between labor
markets, lending more credibility to the
estimates. More importantly, the
Commission notes that the study
corroborates the estimates from other
studies that rely on more credible
research designs, and therefore is
appropriately viewed as additional
evidence supporting the range of
estimated effects on wages across the
labor market.
Two additional studies analyze effects
of non-competes on earnings for specific
populations of workers. A study
conducted by Lipsitz and Starr focuses
on a natural experiment in Oregon,
where non-competes were banned for
hourly workers with relatively low
earnings. The study estimates that when
Oregon stopped enforcing non-competes
for hourly workers, their wages
increased by 2–3% relative to workers
in States that did not experience legal
changes. The study also finds a greater
effect (4.6%) on workers in occupations
that used non-competes at a relatively
high rate.462 The authors additionally
find that women’s earnings increased at
a higher rate, with earnings increases
after the non-compete ban of 3.5% for
women, versus 1.5% for men.
A study by Balasubramanian et al.
focuses on a natural experiment in
Hawaii, which banned non-competes for
high-tech workers in 2015. The study
finds earnings of new hires increased by
about 4% after the ban, relative to
earnings in other States without bans.463
In addition to this research, which
shows that increased enforceability of
461 Starr,
supra note 445 at 783.
& Starr, supra note 72 at 143.
463 Balsubramanian et al., supra note 451 at S349.
462 Lipsitz
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non-competes reduces workers’ earnings
across the labor market generally and for
specific types of workers, two empirical
studies find that increased
enforceability of non-competes
suppresses earnings even for workers
who are not subject to non-competes.
The Johnson, Lavetti, and Lipsitz
study, in a separate analysis, isolates the
impact of a State’s enforceability policy
on workers not directly affected by that
policy to demonstrate that noncompetes affect not just the workers
subject to non-competes, but the broader
labor market as well. The study finds
that increases in non-compete
enforceability in one State have negative
impacts on workers’ earnings in
bordering States, and that the effects are
nearly as large as the effects in the State
in which enforceability changed (but
taper off as the distance to the bordering
State increases).464 The study estimates
that a legal change in one State has an
effect on the earnings of workers just
across that State’s border that is 76% as
great as for workers in the State in
which the law was changed.465 In other
words, when one State changes its law
to be more permissive of non-competes
and itself experiences a decrease in
workers’ earnings of 4%, workers just
across the border (i.e., workers who
share a labor market) 466 would
experience decreased earnings of 3%.467
The authors conclude that, since the
workers across the border are not
directly affected by the law change (i.e.,
contracts that they have signed do not
become more or less enforceable), this
effect must be due to changes in the
local labor market.468 The researchers
based their analysis on where workers
worked, rather than their residence, so
the results are not tainted by workers
464 The NPRM cited an earlier version of Johnson,
Lavetti, and Lipsitz’s study that estimated that a
legal change in one State would have an effect on
the earnings of workers just across that State’s
border that was 87% as great as for workers in the
State in which the law was changed. NPRM at 3488.
The data cited in this final rule reflect an updated
version of this study.
465 Johnson, Lavetti, & Lipsitz, supra note 388 at
51. Seventy-six percent is calculated as the
coefficient on the donor State NCA score (¥.137)
divided by the coefficient on own State NCA score
(¥.181).
466 See U.S. Econ. Rsch. Serv., Commuting Zones
and Labor Market Areas, https://www.ers.usda.gov/
data-products/commuting-zones-and-labor-marketareas/.
467 The Commission notes that the estimates in
the updated version of Johnson, Lavetti, and
Lipsitz’s study are slightly different, but
qualitatively similar to the earlier estimates noted
in the NPRM. The results remain statistically
significant and do not materially affect the
Commission’s analysis.
468 Johnson, Lavetti, & Lipsitz, supra note 388 at
30.
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who worked in the State where the law
changed but lived across the border.
The second of these studies, a study
conducted by Starr, Frake, and Agarwal,
analyzed workers without non-competes
who worked in States and industries in
which non-competes were used at a
high rate.469 The authors find that,
when the rate of use of non-competes in
an industry in a State is higher, wages
are lower for workers who do not have
non-competes but who work in the same
State and industry. This study also finds
that this effect is stronger where noncompetes are more enforceable.470
The authors show that the reduction
in earnings (and in labor mobility) is
due to a reduction in the rate of job
offers. Individuals in State/industry
combinations that use non-competes at
a high rate do not receive job offers as
frequently as individuals in State/
industry combinations in which noncompetes are not frequently used.471
The authors also demonstrate that
decreased mobility and earnings are not
due to increased job satisfaction (i.e., if
workers are more satisfied with their
jobs, they may be less likely to change
jobs, and more likely to accept lower
pay).472
Given some methodological
limitations of this study, the
Commission views it as supporting the
other evidence that non-competes have
negative spillover effects on earnings for
workers without non-competes and
reduce labor mobility. Namely, the
research design relies on cross-sectional
differences in enforceability of noncompetes. Although this study also
examines the use of non-competes, it
does not compare individuals who are
bound by non-competes to individuals
who are not. Instead, it examines the
rate of use across industries and States,
and therefore avoids the statistical
biases inherent in studies which
compare individuals with and without
non-competes. The authors also employ
tests to increase confidence in the
causal interpretation of these results,
but they cannot conclusively rule out
explanations outside of the scope of
their data.
Several additional studies examine
the association between non-compete
use—rather than enforceability—and
earnings. For the reasons described in
Part IV.A.2, the Commission finds that
these studies are less credible in
469 Evan Starr, Justin Frake, & Rajshree Agarwal,
Mobility Constraint Externalities, 30 Org. Sci. 961
(2019), online ahead of print at https://
pubsonline.informs.org/doi/abs/10.1287/
orsc.2018.1252 at 6.
470 Id. at 11.
471 Id. at 10.
472 Id. at 13.
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measuring how non-competes affect
earnings, and accordingly the
Commission gives these studies
minimal weight.
In one such study, Starr, Prescott, and
Bishara examine survey results and find
that non-compete use is associated with
6.6% to 11% higher earnings.473 In
another study, using Payscale.com data,
Balasubramanian, Starr, and Yamaguchi
find that individuals with non-competes
(regardless of what other postcontractual restrictions they had) had
2.1–8.2% greater earnings than
individuals with no post-contractual
restrictions. However, this positive
association may be due to non-competes
often being bundled with NDAs. The
authors find that, compared with
individuals subject only to NDAs, noncompetes are associated with a 3.0–
7.3% decrease in earnings, though the
authors do not disentangle this effect
from the effects of non-solicitation and
non-recruitment provisions.474 Another
study, by Lavetti, Simon, and White,
finds that use of non-competes among
physicians is correlated with greater
earnings (by 14%) and greater earnings
growth.475 Finally, Rothstein and Starr
find that greater use of non-competes is
correlated with higher earnings.476
Because these studies merely reflect
correlation and are unlikely to reflect
causation, the Commission gives them
little weight. The NPRM noted that the
Lavetti, Simon, and White physician
study partially mitigates this
methodological flaw by comparing
earnings effects in a high- versus a lowenforceability State (Illinois versus
California). However, at best, this
comparison is a cross-sectional
comparison with a minimally small
number of States being compared. The
study does not consider changes in noncompete enforceability over time.
Therefore, it is impossible to
disentangle underlying differences in
those two States from the effects of noncompete enforceability. The
Commission accordingly gives this
study, like the other studies reliant on
comparisons of populations using noncompetes and not using non-competes,
little weight, though the shortcoming is
slightly mitigated in the case of this
study. While this study is specific to
physicians, the Commission nonetheless
finds that studies employing stronger
methodologies (especially studies of
473 Starr,
Prescott, & Bishara supra note 68 at 75.
Starr, & Yamaguchi, supra
note 74 at 40. The percentage range is calculated
¥0.030
¥0.076
¥1 and e
¥1, respectively.
as e
475 Lavetti, Simon, & White, supra note 82 at
1051. The increase in earnings is calculated as
e0.131¥1.
476 Rothstein & Starr, supra note 77 at 1.
474 Balasubramanian,
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workers positioned similarly in the
income distribution 477 and studies
which broadly represent the U.S.
workforce 478) provide compelling
evidence that non-competes
significantly suppress wages.
Comments Pertaining to Suppressed
Earnings and Commission Responses
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The Commission’s finding that noncompetes suppress earnings is
principally based on the empirical
evidence described in this Part
IV.B.3.a.ii. However, the comments
provide strong qualitative evidence that
bolsters this finding.
The Commission received thousands
of comments from workers describing
how non-competes suppressed their
earnings. These commenters spanned a
wide variety of industries, hailed from
across the U.S., and recounted a
common experience: a non-compete
prevented them from earning more.
Illustrative examples of these comments
include the following:
• I worked at a TV station. A corporation
owned us and forced me to sign a yearly noncompete in order to remain in my position.
After a few years, I was offered a
management job with a much bigger title and
much more money. . . . However, the
corporation that owned us wouldn’t even talk
about letting me out of the non-compete.
They wouldn’t even discuss a settlement.
They totally refused to allow me to pursue
a much higher salary and a much higher
position, no matter what was offered. I was
forced to choose between staying in my
current job, and not being able to improve my
job or money, or being unemployed for 6
months.479
• I have been subject to a non-compete for
11 years in aggregate as a physician. Because
of my non-compete, I am unable to take a
position with another organization without
having to drive much farther outside of my
non-compete stipulated geographic
restrictions (which would add to the time
that I am away from my family, and costs
more in fuel and vehicle maintenance).
Because of my non-compete, I haven’t had a
raise in 6 years, because I can’t negotiate with
my employer because I have no bargaining
position to negotiate from if I don’t have
options of alternate employment within the
restrictions of my non-compete.480
• I recently received two job offers with
better compensation, but I had my noncompete reviewed by an attorney and learned
that it would open myself up to a significant
lawsuit and potential fines. I most likely have
to sit out a year and either work completely
outside my field where I have advanced
degrees or not work at all. Since I am the
primary breadwinner, this is not financially
possible for my family, so I have to stick with
477 Balasubramanian
et al., supra note 451.
Lavetti, & Lipsitz, supra note 388.
479 Individual commenter, FTC–2023–0007–8067.
480 Individual commenter, FTC–2023–0007–0616.
478 Johnson,
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my current employer who has not given me
a pay increase in 2 years.481
• I am a Certified Nurse Practitioner and
signed [a non-compete]. I live in Minnesota
and would be required to travel one hour one
way in order to fulfill [the] agreement. . . .
My employer increased my responsibilities
(on-call hours added) without additional pay
using vague language in my binding
agreement. I would have to hire a lawyer and
spend thousands of dollars to file a lawsuit
to get the agreement releasing me. . . . My
employer took advantage of my binding
agreement and did not increase my [Relative
Value Unit] rate in 5 years for my or other
Nurse Practitioners in our organization.482
• I was just starting out in my career when
I finally got a part time job in my field of
geology. Unfortunately, it didn’t last long and
I was let go. But because of a non compete
agreement I had to sign I couldn’t take
another job in my field even though I had a
good lead on one. Instead I had to take a job
as a waitress making less than minimum
wage.483
• I work for an IT company, low-level
employee just above minimum wage, and I
had to sign one of these to get the job even
though I don’t know any knowledge above
what someone could learn in 10 or 15 hours
on YouTube, yet I still had to sign this which
makes it so I can’t compete . . . if they
offered me better pay.484
• I began working for my employer 10
years ago as a very young and inexperienced
single mother. I desperately needed a job that
could pay more than minimum wage, and I
eagerly accepted my position and noncompete status. I have now been working at
almost the same rate of pay (as raises are not
readily given to us regardless of recessions or
cost of living increases)—for a DECADE. My
children are approaching college age, and I
will absolutely need a higher income to help
fund their educations.485
• I am in the laboratory medicine field and
was laid off from a job as an implementation
rep for an instrument vendor. Other
companies were the competition, and I was
held to a non-compete. This caused me to go
from a six figure salary with great benefits
back to the hospital making barely 60k as a
single mother with twins and no emergency
fund saved! I later went into the UV
disinfection field and developed a
tremendous amount of knowledge regarding
minimizing the spread of infections in
hospitals (pre-covid). After 5 years, I was laid
off and prevented from continuing in this
niche field that I had spent so much time
developing a skillset and statistics within. I
was only given a 2 week severance (along
with a reminder of legal action if I worked
for the competition). Companies use this as
a bully tactic! 486
481 Individual
commenter, FTC–2023–0007–0651.
commenter, FTC–2023–0007–0857.
Relative value units are a component of a
methodology that calculates earnings for some
healthcare workers.
483 Individual commenter, FTC–2023–0007–
11973.
484 Individual commenter, FTC–2023–0007–
11137.
485 Individual commenter, FTC–2023–0007–7238.
482 Individual
486 Individual
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In addition to receiving thousands of
comments recounting personal stories of
non-competes stymieing the
commenters’ ability to get a betterpaying job or a raise, many commenters
also described how, over the long term,
non-competes can lower wages and
diminish career prospects for workers
forced to sit out of the market or start
over in a new field. The Commission
also received numerous comments
stating that non-competes exacerbate
wage gaps based on gender and race,
including by decreasing
entrepreneurship and wages to a greater
extent for women and people of color
and by giving firms more power to
engage in wage discrimination.487
With respect to the empirical
literature, numerous commenters agreed
that there is a wealth of empirical
evidence to support the Commission’s
preliminary finding that, by inhibiting
efficient matching between workers and
employers, the use of non-competes is
harming workers by suppressing their
earnings. In addition to the literature
discussed in the NPRM and in this final
rule, some commenters pointed to a
2016 report from the Treasury
Department that examines the
correlation between non-compete
enforceability and both earnings and
earnings growth at the State level. The
Treasury report finds that a onestandard-deviation increase in Statelevel enforceability of non-competes is
correlated with 1.38% to 1.86% lower
earnings, which can be found in both
lower earnings upon starting a job and
lower earnings growth.488 The
Commission agrees with commenters
that this provides additional support for
the final rule. However, the Commission
gives less weight to cross-sectional
studies of enforceability, like the 2016
Treasury report, that examine the
correlation between non-compete
enforceability and earnings growth.489
The Commission relies more heavily on
the studies that find that non-competes
suppress earnings based on examining
natural experiments.
Some commenters opposing the rule
argued that studies of non-compete use,
including the studies described in this
Part IV.B.3.a.ii, show a positive
association between non-compete use
and earnings, especially when early
notice of non-competes is provided,
487 See also Part IV.B.3.a.iii (summarizing
comments from workers and worker advocates
stating that non-competes increase illegal conduct
by employers and make it harder for workers to
report illegal conduct).
488 Dept. of the Treasury, Non-Compete Contracts:
Economic Effects and Policy Implications (March
2016) at 20.
489 See Part IV.A.2.
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while others cautioned against
interpreting these relationships as
causal. The Commission agrees with
commenters who caution against a
causal interpretation of these studies,
which are unable to determine whether
non-compete use causes differences in
earnings, whether earnings cause
differences in non-compete use, or
whether a third factor simultaneously
determines both, as discussed in Part
IV.A.2.
Some commenters opposing the rule
stated that the most comprehensive
study of the earnings effects of noncompetes (the Johnson, Lavetti, and
Lipsitz study described in this Part
IV.B.3.a.ii) examines only relatively
incremental changes in laws governing
the enforceability of non-competes (i.e.,
changes other than full bans), and
claimed that this study thus does not
shed light on the effects of a full
prohibition. In response, the
Commission notes that the analysis in
Johnson, Lavetti, and Lipsitz finds that
the effects of changes in non-compete
enforceability are broadly linear. This
means the effect of a change in
enforceability twice the size of another
change results in a change in workers’
earnings that is approximately twice as
large. As a result, the Commission finds
that it would be appropriate to
extrapolate from the effects of
incremental changes in non-compete
laws to the effects of prohibitions, at
least in the context of worker
earnings.490 In other words, if
incremental changes in enforceability
lead to a certain level of earnings effects,
it is reasonable to presume—based on
the linearity of the relationship between
changes in enforceability and workers’
earnings—larger changes will lead to
larger effects.
That said, in the regulatory impact
analysis, the Commission does not
extrapolate from the incremental
changes observed in these studies with
respect to earnings effects.491 Instead,
the Commission follows a conservative
approach and assumes that the
prohibition in the final rule, even
though it is comprehensive, will have
the same effects on earnings as the
incremental legal changes observed in
these studies. Therefore, even if the
effects of changes in non-compete
enforceability are not linear, the
Commission’s analysis of the economic
impacts of the final rule is not
undermined because, if anything, it
underestimates the benefits of the rule.
490 See
Figure 3; Johnson, Lavetti, & Lipsitz, supra
note 388 at 17.
491 See Part X.F.5.
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A commenter argued that the Johnson,
Lavetti, and Lipsitz dataset is outdated
because it examines enforceability
between 1991 and 2014. In response, the
Commission finds that while the
enforceability measures contained in
that dataset do not perfectly reflect
current enforceability due to changes in
State law in the intervening several
years, the measures still reflect the
impacts of non-compete enforceability
on economic outcomes, and likely still
have strong predictive power.
Some commenters opposing the rule
asserted that the overall competitiveness
of U.S. labor markets undermines the
argument that workers suffer from noncompetes. In response, the Commission
notes that a range of factors have
weakened competition in labor
markets.492 In any event, the level of
competitiveness of a labor market does
not justify use of a practice that tends
to negatively affect competitive
conditions.
Some commenters opposing the rule
pointed to academic writings, including
a summary of the research by an FTC
economist writing in his personal
capacity in 2019, stating that there was
limited evidence on the effects of such
clauses. The Commission finds that
these writings are generally outdated
and disagrees with them. As the various
explanations of the empirical research
in Parts IV.B and IV.C illustrate, much
of the strongest evidence on the effects
of non-competes has been published in
recent years. The Commission notes
further that Evan Starr, one expert who
voiced concerns over the state of the
evidence in the past, submitted a
comment that was broadly supportive of
the interpretation of the evidence in the
NPRM and of the proposed rule.493
Other comments opposing the rule
stated that the heterogeneity of the
impact of a non-compete ban on
earnings undermined the Commission’s
preliminary finding regarding the effects
of non-competes on earnings. These
commenters asked whether the
population-wide average effects noted
in certain studies apply across the
workforce or only to certain individuals
(e.g., at certain points in the income
distribution), certain professions, or in
certain geographies (e.g., where local
labor markets tend to be more
concentrated). Another commenter
argued that if a ban on non-competes
drives up earnings for highly skilled
492 See Treasury Labor Market Competition
Report at i.
493 Comment of Evan Starr, FTC–2023–0007–
20878.
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workers, wages might decrease for other
categories of workers.494
In response to these comments, the
Commission finds that, while estimates
of the magnitude of the effect of noncompetes on earnings vary to some
extent across groups of workers, the
effects are directionally and
qualitatively similar across groups. For
example, while Balasubramanian et al.
do not report a table with average
earnings for workers in their study,
workers in the high tech jobs studied
tend to be relatively highly paid, and
the study finds non-competes suppress
these workers’ earnings.495 On the lower
end of the earnings spectrum, Lipsitz
and Starr report average earnings of
$16.41 per hour for workers in their
study, which corresponds to annual
earnings of approximately $34,133 per
year (assuming 2,080 hours worked per
year), and their study likewise finds that
non-competes suppress the earnings of
these workers.496
Additionally, Johnson, Lavetti, and
Lipsitz’s study of workers across the
economy shows that, while collegeeducated workers and workers in
occupations and industries in which
non-competes are used at a high rate
experience relatively larger adverse
effects on their earnings from noncompete enforceability, the estimated
effect of increased enforceability on
other workers is still negative (albeit
statistically insignificant in this
study).497 In short, while these studies
do not estimate the magnitude of
negative effects for every subset of the
population, the finding of negative
effects on earnings is consistent across
dissimilar subsets of the population.
A commenter that opposed the NPRM
asserted that a categorical ban could
decrease wages for highly paid workers,
arguing that such workers could
negotiate higher wages in exchange for
the non-compete that they would lose
with a ban. This speculative assertion is
belied by the comment record, which
indicates that the highly paid, highly
skilled workers who are not senior
494 These commenters were generally referring to
higher-wage workers, but not senior executives.
Comments that focused on senior executives are
addressed in Part IV.C.
495 Workers in the occupation Computer and
Information Research Scientists (SOC code 15–
1221) in the private sector had median earnings of
$156,620 in 2022, while Software Developers (SOC
code 15–1252) in the private sector had median
earnings of $127,870 in 2022. BLS, Occupational
Employment and Wage Statistics, https://
www.bls.gov/oes/tables.htm. These private-sector
data are from the May 2022 National industryspecific and by ownership XLS table (see table
labeled ‘‘national_owner_M2022_dl’’).
496 Lipsitz & Starr, supra note 72 at 148.
497 Johnson, Lavetti, & Lipsitz, supra note 388 at
57.
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executives are also unlikely to negotiate
non-competes.498 It is also belied by
empirical evidence that non-competes
suppress earnings for highly paid
workers.499
Similarly, commenters opposing the
rule questioned whether earnings effects
merely result from firms hiring different
types of workers after changes in noncompete enforceability (for example,
workers with different levels of
experience or education). In response to
these comments, the Commission first
notes that the studies find adverse
impacts across the labor force.
Therefore, even if a different mix of
types of workers were hired due to noncompete enforceability, the evidence
shows workers’ wages are suppressed
across the labor force when noncompetes are more enforceable.
Additionally, the Commission notes that
the study by Lipsitz and Starr compares
the earnings growth of individual
workers before and after the legal
change in Oregon, showing that
earnings growth increased after the noncompete ban. This provides some
evidence that the effects observed in the
literature are not simply due to
substitution, since individual workers’
earnings trajectories would not be
changed if all the effects were simply
due to firms substituting one type of
worker for another.500
Some commenters opposing the rule
asserted that enforceability indices are
likely measured with substantial error.
These commenters argue that the
indices are based on qualitative analyses
of State laws and not data on how
frequently non-competes are actually
enforced or the results of these
enforcement cases. The Commission
finds the enforceability indices are
sufficiently reliable, because they are
generated through careful analysis of
State law that takes into account
variation in legal enforceability along
multiple dimensions.501 Moreover, a
2024 study using enforcement outcome
data finds that a non-compete ban in
Washington increased earnings,
consistent with the studies using
enforceability indices.502
498 See
Parts IV.B.2.b.i and IV.C.1.
e.g., Balasubramanian et al., supra note
499 See,
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451.
500 Lipsitz & Starr, supra note 72, Online
Appendix at 18.
501 Norman D. Bishara, Fifty Ways to Leave Your
Employer: Relative Enforcement of Covenants Not
to Compete, Trends, and Implications for Employee
Mobility Policy, 13 U. Pa. J. Bus. L. 751 (2011);
Barnett & Sichelman, supra note 389.
502 Takuya Hiraiwa, Michael Lipsitz, & Evan
Starr, Do Firms Value Court Enforceability of
Noncompete Agreements? A Revealed Preference
Approach (2024), https://papers.ssrn.com/sol3/
papers.cfm?abstract_id=4364674.
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Some commenters opposing the rule
asserted that Hawaii’s prohibition of
non-competes in the technology
industry may not have covered the
workers claimed (in particular, omitting
workers in the broadcast industry).503
These commenters also asserted that
Hawaii simultaneously banned nonsolicitation clauses.
The Commission finds the study of
Hawaii’s non-compete ban to be
informative, despite these limitations.
First, any workers omitted from
coverage by the statute, but considered
as affected in the study, would lead to
a phenomenon known as ‘‘attenuation
bias,’’ which causes estimated effects to
underestimate the true impact.504
Second, the non-solicitation agreements
banned by the Hawaii law were nonsolicitation of coworker agreements
(otherwise known as non-recruitment
agreements)—agreements under which
workers are barred from recruiting
former coworkers, as opposed to nonsolicitation of client agreements, under
which workers are barred from
soliciting former clients. While nonsolicitation of coworker agreements may
have a marginal impact on workers’
earnings (e.g., in situations in which
workers only find out about job
opportunities via past coworkers), the
Commission does not find it likely that
they have a major effect on workers’
earnings. They may prevent some
workers from hearing about some job
opportunities, but unlike non-competes,
they do not prevent workers from taking
those opportunities. And unlike nonsolicitation of client agreements, they do
not frustrate workers’ ability to build up
a client base after moving to a new
employer. The Commission therefore
finds it likely that much of the impact
identified in the study of the Hawaii law
is due to non-competes. The
Commission also notes that the Hawaii
study is directionally consistent with
the results from other more robust
studies that use different methodologies.
Some commenters opposing the rule
argued that the impact of Oregon
banning non-competes for low-wage
workers may have been limited because
the law did not affect existing noncompetes; because non-competes were
already disfavored in Oregon before the
law change; and because the law
included multiple carve-outs.
Commenters also argued the negative
effects on earnings found in Oregon may
have been confounded by the Great
Recession.
503 Balasubramanian
et al., supra note 451.
bias occurs when the independent
variable (here, whether a worker is covered by the
ban) is measured with error.
504 Attenuation
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The Commission finds that those
concerns are not a compelling reason to
discard the study. The study carefully
examines multiple comparisons of
workers within Oregon and across
States. The results therefore cannot be
explained by a differential response of
Oregon to the Great Recession, a
differential response of hourly workers
to the Great Recession, or even a
differential response of hourly workers
in Oregon to the Great Recession. The
Commission also does not believe that
the study is undermined because the
law did not affect existing non-competes
and included multiple carve-outs, or
because non-competes were disfavored
in Oregon before the law changed.
These factors likely mitigated the
magnitude of the law’s negative effect
on earnings, rather than exaggerating it.
Some commenters opposing the rule
argued that Johnson, Lavetti, and
Lipsitz 505 claim that ‘‘[t]he overall effect
of [non-compete] enforceability on
earnings is ambiguous,’’ and that this
undermines the Commission’s
preliminary findings. However, these
commenters take this quote out of
context. The authors were referring to a
theoretical model, not to the empirical
work in their paper. When economists
do empirical research, they often begin
by constructing a theoretical model and
describing what the theory would
predict; they then describe their
empirical findings, which may show a
different result. The authors described
that it is unclear, theoretically, whether
non-compete enforceability would
increase or decrease earnings. However,
the empirical findings of the study were
clear: as the authors stated, ‘‘We find
that increases in [non-compete]
enforceability decrease workers’
earnings.’’ 506 The fact that the authors
described the theoretical results of a
hypothesized model as ambiguous does
not undermine the fact that their study
had clear empirical results.
Some healthcare businesses and trade
organizations opposing the rule argued
that, without non-competes, physician
shortages would increase physicians’
wages beyond what the commenters
view as fair. The commenters provided
no empirical evidence to support these
assertions, and the Commission is
unaware of any such evidence. Contrary
to commenters’ claim that the rule
would increase physicians’ earnings
beyond a ‘‘fair’’ level, the weight of the
evidence indicates that the final rule
505 Matthew S. Johnson, Kurt Lavetti, & Michael
Lipsitz, The Labor Market Effects of Legal
Restrictions on Worker Mobility (2021) at 11;
https://papers.ssrn.com/sol3/papers.cfm?abstract_
id=3455381.
506 Id. at 2.
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will lead to fairer wages by prohibiting
a practice that suppresses workers’
earnings by preventing competition; that
is, the final rule will simply help ensure
that wages are determined via fair
competition. The Commission also
notes that it received a large number of
comments from physicians and other
healthcare workers stating that noncompetes exacerbate physician
shortages.507
One commenter opposing the rule
criticized the analysis in the Johnson,
Lavetti, and Lipsitz study, suggesting
that data on where individuals live are
not necessarily indicative of where
individuals work, and that identified
spillover effects may simply be due to
cross-border commuters. The
Commission disagrees, because, as
noted, the study considers whether the
workers are subject to enforceable noncompetes based on their work location.
A commenter also argued that if the
absence of non-competes helped
workers, one would expect California,
North Dakota, and Oklahoma to have
the highest median incomes among all
the States. The Commission believes
this expectation is inapt. Given the
evidence that non-competes suppress
workers’ earnings, earnings in
California, North Dakota, and Oklahoma
are likely higher than they would be if
non-competes were enforceable, but
there is no reason to expect they would
necessarily be higher than all other
States.
One commenter opposing the rule
asserted that the Commission’s citation
of one study in the NPRM was
insufficient to show that non-competes
are directly tied to discriminatory
behavior by employers, or that noncompetes worsen racial or gender wage
gaps. The Commission does not rest its
finding in this final rule that noncompetes tend to negatively affect
competitive conditions on findings of
increased discriminatory behavior or
exacerbation of gender and wage gaps.
The Commission merely notes that there
are two empirical studies—described
under ‘‘Evidence of suppressed
earnings’’—that find that non-competes
do, in fact, exacerbate earnings gaps.
One commenter opposing the rule
stated that closing racial and gender
wage gaps may harm racial minorities
and women if their wages were to fall
in absolute terms. Another commenter
argued that the proposed rule would
reduce capital investment and output,
which would decrease White male
workers’ wages. In response, the
Commission notes that the study by
Johnson, Lavetti, and Lipsitz shows that
the impact of a decrease in non-compete
enforceability on earnings is positive for
workers in each of these groups.
The empirical evidence makes clear
that, by restricting a worker’s ability to
leave their current job to work for a
competitor or to start a competing
business, non-competes reduce workers’
earnings, supporting the Commission’s
finding that non-competes tend to
negatively affect competitive conditions
in labor markets.
in labor markets. However, the
Commission believes its finding that
non-competes are an unfair method of
competition is further bolstered by this
strong qualitative evidence related to
non-competes degrading working
conditions.
Numerous workers and worker
advocacy organizations described how
non-competes compel workers to
endure jobs with poor working
conditions. Illustrative examples of
these comments include the following:
iii. Non-Competes Reduce Job Quality
In the NPRM, the Commission
recognized that non-competes may also
negatively affect working conditions,
i.e., job quality,508 although this had not
been studied in the empirical literature
(likely because it is harder to quantify).
Competition in labor markets yields not
only higher earnings for workers, but
also better working conditions.509 In a
well-functioning labor market, workers
who are subject to poor working
conditions can offer their labor services
to an employer with better working
conditions. Such workers can also start
businesses, giving them more control
over working conditions. Non-competes
frustrate this competitive process by
restricting a worker’s ability to switch
jobs or start a business. Furthermore, in
a well-functioning labor market,
employers compete to retain their
workers by improving working
conditions. Where workers are locked
into a job—because their alternative
employment options are restricted—
those competitive forces are diminished
and working conditions can suffer. The
Commission accordingly sought
comment on this topic.
In response, thousands of workers
with non-competes described how, by
frustrating these competitive processes,
non-competes prevent them from
escaping poor working conditions or
demanding better working conditions.
Based on the large number of comments
the Commission received on this issue
and the wide variety of negative and
severe impacts commenters described,
the Commission finds that, in addition
to suppressing earnings, non-competes
negatively affect working conditions for
a significant number of workers.
The Commission finds that the effects
of non-competes on labor mobility and
workers’ earnings are sufficient,
standing alone, to support its finding
that non-competes with workers other
than senior executives tend to
negatively affect competitive conditions
• In March 2018, I was fired from a job in
local news for refusing to go into an unsafe
situation. I’d recently received a letter from
a man threatening to kidnap me. When my
boss decided he would still send me out
alone in the field, I fought him on it, lost, and
was terminated. Three weeks later, I found
out I was pregnant. Unable to work in my
field because of a noncompete enforced even
AFTER I was terminated, I had no choice but
to apply for WIC and government assistance,
and work at a retail job making half my
previous salary. I wanted to work. I wanted
money to support my child. I wanted money
to move closer to home, to escape a domestic
violence situation. My noncompete kept me
in a horrible spot, and nearly cost me my
life.510
• I started my first job as a Nurse
Practitioner in 2019. All positions I
interviewed for required a noncompete. . . . In my case, I work for an
employer that is hostile, discriminated
against me during pregnancy and maternity
leave and has raised his voice at me in
meetings. He told me I was lucky to even
have a job after becoming pregnant. I learned
after starting at the practice that he has
shown this pattern before with previous
employees. I say this because all of these
above-mentioned reasons are why I have the
right to want to quit my job and move on.
I desperately want to leave and start another
job but I can’t because of the non compete.
I feel like a prisoner to my job. I feel
depressed in my work conditions and I feel
like I have no way out.511
• I’m a barber and violated a non-compete
about 6 months ago. . . . I worked for my
previous employer for two years in a toxic
environment. I told my employer how work
was affecting my home life on more than one
occasion and she did nothing. . . . How was
I to know that I would be working in a toxic
environment when I applied? So ultimately,
I decided in order to be happy and make a
living wage, I’d have no choice but to violate
my non-compete. She came after me in no
time flat. Now I’m paying legal fees and at
risk of going to court and losing my job for
6 more months. . . . [I]f I’m working in poor
working conditions, I should be able to work
where I please. For two years, my job and
employer affected my mental health. I chose
to take anti-depressants after things got bad
at work, upped my dosage twice as work
508 NPRM
Part IV.B.3.b.iv for a more detailed
summary of these comments.
507 See
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at 3504.
Labor Market Competition Report at
509 Treasury
i.
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510 Individual commenter, FTC–2023–0007–
12813.
511 Individual commenter, FTC–2023–0007–4989.
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became progressively worse and since I’ve
left, I’ve stopped taking my medication.512
• I am a commissioned employee in the
mortgage world, and I had a non-compete
with my former company in Ohio. Near the
end of my time at this company, they merged
with another company and put the new
company in charge of the sales staff. It was
miserable. We started having issues, even
with having basic supplies, and it went from
just harming me to harming my ability to get
business complete, which harms the
consumer. I left and I was sued for a three
year period. . . . I really do not feel that
[non-competes] should be allowed. You are
stuck at employers and they can treat you in
any manner that they please because they
know that they can make your life a living
hell if you leave them.513
• Like many new graduates in the medical
field, I signed on with a company that made
numerous empty promises. . . . What I was
not prepared for, was the company’s strategic
increase in facilities in which I was to
perform services under this contract. In the
short span of 2 years, I did
neurophysiological monitoring for 24
facilities . . . . When working conditions fell
apart regardless of my requests for adequate
sleep following 36 hours straight of working
on call at my designated stroke hospital, time
for meals or breaks within 18+ hour work
days, and a reasonable travel distance within
the area the company demanded I relocate to,
I was met with threats from HR regarding my
non-compete if I were to leave. . . . Working
conditions became so intense, I was placed
on migraine medications at the
recommendations of my doctor and required
three separate trips in the ER for medical
conditions related to stress, inability to eat or
drink while tied within tens of hours long
surgeries . . . . Again I was met with threats
from HR and now their legal team.514
Many commenters stated that noncompetes harm working conditions for
lower-wage workers. However, there
were many commenters in higher-wage
jobs who also stated that non-competes
harmed their working conditions. For
example, numerous physicians
explained that they were trapped in jobs
with poor working conditions because
of non-competes. Many of these
physicians described how non-competes
accelerate burnout in their profession by
making it harder for workers to escape
bad working conditions or demand
better working conditions. Many
commenters recounted how they left
poor work environments but noncompetes harmed them by forcing them
to leave their field, move out of the area
where they lived, or spend time and
money defending themselves from legal
action. Many commenters argued that
prohibiting non-competes would
increase workers’ bargaining power and
512 Individual
commenter, FTC–2023–0007–3323.
commenter, FTC–2023–0007–3955.
514 Individual commenter, FTC–2023–0007–1252.
513 Individual
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in turn incentivize employers to provide
better work environments.
Workers in both high-wage and lowwage professions, as well as worker
advocacy groups, stated that by
diminishing workers’ competitive
alternatives, non-competes keep
workers trapped in jobs where they
experience dangerous, abusive, or toxic
conditions; discrimination; sexual
harassment; and other forms of
harassment. These commenters also
described how non-competes trap some
workers in jobs where their employer
commits wage and hour violations, such
as wage theft, as employers that use
non-competes can insulate themselves
from the free and fair functioning of
competitive markets and are thus more
likely to be able to steal worker wages
with impunity. Several commenters said
they were unable to receive benefits
because a non-compete rendered them
unable to switch to a job with better
benefits or rendered them unable to
leave their job when their employer took
their benefits away. A professional
membership network for survivors of
human trafficking explained that
traffickers masquerading as legitimate
businesses use non-competes to prevent
trafficking victims from leaving.
Some workers and advocacy
organizations stated that non-competes
increase the potential for harm from
retaliation. These commenters stated
that restricting a worker’s employment
opportunities makes it even harder for
workers to find new jobs after
experiencing retaliation. These
commenters argued that this
discourages workers from reporting
fraud, harassment, discrimination, or
labor violations. A labor union
commented that, by making it harder for
workers to find new jobs, non-competes
can deter unionization and chill
activities protected by the National
Labor Relations Act, including activities
to address unsafe, unfair, or
unsatisfactory working conditions.
According to a trade organization of
attorneys, whistleblower protections
may come too late for a fired
whistleblower who cannot obtain
another job because of a non-compete.
Several commenters provided survey or
case evidence showing that workers
who report sexual harassment, wage
theft, or poor working conditions are
frequently retaliated against, including
by being fired.515 These commenters
515 For example, the National Women’s Law
Center, which operates and administers the TIME’S
UP Legal Defense Fund, reported that among
individuals who contacted the Fund to request legal
assistance related to sexual harassment in the
workplace, 72% reported facing retaliation, and,
among those, 36% had been fired. Comment of Nat’l
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stated that, because non-competes make
it harder for these workers to find new
jobs, non-competes decrease the
likelihood that workers report these
kinds of harms.
Many workers described how, by
limiting their ability to get out of
harmful workplace environments, noncompetes contributed to stress-related
physical and mental health problems.
Many commenters, particularly in the
healthcare profession, stated that
suicide is a major problem in their
profession and described non-competes
as one of the stressors, because noncompetes make it harder to leave jobs
with unsustainable demands, leaving
workers feeling trapped.
While thousands of commenters
described, often in personal terms, how
non-competes have negatively affected
their working conditions, the
Commission received few comments
from workers or worker advocates
stating that non-competes improved
working conditions. The few comments
received stated that workers who remain
with an employer can be harmed by
departing and competing colleagues, via
increased workloads or harm to their
employer.
Taken together, these comments
provide strong qualitative evidence that
non-competes degrade working
conditions, which supports the
Commission’s finding that noncompetes tend to negatively affect
competition in labor markets.
b. Non-Competes Tend to Negatively
Affect Competitive Conditions in
Product and Service Markets
Based on the Commission’s expertise
and after careful review of the
rulemaking record, including the
empirical research and the public
comments, the Commission finds that
non-competes tend to negatively affect
competitive conditions in markets for
products and services by inhibiting new
business formation and innovation.
New businesses are formed when new
firms are founded by entrepreneurs or
spun off from existing firms. New
business formation increases
competition by reducing concentration,
bringing new ideas to market, and
forcing incumbent firms to respond to
new firms’ ideas instead of stagnating.
New businesses disproportionately
create new jobs and are, as a group,
more resilient to economic
Women’s L. Ctr., FTC–2023–0007–20297 at 5 (citing
Jasmine Tucker & Jennifer Mondino, Coming
Forward: Key Trends and Data from the TIME’S UP
Legal Defense Fund, 4 (Oct. 2020), https://nwlc.org/
wp-content/uploads/2020/10/NWLC-Intake-Report_
FINAL_2020-10-13.pdf).
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downturns.516 With respect to spinoffs,
research shows that spinoffs within the
same industry are highly successful
relative to other entrepreneurial
ventures.517
Non-competes, however, tend to
negatively affect competitive conditions
in product and service markets by
inhibiting new business formation in
two ways. First, since many new
businesses are formed by workers who
leave their jobs to start firms in the same
industry, non-competes reduce the
number of new businesses that are
formed in the first place.518 Second,
non-competes deter potential
entrepreneurs from starting or spinning
off new businesses—and firms from
expanding their businesses—by locking
up talented workers.519 Non-competes
thus create substantial barriers to
potential new entrants into markets and
also stymie competitors’ ability to grow
by making it difficult for those entrants
to find skilled workers.
Innovation refers to the process by
which new ideas result in new products
or services or improvements to existing
products or services. Innovation may
directly improve economic outcomes by
increasing product quality or decreasing
prices, and innovation by one firm may
also prompt other firms to compete and
improve their own products and
services. However, non-competes tend
to negatively affect competitive
conditions in product and service
markets by inhibiting innovation.
Non-competes tend to reduce
innovation in three ways. First, noncompetes prevent workers from starting
businesses in which they can pursue
innovative new ideas.520 Second, noncompetes inhibit efficient matching
between workers and firms.521 Where
workers are less able to match with jobs
that maximize their talents, employers’
ability to innovate is constrained. Third,
and relatedly, non-competes reduce the
movement of workers between firms.522
516 See, e.g., The Importance of Young Firms for
Economic Growth, Policy Brief, Ewing Marion
Kauffman Foundation (Sept. 24, 2015).
517 Aaron K. Chatterji, Spawned With a Silver
Spoon? Entrepreneurial Performance and
Innovation in the Medical Device Industry, 30
Strategic Mgmt. J. 185 (2009).
518 See, e.g., Evan Starr, Natarajan
Balasubramanian, & Mariko Sakakibara, Screening
Spinouts? How Noncompete Enforceability Affects
the Creation, Growth, and Survival of New Firms,
64 Mgmt. Sci. 552 (2018).
519 See, e.g., Shi, supra note 84.
520 See Part IV.B.3.b.i.
521 See Part IV.B.3.a. While the Commission
focuses on the most direct negative effects on
competition in product and service markets in this
Part IV.B.3.b, inefficient matching between workers
and firms may have additional negative effects,
including on output.
522 See Part IV.B.3.a.i.
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This decreases knowledge flow between
firms, which limits the cross-pollination
of innovative ideas.
As described in Parts IV.B.3.b.i and ii,
the Commission finds that the effects of
non-competes on new business
formation and innovation are sufficient
to support its finding that non-competes
tend to negatively affect competitive
conditions in product and service
markets. In addition, as described in
Parts IV.B.3.b.iii and iv, the Commission
believes this finding is further bolstered
by evidence that non-competes increase
concentration and consumer prices, as
well as evidence that non-competes
reduce product quality.
The Commission’s findings relating to
new business formation and innovation
are principally based on the empirical
evidence described in Parts IV.B.3.b.i
and ii. However, the comments provide
strong qualitative evidence that bolsters
these findings. Furthermore, the
Commission notes that the legal
standard for an unfair method of
competition under section 5 requires
only a tendency to negatively affect
competitive conditions; empirical
evidence of actual harm is not necessary
to establish that conduct is an unfair
method of competition. In the case of
non-competes, however, there is
extensive empirical evidence, as well as
extensive corroborating public
comments, that non-competes
negatively affect competitive conditions
in product and service markets.
i. Non-Competes Inhibit New Business
Formation
Evidence of Inhibited New Business
Formation
The Commission finds that noncompetes tend to negatively affect
competitive conditions in product and
service markets by inhibiting new
business formation. The weight of the
empirical evidence establishes that
when non-competes become more
enforceable, the rate of new business
formation (i.e., the number of new
businesses formed) declines.
Several empirical studies assess the
effects of non-competes on the rate of
new business formation. A study
conducted by Jessica Jeffers examines
several State law changes in the
technology sector and the professional,
scientific, and technical services sector
and finds a decline in new firm entry
when non-competes become more
enforceable. Jeffers finds that as noncompetes became more enforceable, the
entry rate of new firms decreases
substantially.523 Jeffers’ study uses
523 Jeffers, supra note at 450. The 2024 version of
Jeffers’ study reports a 7% impact.
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several changes in non-compete
enforceability that are measured in a
binary fashion. While this study
therefore does not satisfy all the
principles outlined in Part IV.A.2, it
satisfies most of them and is accordingly
quite robust and weighted highly.
Another study, conducted by Matt
Marx, examines the impact of several
changes in non-compete enforceability
between 1991 and 2014 on new
business formation, and likewise finds a
negative effect of non-competes on new
business formation.524 Marx finds that,
when non-competes become more
enforceable, men are less likely to found
a rival startup after leaving their
employer, that women are even less
likely to do so (15% less likely than
men), and that the difference is
statistically significant.525 This study
therefore supports both that noncompetes inhibit new business
formation and that non-competes tend
to have more negative impacts for
women than for men. Marx uses several
changes in non-compete enforceability
measured in a continuous fashion. The
study therefore satisfies the principles
outlined in Part IV.A.2 and is weighted
highly.
In addition, Johnson, Lipsitz, and Pei
analyze the extent to which noncompete enforceability affects the rate of
firm entry in high-tech industries. They
find that an average increase in noncompete enforceability decreases the
establishment entry rate by 3.2%.526
Outside of examining only innovative
industries, this study’s methodology is
otherwise strong, and the study is
therefore weighted highly. While this
study uses multiple changes in a
granular measure of non-compete
enforceability, a quite robust
methodology, the study is limited to
high-tech industries.
In addition, a study conducted by Can
and Fossen indicates that decreases in
enforceability of non-competes in Utah
and Massachusetts increased
entrepreneurship among low-wage
workers.527 Can and Fossen examine
just two changes in non-compete
enforceability, measured in a binary
fashion, and the study is therefore given
slightly less weight than studies which
524 Matt Marx, Employee Non-Compete
Agreements, Gender, and Entrepreneurship, 33 Org.
Sci. 1756 (2022).
525 Id. at 1763.
526 Matthew S. Johnson, Michael Lipsitz, & Alison
Pei, Innovation and the Enforceability of NonCompete Agreements, Nat’l. Bur. Of Econ. Rsch.
(2023) at 36.
527 Ege Can and Frank M. Fossen, The
Enforceability of Non-Compete Agreements and
Different Types of Entrepreneurship: Evidence From
Utah and Massachusetts, 11 J. of Entrepreneurship
and Pub. Pol. 223 (2022).
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examine more changes or use a more
granular measure of enforceability. The
study corroborates the results of studies
using these stronger methodologies.
Furthermore, a study conducted by
Benjamin Glasner focused on high-tech
industries finds that technology workers
increased entrepreneurial activity in
Hawaii after non-competes were
restricted, but finds no effect on
entrepreneurial activity from Oregon’s
restriction on non-competes with lowwage workers.528 Similar to the study by
Can and Fossen, this study by Glasner
uses two changes in non-compete
enforceability measured in a binary
fashion. Additionally, a study published
by Stuart and Sorenson shows that
increased enforceability of noncompetes decreases the amount by
which firm acquisitions and IPOs
induce additional local business
formation.529 This study uses crosssectional variation in non-compete
enforceability measured in a binary
fashion, and studying the amount by
which firm acquisitions and IPOs
induce additional local business
formation does not cover all
entrepreneurship. These studies are
thus given more limited weight, but
generally are in line with other evidence
that non-competes reduce new business
formation and innovation.
Additionally, a study conducted by
Starr, Balasubramanian, and Sakakibara
analyzes the effect of non-compete
enforceability on spinouts (i.e., when a
firm creates a new business by splitting
off part of its existing business). The
authors find that, when non-compete
enforceability increases by one standard
deviation, the rate of spinouts within
the same industry decreases by 32.5%—
a major decrease in new business
formation.530 Research shows that
spinouts within the same industry are
highly successful, on average, when
compared with typical entrepreneurial
ventures.531 This study uses crosssectional differences in non-compete
enforceability, measured in a
continuous fashion, though it attempts
to avoid problems related to the use of
cross-sectional differences in noncompete enforceability by using law
firms—which likely do not use noncompetes due to ethical limits in the
legal profession 532—as a control group.
The Commission therefore gives this
study somewhat less weight than
studies of changes in non-compete
enforceability, though the findings
corroborate the findings of the studies
by Jeffers and Marx.
In addition, a study by Salome´
Baslandze shows that non-competes
reduce new business formation, finding
that greater non-compete enforceability
inhibits entry by spinouts founded by
former employees of existing firms.533
Baslandze notes that spinouts tend to
innovate more and are relatively higher
quality than other new firms. This study
examines changes in non-compete
enforceability on a continuous measure
but assumes that changes over a 19-year
period occur smoothly over time instead
of identifying exactly when the legal
changes were made. While this study
uses changes in non-compete
enforceability and corroborates the
findings of the aforementioned studies
on new business formation, the
assumption regarding the timing of
changes yields an imprecise measure of
non-compete enforceability over time.
The Commission therefore gives this
study somewhat less weight than
studies which precisely identify the
timing of changes in non-compete
enforceability.
Finally, in a 2011 study, Samila and
Sorenson find that when non-competes
are more enforceable, rates of
entrepreneurship, patenting, and
employment growth slow. They find
that an increase in venture capital
funding creates three times as many
new firms where non-competes are
unenforceable, compared to where noncompetes are enforceable.534 This study
528 Benjamin Glasner, The Effects of Noncompete
Agreement Reforms on Business Formation: A
Comparison of Hawaii and Oregon, Econ.
Innovation Group White Paper (2023), https://
eig.org/noncompetes-research-note/.
529 Toby E. Stuart & Olav Sorenson, Liquidity
Events and the Geographic Distribution of
Entrepreneurial Activity, 48 Admin. Sci. Q. 175
(2003).
530 Starr, Balasubramanian, & Sakakibara, supra
note 518 at 561. 32.5% is calculated as 0.0013/
0.004, where 0.0013 is the coefficient reported in
Table 2, Column 6, and 0.004 is the mean WSO
entry rate reported in Table 1 for ‘‘nonlaw’’ firms.
531 For reviews of the literature, see, e.g., Steven
Klepper, Spinoffs: A Review and Synthesis, 6
European Mgmt. Rev. 159 (2009) and April Franco,
Employee Entrepreneurship: Recent Research and
Future Directions, in Handbook of Entrepreneurship
Research 81 (2005).
532 See Am. Bar Ass’n, Model Rule 5.6, https://
www.americanbar.org/groups/professional_
responsibility/publications/model_rules_of_
professional_conduct/rule_5_6_restrictions_on_
rights_to_practice/.
533 Salome
´ Baslandze, Entrepreneurship Through
Employee Mobility, Innovation, and Growth, Fed.
Res. Bank of Atlanta Working Paper No. 2022–10
(2022), https://papers.ssrn.com/sol3/
papers.cfm?abstract_id=4277191.
534 Samila & Sorenson find that a 1% increase in
venture capital funding increased the number of
new firms by 0.8% when non-competes were
enforceable, and by 2.3% when non-competes were
not enforceable. Sampsa Samila & Olav Sorenson,
Noncompete Covenants: Incentives to Innovate or
Impediments to Growth, 57 Mgmt. Sci. 425, 432
(2011). The values are calculated as 0.8% =
e0.00755¥1 and 2.3% = e0.00755 + 0.0155¥1,
respectively.
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uses cross-sectional variation in noncompete enforceability along two
dimensions, both of which are measured
in a binary fashion. Due to this
measurement, the Commission gives
this study less weight, though its results
corroborate the findings of the other
studies on new business formation.
The Commission gives minimal
weight to two additional studies. One of
these estimates the job creation rate at
startups increased by 7.8% when
Michigan increased non-compete
enforceability.535 However, the
Commission places less weight on this
study than the studies discussed
previously because it examines only one
legal change in one State and because
the change to non-compete
enforceability was accompanied by
several other simultaneous changes to
Michigan’s antitrust laws. Thus, it is not
possible to isolate the effect of the
change in non-compete enforceability
standing alone.
The other study finds mixed effects of
non-compete enforceability on the entry
of businesses into Florida. The study
examines a legal change in Florida
which made non-competes more
enforceable. The authors find larger
businesses entered the State more
frequently (by 8.5%) but smaller
businesses entered less frequently (by
5.6%) following the change.536
Similarly, Kang and Fleming find that
employment at large businesses rose by
15.8% following the change, while
employment at smaller businesses
effectively did not change.537 This study
examines a single change in noncompete enforceability. However, the
Commission gives this study minimal
weight because the study does not
examine new business formation
specifically; instead, it assesses the
number of ‘‘business entries,’’ which
does not necessarily reflect new
business formation because it also
captures existing businesses moving to
the State.
Additional research analyzes the
effects of non-competes on the number
of jobs created by new businesses.538
535 Gerald A. Carlino, Do Non-Compete
Covenants Influence State Startup Activity?
Evidence from the Michigan Experiment, Fed. Res.
Bank of Phila. Working Paper No. 21–26 at 16
(2021).
536 Hyo Kang & Lee Fleming, Non-Competes,
Business Dynamism, and Concentration: Evidence
From a Florida Case Study, 29 J. Econ. & Mgmt.
Strategy 663, 673 (2020).
537 Id. at 674. The value is calculated as 15.8%
= e0.1468¥1.
538 In the NPRM, the Commission stated that the
evidence relating to the effects of non-competes on
job creation was inconclusive. However, in the final
rule, the Commission does not make a separate
finding that non-competes reduce job creation.
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While the research described previously
shows that non-competes inhibit the
rate of new business formation, this
research indicates that even where new
businesses are created, these new
businesses have fewer workers where
non-competes are more enforceable.
This evidence suggests that noncompetes not only prevent small
businesses from being formed, but they
also hinder entrepreneurship by tending
to reduce the number of employees new
firms are able to hire.
In addition to analyzing the rate of
firm entry in high-tech industries,
Johnson, Lipsitz, and Pei analyzes the
number of jobs created at newly
founded firms in innovative
industries.539 Using evidence from
several State law changes, the authors
find that increases in non-compete
enforceability lead to a reduction in the
number of jobs created at newly
founded firms in innovative industries
(though not necessarily across all
industries or all types of firms) by
7.2%.540
A study by Starr, Balasubramanian,
and Sakakibara finds that increases in
non-compete enforceability decreased
average per-firm employment at new
firms.541 In the NPRM, the Commission
stated that this study found that several
increases in non-compete enforceability
were associated with a 1.4% increase in
average per-firm employment at new
firms.542 However, upon further review
of the study, the Commission interprets
this study as finding that increases in
non-compete enforceability decreased
average per-firm employment at new
firms—both for spinouts within the
same industry and spinouts into a
different industry.543 For spinouts into
a different industry, average per-firm
employment at the time of founding
decreases by 1.4% due to greater noncompete enforceability. For spinouts
into the same industry, average per-firm
employment decreases by 0.3%.544 At
Instead, it cites the research described herein—
which relates solely to job creation at newly
founded firms—to support its finding that noncompetes inhibit new business formation.
539 Johnson, Lipsitz, and Pei, supra note 526 at
36.
540 Id. While this study satisfies each of the other
metrics outlined in Part IV.A.2, the sample is
restricted to firms in innovative industries, and
therefore the outcome of interest is not reflective of
the entire population.
541 Starr, Balasubramanian, & Sakakibara, supra
note 518 at 552.
542 NPRM at 3488–89.
543 While this study satisfies some of the
principles for robust design outlined in Part IV.A.2,
the Commission notes that average per-firm
employment does not precisely correspond to the
economic outcome of interest, which is overall
employment or job creation.
544 Calculated as 1.4%¥1.1%, based on the effect
for non-within-industry spinouts (1.4%) and the
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seven years after founding, the results
are similar: spinouts into a different
industry have average per-firm
employment that is 1.5% lower due to
greater non-compete enforceability,
while spinouts into the same industry
have per-firm employment that is 0.7%
lower.545 The Commission notes that
this study compares States with
different levels of enforceability, using
law firms as a control group, instead of
considering changes in non-compete
enforceability. It is therefore given less
weight than studies with stronger
methodologies.546
Comments Pertaining to Inhibited New
Business Formation and the
Commission’s Responses
The Commission’s finding that noncompetes inhibit new business
formation is principally based on the
empirical evidence described in this
Part IV.B.3.b.i. However, the comments
provide strong qualitative evidence that
bolsters this finding.
Hundreds of commenters agreed with
the Commission’s preliminary finding
that non-competes reduce new business
formation. Illustrative examples of
comments the Commission received
include the following:
• I am a hairstylist . . . and have been
with the company for 11 years. Our work
conditions have changed drastically over the
years and Covid has really sent us on a sharp
decline. It is not the same salon I signed on
to work for. That being said, a few coworkers
want to open a salon and take some of us
with them to bring back the caliber of service
we want to give our clients. Our non-compete
contracts state that we can’t work within 30
miles of this salon. We didn’t expect that
relative impact on within-industry spinouts
compared with non-within-industry spinouts
(¥1.1%). See Starr, Balasubramanian, & Sakakibara,
supra note 518 at 561.
545 Calculated as 1.5%¥0.7%, based on the effect
for non-within-industry spinouts (1.5%) and the
relative impact on within-industry spinouts
compared with non-within-industry spinouts
(¥0.8%). See id. at 563.
546 There are also two studies analyzing how noncompetes affect job creation or employment
generally. Neither study relates to new business
formation specifically. Goudou finds a decreased
job creation rate from an increase in non-compete
enforceability in Florida. Felicien Goudou, The
Employment Effects of Non-compete Contracts: Job
Retention versus Job Creation (2023), https://
www.jesugogoudou.me/uploads/JMP_Felicien_
G.pdf. This study considers just one change in noncompete enforceability, and is therefore given less
weight, though the results corroborate findings in
papers which satisfy more of the guideposts in Part
IV.A.2. Additionally, the 2023 version of Johnson,
Lavetti, & Lipsitz, supra note 388, finds that
increased non-compete enforceability reduces
employment by 1.9%, though they do not estimate
the impact on job creation directly. Rather, the
authors look only at the closely related metric of
changes in overall employment. This study
otherwise has a strong methodology, as discussed
in Part IV.B.3.a.ii.
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standards would drop so low and they would
raise prices so high that we lost so many
clients. . . . We have all had enough of the
toxic environment and need to be free of this
unfair contract.547
• I am a veterinarian that has had to suffer
under non-compete clauses my entire career.
I have had to sell my home and relocate
several times including moving out of State
due to non-compete clauses. I’m currently
stuck in a [non-compete covering a] 30 mile
radius of all 4 practices of a group of
hospitals I work for. This basically keeps me
from working in an enormous area. I had to
sign it due to circumstances out of my
control and they took advantage of my
situation. I recently tried to start my own
business, not related to the type of practice
that I have the non-compete clause with, and
had to abandon the idea because I couldn’t
get funding without my current employer
releasing me from the contract or by
relocating again out of the huge area of noncompete.548
• We own a small family practice in urban
Wisconsin. I previously was employed by a
large healthcare organization and burned out.
When I left to star[t] my own business, I was
restricted from working close by, by a noncompete. I spent $24,000 [in] legal fees
challenging this successfully. . . . Now as a
business owner for 5 years, we have the
opportunity to hire some physician assistants
who have been terminated without cause
from my prior employer. I am unable to do
so because they also had to sign noncompetes. I have seen many disgruntled
patients who have delayed care because of
this.549
• I am aesthetic nurse practitioner wanting
to start my own business but I am tied to a
2 year 10 mile non compete. I was basically
obligated to sign the non-compete when I
needed to reduce my hours to finish my
master’s degree (that I paid for and they
wanted me to get). I feel forced to stay at a
job that is not paying me what I am worth.550
• I am a licensed social worker with a noncompete which is hindering my employment
options. . . . I would like to start my own
business as the mental health facility I work
for is not supportive of mental health. This
rule would be a great benefit for mental
health professionals and those seeking
quality mental health services.551
• As a recently graduated physician, I
wanted to start my own practice and become
a small business owner. However, I also
needed a source of income to start out and
wanted to work part time at a local hospital
for income and benefits. However, due to a
non-compete clause in their contracts, I
could not start my own business and practice
in the same city if I was to work with them.
This hindered my ability to work as much as
I wanted (ended up having to work as an
independent contractor for significantly less
547 Individual
commenter, FTC–2023–0007–3299.
commenter, FTC–2023–0007–1448.
549 Comment of Three Oaks Health, FTC–2023–
0007–1397.
550 Individual commenter, FTC–2023–0007–
10157.
551 Individual commenter, FTC–2023–0007–
11922.
548 Individual
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shifts per month and no benefits), and made
it more difficult to get my business off the
ground due to expenses for providing my
own benefits. Banning non-compete clauses
would significantly help the ability for
citizens to pursue starting small businesses
or other work to increase their income and
prosperity.552
• Mr. Z had worked for a company for over
15 years installing windshields in vehicles.
He was a lower-level employee making
$18.50 an hour and did not learn any trade
secrets or confidential information. After
years of working for the company the
employer refused to raise his wages despite
his experience, so he decided to start his own
business. Shortly after giving notice and
beginning his new endeavor, he received a
letter from his previous employer informing
him that he was in breach of his non-compete
agreement and the employer would enforce
it if he continued with his business plan.553
• Non-competes have prohibited me from
making a living as a fitness and wellness
professional to such an extent, that it hurt me
economically. I opened up my own business
that was different than my previous
employer, even though it was different and
I told him I was going to focus on a different
area in wellness, my previous employer sued
me. I ended up having to hire an attorney to
defend myself and when it was all said and
done, I spent close to 12,000 in fees and
penalties.554
• Non compete agreements are detrimental
to the average worker, preventing them from
pursuing better paying job offers or from
starting their own business in the same
industry. I am directly affected by a noncompete clause I had signed as part of a job
acceptance. I am now forming my own
business in the same industry as my
employer, and cannot do business within a
50-mile radius of my employer. That radius
covers the hometown I live in. Even though
we are in the same industry, we have very
different target markets.555
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As these comment excerpts reflect,
many potential entrepreneurs wrote to
the Commission to describe how they
wanted to strike out on their own, but
a non-compete preventing them from
doing so. These comments indicate that
non-competes have deprived
communities of homegrown
businesses—with respect to everything
ranging from tech companies, to hair
salons, to physician practices, and many
more types of firms. This deprives
markets of competing firms that can
reduce concentration—which in turn
has benefits for lowering prices and
raising the quality of products and
services, and increasing innovation in
bringing new ideas to market—as well
552 Individual commenter, FTC–2023–0007–
11777.
553 Comment of NW Workers’ Justice Project,
FTC–2023–0007–15199 (discussing a client).
554 Individual commenter, FTC–2023–0007–
12904.
555 Individual commenter, FTC–2023–0007–
12697.
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as depriving communities of
opportunities for new job creation.
Even where entrepreneurs were able
to start businesses, they explained how
non-competes prevented them from
hiring talented workers and made it
harder for their nascent businesses to
grow and thrive. Many other
commenters described personal
experiences in which their newly
formed businesses were threatened by
litigation costs related to non-competes.
Other commenters stated that the threat
of litigation related to non-competes
increases the risk and cost of starting a
new business, particularly if that
business intends to compete against a
large incumbent firm. One commenter
stated that incumbent firms can use
non-compete litigation as a mechanism
to chill startup formation where startups
lack the resources to contest a noncompete.
Numerous small businesses and
organizations representing small
businesses submitted comments
expressing support for the proposed rule
and describing how it would help small
business owners. These commenters
contend that categorically prohibiting
non-competes will empower small
businesses by providing them with new
access to critical talent and will drive
small business creation as
entrepreneurial employees will be free
to compete against their former
employers. Many small businesses also
argued that non-competes can hinder
small business formation and can keep
small businesses from growing once
they are formed. The extensive
comments the Commission received
from small businesses are also
addressed in Part XI.C.
Some small businesses said they
spent tens or hundreds of thousands of
dollars defending themselves from noncompete lawsuits. A one-person
surveying firm said it has to regularly
turn down work because of the former
employer’s threat to sue over a noncompete. A small, five-worker firm said
it was sued by a billion-dollar company
for violating a non-compete despite the
fact that the firm waited out the noncompete period and did not use
proprietary information or pursue the
former employer’s customers; it fears
the legal fees will force it out of
business. A legal aid organization
relayed the story of a client, a selfemployed beauty worker who was
unable to provide their service during a
non-compete lawsuit despite working
outside the non-compete geographic
radius. The CEO of one small transport
and logistics company said a ban would
remove a tool used mostly by the largest
companies in each industry to maintain
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their market dominance, as small
competitors cannot match their legal
budgets. Further, many workers said
they would open their own business if
non-competes were banned.
Many small businesses shared their
experiences of how non-competes have
made hiring more difficult. For
example, a small physician practice said
non-competes made it difficult to
compete with larger practices to attract
and retain physicians. A small business
and a medical association said small
businesses could not afford a lawsuit
when hiring workers. An IT startup
tried to hire an executive who had
retired from a large firm, but the large
firm sued the startup to enforce what
the startup said was an unenforceable
non-compete. According to the startup,
because a lawsuit would have cost up to
$200,000, it was forced to settle and
could not work with numerous potential
clients, and its growth was significantly
slowed. It stated that it continues to turn
away many potential hires to avoid
being sued over non-competes.
Other commenters raised additional
issues relevant to hiring. According to
one technology startup organization, the
inability to assemble the right team is a
major reason startups fail, and small
businesses lose opportunities because
they must avoid hiring workers who are
subject to even unenforceable noncompetes. That organization also said
startups currently face legal and time
costs from navigating the patchwork and
complexity of State non-compete laws,
especially when trying to determine if a
potential hire’s non-compete is
enforceable; the time and expense of
navigating this landscape will thus often
cause the startups to forego that hire.
That organization said some noncompetes prevent experienced workers
from counseling, advising, or investing
in startups, and such mentoring can
double a startup’s survival rate.
Several self-identified entrepreneurs
commented that because of their noncompetes, they feared not being able to
operate, build, or expand their business.
Numerous workers reported that they
wanted to or planned to start their own
business, but their non-compete made
them too afraid to do so. A public policy
organization referenced the Census
Bureau’s Annual Business Survey to
argue that a majority of business owners
and an even higher majority of Black
business owners view starting their own
business as the best avenue for their
ideas, and that non-competes may
prevent these potential entrepreneurs’
ideas from coming to market.
Several commenters stated that noncompetes make it harder for new
businesses to hire workers with relevant
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experience or industry knowledge.
Some commenters argued that noncompete bans, such as in California,
have contributed to higher rates of
successful start-ups, while new firms in
States where non-competes are more
enforceable tend to be smaller and are
more likely to fail.
In contrast, several commenters
opposed to the rule argued that noncompetes promote new business
formation by protecting small and new
firms’ investments, knowledge, and
workers from appropriation by
dominant firms poaching their
employees. Commenters also theorized
that, while non-competes directly
inhibit employee spinoffs, they may
encourage businesses to enter the
market by enhancing their ability to
protect their investments. As described
in Part IV.D.2, the Commission finds
that firms have viable alternatives for
protecting these investments that
burden competition to a less significant
degree than non-competes. The
Commission further notes that these
commenters did not provide evidence to
support their assertions.
In addition, when assessing how noncompetes affect new business formation,
the Commission believes it is important
to consider the net impact. It is possible
that the effects described by these
commenters and the effects described by
the Commission earlier in this Part
IV.B.3.b.i can be occurring at the same
time. That is, a non-compete might in
some instances be protecting a firm’s
investments in a manner that is
productivity-enhancing holding all else
equal. But even that same non-compete
can—and certainly non-competes in the
aggregate do—inhibit new business
formation by prohibiting workers from
starting new businesses and by locking
up talented workers, preventing the
worker from efficiently matching with
the job that is the highest and best use
of their talents. What the empirical
evidence shows is that non-competes
reduce new business formation, overall
and on net, indicating that the tendency
of non-competes to inhibit new business
formation more than counteracts any
tendency of non-competes to promote
new business formation.
Other commenters said non-competes
protect firms’ value and assets for sale
in future acquisitions, which they said
drives seed capital investment in startups. An investment industry
organization commented that privateequity financing, particularly for earlystage companies, often includes noncompetes and is used to support growth,
in turn increasing competition. In
response, the Commission notes that
these commenters provided no
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empirical evidence that decreases in
non-compete enforceability have
affected seed capital investment and
private-equity financing. Moreover, the
Commission notes that there is no
indication that small businesses or
early-stage companies in States that
have banned or limited non-competes
have been unable to obtain financing.
To the contrary, California, where noncompetes are unenforceable, has a
thriving start-up culture.
Other commenters addressed
empirical research related to new
business formation. Some commenters
similarly argued that research on the
average quality of employee spinouts
due to changes in non-compete
enforceability may imply negative
effects of the rule (e.g., if prohibiting
non-competes decreases average
employment or average survival rates of
new firms). Some commenters also
noted that the Baslandze study finds
that weaker non-compete enforceability
increases the rate at which spinouts
form but result in a lower proportion of
high-quality spinouts.556
In response to these comments, the
Commission notes commenters
primarily referenced Starr,
Balasubramanian, & Sakakibara 557 to
support this view. The findings in this
study have been misinterpreted by
commenters. This study actually finds
that spinouts that form when noncompete enforceability is stricter are
lower quality (i.e., create fewer jobs), but
that the effect is less drastic for spinouts
within the same industry versus
spinouts into different industries.
Coupled with other evidence discussed
in Part IV.B.3.b.i, the weight of which
points to increased job creation due to
the rule, the Commission finds that
empirical studies have not established
that non-competes lead to higher-quality
startups or higher-quality spinouts. The
Commission also notes that the result in
the Baslandze study regarding the
quality of spinouts is theoretical, and
the study does not test this theory
empirically.
Commenters also argued that noncompetes may have different effects on
different types of workers—for example,
across different industries, occupations,
or levels of pay—and that these
differences may affect the impacts of
non-competes on new business
formation. In response, the Commission
notes that the studies show negative
effects across a range of industries and
are directionally consistent, even if they
do not provide results for all subgroups.
556 Baslandze,
557 Starr,
supra note 533 at 40.
Balasubramanian, & Sakakibara, supra
note 518.
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Commenters asserted that noncompetes may affect job creation
through several different mechanisms.
The Commission agrees and finds that,
regardless of the specific mechanism,
the weight of the evidence indicates that
non-competes inhibit job creation.
Commenters opposing the rule also
questioned the usefulness of studies of
Michigan’s law change, given that
existing non-competes remained
enforceable under the Michigan law;
they state that as a result, it would take
longer for effects from the law to be
realized. As noted under ‘‘Evidence of
inhibited new business formation,’’ the
Commission gives minimal weight to
this study, but for other reasons.
In an ex parte communication entered
into the record, the author of the study
of the Michigan law change expressed
concern over the Commission’s
interpretation of the study.558 In
particular, he stated that his
methodology mitigated concerns that
the study’s findings of an increase in the
job creation rate may be due to
decreases in that rate’s denominator
(total employment). While the
Commission does not agree with this
assessment,559 the Commission places
less weight on the study for different
reasons, as noted.
Some commenters who opposed the
rule also addressed the evidence
relating to non-competes and job
creation, although these commenters
generally did not focus on job creation
related to new businesses specifically.
Some of these commenters asserted that
the studies addressed in the NPRM
indicated that non-competes are
associated with a greater number of jobs
available and increased rates of job
creation, rather than decreased rates of
job creation. Some asserted that the
evidence on job creation is mixed and
that the issue is understudied. In the
NPRM, the Commission stated that the
evidence relating to the effects of noncompetes on job creation was
inconclusive. However, in the final rule,
558 Ex Parte Communication: Email from G.
Carlino to E. Wilkins (Jan. 30, 2023), https://
www.ftc.gov/system/files?file=ftc_gov/pdf/P201200
NonCompeteNPRMExParteCarlinoRedacted.pdf.
559 In particular, the long time period and the
difference-in-difference methodology used in the
study do not mitigate concerns that decreases in
employment due to non-compete enforceability
could drive increases in the job creation rate. The
concern is not that the findings somehow represent
effects on anything other than the average job
creation rate (as noted by the author in his ex parte
communication), but that a rate is comprised of a
numerator and denominator, and effects on either
may drive effects on the rate as a whole. This
concern is shared by at least two empirical studies
of non-competes. See Johnson, Lavetti, & Lipsitz
supra note 388 at 19 and Johnson, Lipsitz, & Pei
supra note 526 at 19.
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the Commission does not make a
separate finding that non-competes
reduce job creation. Instead, it cites the
research described herein—which
relates to job creation at newly founded
firms—to support its finding that noncompetes inhibit new business
formation.
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ii. Non-Competes Inhibit Innovation
Evidence of Inhibited Innovation
The Commission finds that noncompetes tend to negatively affect
competitive conditions in product and
service markets by inhibiting
innovation. Three highly reliable
empirical studies find that noncompetes reduce innovation.
One such study, a study by Zhaozhao
He, finds that the value of patents,
relative to the assets of the firm,
increases by about 31% when noncompete enforceability decreases.560 In
contrast to some other studies of
innovation discussed here, He’s study
focuses on the value of patents, rather
than the mere number of patents. The
study does so to mitigate concerns that
patenting volume may not represent
innovation.561 The study analyzes the
impact of several legal changes to noncompete enforceability, using a binary
measure of non-compete enforceability.
While this study therefore does not
satisfy all the principles outlined in Part
IV.A.2, it nonetheless satisfies many of
them and contains a reasonably strong
methodology.
A second study, by Johnson, Lipsitz,
and Pei, finds that increased
enforceability of non-competes
decreases the rate of ‘‘breakthrough’’
innovations and innovations which
make up the most cited patents. This
study lends weight to the finding that
non-competes harm both the quantity
and the quality of innovation.562 The
authors also show that when noncompete enforceability decreases,
patenting increases even in industries
where most new innovations are
patented. These increases imply that the
effect is a true increase in innovation,
rather than firms substituting between
patents and non-competes.
Johnson, Lipsitz, and Pei also show
that State-level changes in non-compete
policy do not simply reallocate
innovative activity across State lines,
which would result in no change in
innovation at the national level. Instead,
they find that decreasing non-compete
enforceability, even in one State,
increases innovative activity
nationally.563 Johnson, Lipsitz, and Pei’s
study uses several legal changes to
analyze the impact of enforceability. It
also uses several metrics of quality and
quantity to mitigate concerns over
whether patenting is an accurate
reflection of innovation, especially in
this context. The study thus satisfies all
the principles outlined in Part IV.A.2
and is therefore given substantial weight
by the Commission.
A third study, by Rockall and
Reinmuth, finds that non-competes have
a significant negative impact on
innovation. They further find that this
effect is not driven solely by the entry
of new businesses. Their work suggests
a potentially central role for knowledge
spillovers, which are hampered when
worker mobility is diminished. The
study uses many changes to noncompete enforceability quantified on a
continuous basis and considers several
metrics which represent the quantity
and quality of patenting, in order to
accurately capture the relationship
between non-competes and
innovation.564 Similar to the study by
Johnson, Lipsitz, and Pei, this study
therefore satisfies all the principles
described in Part IV.A.2 and is given
substantial weight.
The Commission places the greatest
weight on the foregoing three studies, in
which factors unrelated to the legal
changes at issue are less likely to drive
the results. There are additional studies
that relate to non-competes and
innovation, but the Commission gives
them less weight.
A study by Samila and Sorenson finds
that venture capital induced less
patenting by 6.6 percentage points when
non-competes are enforceable.565
However, the authors note that
patenting may or may not reflect the
true level of innovation, as firms may
use patenting as a substitute for noncompetes where they seek to protect
sensitive information.566 Furthermore,
this study assesses only the quantity of
patents and does not take into account
the quality of patents, which would be
a better proxy for innovation. For this
reason, the Commission gives less
weight to this study (although its
findings are directionally consistent
with the first three studies described
herein). This study also uses cross563 Id.
567 Carlino,
564 Emma
560 Zhaozhao
He, Motivating Inventors: NonCompetes, Innovation Value and Efficiency 21
(2023), https://ssrn.com/abstract=3846964. Thirty
one percent is calculated as e0..272¥1.
561 Id. at 17.
562 Johnson, Lipsitz, & Pei, supra note 526.
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Rockall & Kate Reinmuth, Protect or
Prevent? Non-Compete Agreements and Innovation
(2023), https://papers.ssrn.com/sol3/
papers.cfm?abstract_id=4459683.
565 Samila & Sorenson, supra note 534 at 432. The
value is calculated as 6.6% = e0.0208 + 0.0630¥e0.0208.
566 Id.
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sectional variation in non-compete
enforceability, which is measured along
two dimensions in a binary fashion. In
addition, a study by Gerald Carlino
examined how patenting activity in
Michigan was affected by an increase in
non-compete enforceability. The study
finds that mechanical patenting
increased following the change in the
law, but that drug patenting fell, and
that the quality of computer patents
fell.567 However, the increase in
mechanical patenting appears to have
primarily occurred approximately 14
years after non-compete enforceability
changed. This suggests that some other
mechanism may have led to the increase
in patenting activity.568 Moreover, the
study uses a single change in noncompete enforceability to generate its
results, and it uses only one measure of
innovation outside of patent quantity—
quality as measured by patent citations.
Finally, this study examines a change to
non-compete enforceability which was
accompanied by several other changes
to Michigan’s antitrust laws, making it
impossible to identify the effect of the
change in non-compete enforceability
standing alone. For these reasons, the
Commission gives less weight to this
study.
A study by Clemens Mueller does not
estimate the overall impact of noncompete policy on innovation, but
instead focuses on career detours of
inventors.569 Mueller shows that
inventors are more likely to take ‘‘career
detours’’—that is, to change industries
to avoid the reach of their noncompete—when enforceability of noncompetes is stricter. Due to the lower
match quality between that inventor and
their new industry, the innovative
productivity of those inventors suffers
after they take career detours. However,
the Commission assigns this study less
weight because, while its methodology
satisfies the principles outlined in Part
IV.A.2, the study is only informative of
the productivity of individuals taking
career detours. It does not address
whether innovation in the aggregate
increases. Mueller uses several changes
in non-compete enforceability to
generate results, but those changes are
measured in binary—rather than
continuous—fashion.
Coombs and Taylor examine the
impact of non-compete enforceability on
innovation. They find that research
Fmt 4701
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supra note 535 at 40.
at 48.
569 Clemens Mueller, Non-Compete Agreements
and Labor Allocation Across Product Markets,
Proceedings of the EUROFIDAI-ESSEC Paris
December Finance Meeting 2023 (2023), https://
papers.ssrn.com/sol3/papers.cfm?abstract_
id=4283878.
568 Id.
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productivity, as measured by the
number of products in biotechnology
firms’ prospectuses, was lower in
California than other States, which they
suggest implies that California’s ban on
non-competes hampers research
productivity.570 However, this study is
purely cross-sectional, and results may
be due to other differences between
California and other States; the
Commission accordingly places less
weight on this study.
Two additional studies address firm
strategies related to innovation.
However, the Commission gives them
little weight because the outcomes
studied do not inform how noncompetes would affect the overall level
of innovation in the economy. The first,
by Raffaele Conti, uses two changes in
non-compete enforceability (in Texas
and Florida), and indicates that firms
engage in riskier strategies with respect
to research and development (‘‘R&D’’)
when non-compete enforceability is
greater.571 However, this study does not
address whether these riskier strategies
lead to greater innovation. The second,
by Fenglong Xiao, finds that increases in
non-compete enforceability led to
increases in exploitative innovation
(i.e., innovation which stays within the
bounds of the innovating firm’s existing
competences) in the medical device
industry.572 The study finds this
increase in exploitative innovation leads
to an increase in the rate at which new
medical devices are introduced.
However, the study also finds that
explorative innovation (i.e., innovation
which moves outside those bounds)
decreased, and explorative innovation is
the mode of innovation which the
empirical literature has found to be
associated with high growth firms.573
The net impact on innovation from this
study is thus unclear. The study
examines several changes in noncompete enforceability, measured with a
binary indicator of non-compete
enforceability.
570 Porcher L. Taylor, III, and Joseph E. Coombs,
Non-Competition Agreements and Research
Productivity in the Biotechnology Industry, 26
Frontiers of Entrepreneurship Rsch. 1 (2006).
571 Raffaele Conti, Do Non-Competition
Agreements Lead Firms to Pursue Risky R&D
Strategies?, 35 Strategic Mgmt. J. 1230 (2014).
572 Fenglong Xiao, Non-Competes and
Innovation: Evidence from Medical Devices, 51
Rsch. Pol’y 1 (2022).
573 Alessandra Colombelli, Jackie Krafft &
Francesco Quatraro, High-Growth Firms and
Technological Knowledge: Do Gazelles Follow
Exploration or Exploitation Strategies?, 23 Indus.
And Corp. Change 262 (2014).
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Comments Pertaining to Inhibited
Innovation and the Commission’s
Responses
The Commission’s finding that noncompetes inhibit innovation is
principally based on the empirical
evidence described in this Part
IV.B.3.b.ii. However, the comments
provide strong qualitative evidence that
bolsters this finding.
Several academics and economic
research groups, among other
commenters, agreed with the
Commission’s preliminary finding that
non-competes inhibit innovation.
Commenters argued that non-competes
reduce knowledge flow and
collaboration, force workers to leave
their field of expertise, and discourage
within-industry spinouts that promote
innovation. Many commenters stated
that banning non-competes would make
it easier for workers to pursue
innovative ideas and to hire the best
talent to help develop those ideas.
Illustrative examples of comments the
Commission received include the
following:
• I am a geneticist at Stanford University,
and I am co-founding a biotech startup that
aims to discover new cancer
immunotherapies. Many of the most talented
geneticists, immunologists, cancer biologists,
and other scientists with unique and valuable
skillsets for drug development are bound by
non-competes that prevent them from leaving
jobs at big pharma companies to join biotech
startups like mine. The result is artificial
scarcity in the market for top scientific
talent—a phenomenon that precludes healthy
competition between industry incumbents
and new entrants. Given that much of our
country’s most cutting-edge translational
research happens within biotech startups,
and given that many of the most successful
drugs on the market originate in biotech
startups, non-competes in pharma and
biotech prevent the most talented scientists
from working on the most innovative science
and obstruct the development of new
treatments and cures for human disease—
leaving our society worse off.574
• As a practicing Physician for over thirty
years, and one who trained fellows in pain
management, who followed many of their
students’ careers, I was able to see the
detriments of unfair Non-Compete clauses in
their contracts. Often a physician would take
a job, and if it did not work out, the
restrictions were so severe, that they would
need to move to a new geographic location
in order to be employed. . . . Other
scenarios exist as well. Where large
institutions can block scientific discovery of
their research physicians from moving to
other institutions which may be better able
to support their research, potentially
blocking the promotion of scientific
discovery.575
574 Individual
commenter, FTC–2023–0007–0198.
575 Individual commenter, FTC–2023–0007–3885.
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• I am an engineer in the orthopedic space.
I have an idea for a truly innovative foot and
ankle plating system that I believe could
become the standard of care for fracture
fixation and foot deformity correction. It
could save 10–15 minutes of operating room
time per surgery, which studies show carries
a cost of $1000 (times millions of surgeries
annually). It does not directly compete with
my former employer’s product, but I have to
wait a year to start engaging surgeons about
it because of a very broad non-compete, for
a product that does not even compete.576
• I currently work as a mid-level technical
employee at a company that enforces long (a
year or longer) noncompetes. . . . After
working for larger companies for a few years
after college, many of my friends started their
own companies. Some succeeded massively
and some didn’t but what was common
among most of them was that the companies
they started were somewhat related to what
they were working on before. They either saw
a gap in the industry while working for a
larger company, or had a bold idea in their
domains that they wanted to quit their jobs
and try executing it. All this risk taking has
in turn resulted in innovation, more
competition, and hundreds of jobs. This
would not have been possible if these people
were under non-compete agreements from
their previous employers. In fact, many of my
friends who are currently working for
companies that have non-competes have
personally told me that they want to try a
different approach than the current
incumbents in their industry, but they simply
can’t take this risk because of the long noncompetes they are under. Note that noncompetes are even more consequential for
workers of relatively less experience because
sitting out for 1 year while only having 3 to
4 years of experience is a lot more
detrimental to one’s career when compared
to an individual with 20 years of experience.
Given that younger workers are more willing
to take risks and try new ideas, the impact
of non-competes on innovation is far worse
than many think.577
• I am an engineer who has worked on
software and hardware in several domains,
including the semiconductor industry. I
perceive non-competes to not only be
detrimental to free trade but also to be
detrimental to American innovation and
manufacturing. If the United States is serious
about supporting the growth of the
semiconductor industry in the U.S., it must
ensure that semiconductor companies inside
the United States truly act to benefit
American innovation. . . . The FTC would
act prudently to ban such agreements.578
• I am a physician. I have worked for
public entities for my entire career. I have
worked under non-competes for my entire
career. The result of these non-compete
clauses is that myself and my colleagues keep
our imagination and creativity locked away.
We see novel applications of pharmaceuticals
and medical devices which our leadership
576 Individual
577 Individual
commenter, FTC–2023–0007–0760.
commenter, FTC–2023–0007–
19807.
578 Individual commenter, FTC–2023–0007–
12872.
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does not want to pursue, and we are also
precluded from pursuing these ideas due to
the noncompete. We see new ways to reach
people and help people with our unique skill
sets, and our noncompete keeps us from
being able to reach them. The noncompete
allows our employer to own us. They
monopolize the talent of their workforce and
this deprives the community of the
innovation that may stem from the
unleashing of the creativity of the physician
workforce. I see the direct impact of noncompete clauses. The public has so much to
gain by releasing healthcare workers from
their noncompete clauses. These talented
individuals, once released from their
noncompetes, will begin to contribute to
their communities with new ideas and
innovation that will serve their communities.
Many entities have so many reasons to avoid
innovation and this stifles the individuals
who work for them and oppresses new ideas.
Once released from the bureaucracy and
burden of non-competes I believe you will
see an abundance of community outreach,
device innovation and community service
from many physicians currently subjugated
by their noncompete clauses.579
A research organization said a ban on
non-competes would increase the value
workers realize from creativity and
inventiveness, though it also asserted
that non-competes can incentivize firms
to create and share information. Some
workers commented that they had
innovative ideas or research that their
employer was unwilling to pursue, but
the worker could not leave to pursue
their ideas elsewhere. A commenter also
argued that captive workforces can stifle
competition for workers and for clients
or patients that leads to innovation.
According to several commenters,
trapping workers in jobs can also lead
to decreased productivity and so-called
‘‘quiet quitting.’’
Some commenters contended that
California’s ban on non-competes
helped Silicon Valley and other
industries in California thrive. For
example, a public policy organization
pointed to industry clusters where
studies have identified job hopping,
which may otherwise be prohibited by
non-competes, as the primary
mechanism of knowledge diffusion and
argued that restricting non-competes for
knowledge workers would improve the
U.S.’s competitiveness. Other
commenters questioned whether noncompetes played a role in Silicon
Valley’s growth. In response, the
Commission notes that it does not
attribute California’s success in the
technology industry to its non-compete
laws. The Commission merely notes (in
Part IV.D) that the technology industry
is highly dependent on protecting trade
secrets and that it has thrived in
579 Individual
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California despite the inability of
employers to enforce non-competes,
suggesting that employers have less
restrictive alternatives for protecting
trade secrets.
Other commenters opposing the rule
argued that non-competes may promote
innovation by encouraging firms to
make productivity-enhancing
investments and by decreasing the risk
of workers leaving. These commenters
stated that non-competes protect firms’
investments in workers, R&D,
intellectual capital, and innovation. The
Commission does not believe that noncompetes are needed to protect valuable
firm investments. As described in Part
IV.D.2, the Commission finds that firms
have less restrictive alternatives that
protect these investments adequately
while burdening competition to a less
significant degree.
In addition, when assessing how noncompetes affect innovation, the
Commission believes it is important to
consider the net impact. It is possible
that the effects described by these
commenters and the effects described by
the Commission earlier in this Part
IV.B.3.b.ii can be occurring at the same
time. That is, a non-compete might in
some instances be protecting a firm’s
investments in a manner that is
productivity-enhancing holding all else
equal. But even that same non-compete
can—and certainly non-competes in the
aggregate do—inhibit innovation by
preventing workers from starting new
businesses in which they can pursue
innovative ideas; inhibiting efficient
matching between workers and firms;
and reducing the movement of workers
between firms. What the empirical
evidence shows is that non-competes
reduce innovation, overall and on net,
indicating that the tendency of noncompetes to inhibit innovation more
than counteracts any tendency of noncompetes to promote innovation.
The Commission addresses the
available evidence on the relationship
between non-competes and firm
investment in Part IV.D.1.
A business commenter contended that
worker mobility does not necessarily
improve innovation since the new firm
may be unable or unwilling to use the
worker’s knowledge or ideas, or the new
start-up may fail and leave consumers
with less innovative products and
services. In response, the Commission
notes that it is certainly possible that
some workers switch jobs to firms that
are unable or unwilling to use their
knowledge or ideas, or to startups that
may fail. However, the fact that the
empirical evidence shows that reduced
non-compete enforceability increases
innovation suggests that these effects are
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outweighed by workers who can switch
jobs to firms that make better use of
their talents, or to startups that thrive
and bring innovative new products to
market.
Other commenters stated that noncompetes promote the sharing of ideas
and information within firms and
incentivize risk-taking. The Commission
is not aware of evidence that noncompetes promote the sharing of ideas
within firms specifically, but in any
event the Commission explains in Part
IV.D.2 that trade secrets and NDAs
provide less restrictive means than noncompetes for protecting confidential
information. With respect to risk-taking,
the Commission notes that the Conti
study finds that firms engage in riskier
R&D strategies when non-compete
enforceability is greater, but it is not
clear whether these riskier R&D
strategies translate into increased
innovation.
Commenters also argued that noncompetes may have different effects on
different types of workers—for example,
across different industries, occupations,
or levels of pay—and that these
differences may affect the impacts of
non-competes on innovation. In
response, the Commission notes that the
most methodologically robust studies
show negative effects across a range of
industries and are directionally
consistent, even if they do not provide
results for all subgroups.
A research organization argued that
non-competes decrease the likelihood
that innovative technologies are
developed outside the U.S. and that
non-competes promote economic
growth, competitiveness, and national
security. The Commission is not aware
of any reliable evidence of the effects of
non-competes on whether innovative
technologies are developed outside the
U.S. However, the weight of the
empirical evidence indicates that noncompetes reduce the amount of
innovation occurring within the U.S.
Some commenters noted that
innovation hubs have emerged in States
that enforce non-competes. In response,
the Commission notes that it does not
find that it is impossible for innovation
hubs to emerge where non-competes are
enforceable. Instead, the Commission
finds that, overall, non-competes inhibit
innovation.
One commenter performed an
empirical exercise in which he
correlated Global Innovation Index
rankings of innovation clusters with the
enforceability of non-competes in each
location. The commenter found that
only one of the top five clusters bans
non-competes, and only three others in
the top 100 ban non-competes. The
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commenter cited the success of Chinese
innovation clusters, noting that noncompetes are permitted in each of
them.580 The Commission does not find
this evidence persuasive. Other
differences across countries may explain
these results better than policy towards
non-competes, which is one factor
among many that affect the level of
innovation in an economy.
Some commenters argued that the
empirical research cited in the NPRM
has mixed results. These commenters
point to the study by Xiao (2022)
showing that non-competes increase
exploitative innovation (innovation that
incrementally extends firms’ existing
capabilities), but not explorative
innovation (innovation that extends the
scope of firms’ capabilities). In
response, the Commission notes that,
within this particular study, the net
impact of non-competes on innovation
was unclear. But the Commission does
not believe the evidence overall is
mixed, given that the three empirical
studies of the effects of non-competes
on innovation that use the most reliable
empirical methods all find that noncompetes reduce innovation.
Some commenters claimed that two
studies cited in the NPRM—the Xiao
and Conti studies—had findings that
were omitted or misinterpreted: first,
the Xiao finding that non-compete
enforceability increases the rate of new
discoveries of medical devices due to
increases in the rate of exploitative
innovation but not explorative
innovation); and second, the Conti
finding that greater non-compete
enforceability leads to riskier
innovation, which these commenters
assert is a positive outcome.581 In
response, the Commission notes that the
NPRM described both of these findings
and did not omit or misinterpret
them.582 The Commission explains why
it gives these studies little weight under
‘‘Evidence of inhibited innovation.’’
A commenter asserted that the He
study is insufficient evidence to support
a finding, and that the study examines
the effects of non-compete
enforceability on the value of patents,
which the commenter asserts misses
other aspects of innovation. In response,
the Commission believes that the He
study is methodologically robust and
that, while no single metric can capture
all aspects of innovation, the value of
patents is a meaningful proxy. The
Commission also notes that the effects
580 Comment of Mark Cohen, FTC–2023–0007–
12064, at 12–13.
581 Referring to Xiao, supra note 572 and Conti,
supra note 571.
582 NPRM at 3492–93.
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observed in the He study are
considerable, as the study finds that the
value of patents, relative to the assets of
the firm, increases by about 31% when
non-compete enforceability decreases.
In addition, the Commission notes that
the comment record provides
substantial qualitative support in line
with the empirical findings.
Furthermore, additional research,
published since the release of the
NPRM, helps confirm the Commission’s
finding regarding the effect of noncompetes on innovation. As described
under ‘‘Evidence of inhibited
innovation,’’ this evidence moves
beyond assessing the impact of noncompetes on the value of patents or the
number of patents to identify the quality
of new innovation, as well as the
mechanisms underlying these effects.
Many commenters referred to a law
review article, which was also
submitted as a comment itself, that
critiques the literature on non-competes
and innovation.583 First, the authors
argue that a measure of enforceability
used in part of the economic literature
is incorrect and that a more recently
developed measure is imperfect but
better.584 The Commission agrees with
the authors that the more recently
developed measure of enforceability, the
scale based on Bishara (2011), is
stronger than other measures of
enforceability due to its granularity.
This metric is used in many studies
cited in this final rule, including the
Johnson, Lipsitz, and Pei study, which
largely reinforces the conclusions in the
He study, lending weight to the
conclusions in these studies that noncompetes suppress the overall level of
innovation in the economy.
Second, the authors argue that a given
non-compete may be governed by the
laws of a State other than the State
where the worker lives, which
undermines the reliability of studies
analyzing the effects of non-compete
enforceability. The authors argue that
cross-border enforcement of noncompetes may be a difficult issue to
properly address in empirical work and
has not been accounted for in the work
to date. In response, the Commission
notes that if the State law that applied
to a given non-compete were totally
random—for example, if a non-compete
583 Barnett
& Sichelman, supra note 389.
allegedly flawed measures use binary
indicators for enforcement versus non-enforcement,
or binary indicators for several facets of
enforceability (Stuart and Sorenson, supra note 529;
Mark J. Garmaise, Ties that Truly Bind:
Noncompetition Agreements, Executive
Compensation, and Firm Investment, 27 J. L., Econ.,
& Org. (2011)), and the more recent measure is more
nuanced (Bishara, supra note 501).
584 The
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in Oregon was no more likely to be
governed by Oregon’s law than any
other State’s law—we would expect to
observe no effects on economic
outcomes (such as earnings, innovation,
and new business formation) from
changes in State law. Instead, the
empirical research shows that changes
in State law have clear impacts on
economic outcomes in particular States.
This indicates that enough noncompetes within a particular State are
subject to that State’s law for changes in
that State’s law to affect economic
outcomes in that State.
Third, the authors argue that there is
a lack of data on the use of noncompetes and that such data are needed
to completely assess the effects of noncompetes. Although there is not
comprehensive data on individual
workers’ employment agreements, the
Commission believes the studies that
examine changes in enforceability do so
based on sufficient data to be reliable
and are otherwise methodologically
sound. These studies are also highly
probative with respect to the effects of
the final rule because what they are
examining—how changes in the
enforceability of non-competes affect
various outcomes—matches closely
with what the final rule does. The
Commission also notes that there is
considerable data regarding the
prevalence of non-competes, which it
discussed in Part I.B.2.
Fourth, the article argues that some
studies of non-competes have small
sample sizes, which may lead to
measurement error. In response to
concerns about small sample sizes, the
Commission notes that the most recent
studies use a greater breadth of variation
in the legal environment surrounding
non-competes, overcoming this obstacle.
Fifth, the article expresses concern
about certain studies that are based on
legal changes in Michigan. The
Commission takes this critique into
account throughout this final rule and
notes it when discussing the applicable
studies that examine legal changes in
Michigan, including under ‘‘Evidence of
inhibited innovation.’’
In an ex parte communication
included in the public record, the
author of one of the studies of
innovation stated that studies which
examine multiple legal changes may be
biased, since affected parties may
anticipate the legal change and adjust
their behavior prior to the date that the
legal change is made. The author stated
that examination of the legal change in
Michigan was therefore preferable, since
it was ‘‘inadvertent’’ and therefore not
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subject to anticipation effects.585 The
Commission agrees that, in general,
anticipation effects can bias the findings
of empirical studies. However,
empirical work shows that the legal
changes used in much of the literature
on non-competes are not subject to
anticipation effects.586 This may be
because the vast majority are changes
based on judicial decisions, rather than
statutory changes, as hypothesized by
researchers.587 Moreover, even if
anticipation effects occur in studies of
non-compete enforceability, that would
likely not change the measurable
observed benefits of reducing noncompete enforceability, and may indeed
lead to underestimation of observed
benefits. Underestimation would occur
if parties were adjusting their behavior
in advance of the change in
enforceability in the same direction as
the effects observed after the change.
This would occur if, for example, firms
began to decrease use of non-competes
in advance of a decrease in non-compete
enforceability, knowing that those noncompetes would soon be less
enforceable. This ultimately would
mean that the actual effects on labor
mobility, earnings, new business
formation, innovation, and other
outcomes could be even greater.
Additionally, the legal change in
Michigan is subject to other criticism, as
discussed under ‘‘Evidence of inhibited
innovation’’ and by commenters.
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iii. Non-Competes May Increase
Concentration and Consumer Prices
Evidence of Increased Concentration
and Consumer Prices
As described in Parts IV.B.3.b.i and ii,
the Commission finds that noncompetes tend to negatively affect
competitive conditions in product and
service markets by inhibiting new
business formation and innovation, and
have in fact done so. The Commission
finds that these effects, standing alone,
are sufficient to support its finding that
non-competes tend to negatively affect
competitive conditions in product and
service markets.
However, the Commission notes that
there is also evidence that non-competes
increase industrial concentration more
broadly, which in turn tends to raise
consumer prices. The empirical
literature on these effects is less
developed than the empirical work
documenting declines in new business
formation and innovation; specifically,
585 Ex Parte Communication: Email from G.
Carlino, supra note 558.
586 Johnson, Lavetti & Lipsitz, supra note 388 at
12–14.
587 Id. at 12.
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the empirical evidence on consumer
prices relates only to healthcare markets
(though the evidence on concentration
spans all industries in the economy).
For this reason, the Commission does
not rest its finding that non-competes
tend to negatively affect competitive
conditions in product and service
markets on a finding that non-competes
increase concentration and consumer
prices. However, there are several
reliable studies finding that noncompetes increase concentration and/or
consumer prices, bolstering the
Commission’s finding that noncompetes tend to negatively affect
competitive conditions in product and
service markets.
The Commission finds that noncompetes reduce new business
formation.588 By doing so, noncompetes may increase concentration.
Non-competes may also stunt the
growth of existing firms that would
otherwise better challenge dominant
firms, for example, by limiting potential
competitors’ access to talented
workers.589
Non-competes may also affect prices
in a variety of ways. By suppressing
workers’ earnings, non-competes
decrease firms’ costs, which firms may
theoretically pass through to consumers
in the form of lower prices. However,
non-competes may also have several
countervailing effects that would tend to
increase prices. First, non-competes
may increase concentration, which
could lead to less competition between
firms on price, and therefore higher
prices for consumers. Second, by
inhibiting efficient matching between
workers and firms, non-competes may
reduce the productivity of a firm’s
workforce, which may lead to higher
prices. Third, by inhibiting innovation,
non-competes may hinder the
development of lower-cost products or
more efficient manufacturing processes.
One study, by Hausman and Lavetti,
focuses on physician markets. The study
finds that as the enforceability of noncompetes increases, these markets
become more concentrated, and prices
for consumers for physician services
increase. The study finds that while
non-competes allow physician practices
to allocate clients more efficiently
across physicians, this comes at the cost
of greater concentration and higher
consumer prices. This study examines
several changes in non-compete
enforceability measured continuously.
The authors note that, in theory, if
588 See
Part IV.B.3.b.i.
Part IV.C.2.c.i (describing a study
addressing how non-competes force firms to make
inefficiently high buyout payments).
589 See
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decreased non-compete enforceability
decreases earnings, then the fall in
prices may simply be due to passthrough of labor costs. However,
empirical research shows that decreased
non-compete enforceability increases
earnings (as discussed in Part
IV.B.3.a.ii). Even if that were not the
case, Hausman and Lavetti show that
labor cost pass-through cannot explain
their findings.590 This study satisfies all
of the principles described in Part
IV.A.2, and is accordingly weighted
highly by the Commission.
Another study, by Lipsitz and
Tremblay, examines all industries in the
economy and shows empirically that
increased enforceability of noncompetes at the State level increases
concentration.591 Lipsitz and Tremblay
theorize that non-competes inhibit
entrepreneurial ventures that could
otherwise enhance competition in goods
and service markets. The authors show
that the potential for harm is greatest in
the industries in which non-competes
are likely to be used at the highest
rate.592
If the general causal link governing
the relationship between enforceability
of non-competes, concentration, and
consumer prices acts similarly to that
identified in the study by Hausman and
Lavetti, then it is plausible that
increases in concentration identified by
Lipsitz and Tremblay would lead to
higher prices in a broader set of
industries than healthcare. Lipsitz and
Tremblay use several changes in noncompete enforceability measured in a
continuous fashion, but do not measure
the impact on consumer prices or
welfare. The Commission therefore
finds the study’s conclusion that noncompetes increase concentration highly
robust, but the study is not itself direct
empirical evidence of a relationship
between non-competes and prices.
Two additional studies assess the
effects of non-competes on
concentration and prices. However, the
Commission gives these studies little
weight.
A study of physician non-competes by
Lavetti, Simon, and White finds that
prices charged by physicians with noncompetes are similar to those charged by
physicians without non-competes.593
590 Naomi Hausman & Kurt Lavetti, Physician
Practice Organization and Negotiated Prices:
Evidence from State Law Changes, 13 Am Econ. J.
Applied Econ. 278 (2021).
591 Michael Lipsitz & Mark Tremblay,
Noncompete Agreements and the Welfare of
Consumers 6 (2021), https://papers.ssrn.com/sol3/
papers.cfm?abstract_id=3975864. Concentration is
measured by an employment-based HerfindahlHirschman Index (HHI).
592 Id. at 3.
593 See Lavetti, Simon, & White, supra note 82.
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The Commission gives this study less
weight because it merely analyzes
differences between workers based on
the use of non-competes.594
A study by Younge, Tong, and
Fleming finds that non-competes
contribute to economic concentration
because non-compete enforceability
increases the rate of mergers and
acquisitions.595 This study uses one
change in non-compete enforceability—
in Michigan—to generate its results.
However, in addition to its use of a
single legal change in a single State, the
change to non-compete enforceability
was accompanied by several other
changes to Michigan’s antitrust laws, so
it is not possible to identify the effect of
the change in non-compete
enforceability standing alone.
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Comments Pertaining to Increased
Concentration and Consumer Prices and
the Commission’s Responses
Several commenters addressed the
question of whether non-competes affect
concentration and consumer prices.
Some commenters asserted that the rule
would lower consumer prices by
improving matches between employers
and workers, increasing productivity.
Commenters also argued that locking up
talent, particularly in specialized
markets, prevents entrepreneurship and
new business formation and can thus
contribute to increased concentration.
Some commenters opposing the
NPRM claimed that banning noncompetes could increase concentration.
These commenters argued that larger
firms could discourage companies from
expanding into new and underserved
markets by poaching, or threatening to
poach, their key employees, leading to
increased costs that could force some
firms out of business. These
commenters also argued that noncompetes protect small businesses from
dominant consolidators, as high
recruitment, retention, and other costs
may induce small businesses to sell or
larger businesses may hire away their
workers. A medical trade organization
stated that without non-competes,
independent practices might not be able
to afford to hire and thus may be unable
to grow or compete.596
While these commenters theorize that
prohibiting non-competes would
increase concentration, the Commission
594 See Part IV.A.2 (describing the shortcomings
of such studies).
595 Kenneth A. Younge, Tony W. Tong, & Lee
Fleming, How Anticipated Employee Mobility
Affects Acquisition Likelihood: Evidence From a
Natural Experiment, 36 Strategic Mgmt. J. 686
(2015).
596 See also Part XI.C.2, which addresses these
types of comments in greater detail.
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notes that the available evidence
indicates that non-competes increase
concentration, rather than reducing it.
The Commission further notes that these
theories are inconsistent with the robust
empirical literature finding that noncompetes reduce new business
formation, as well as with the hundreds
of comments from small businesses,
including physician practices,
recounting how non-competes stymied
their ability to enter markets or grow
because they make it harder to hire
talent.
Several commenters claimed that
prohibiting non-competes would
increase worker earnings and increase
transaction costs related to hiring,
which firms would pass through to
consumers in the form of higher prices.
However, the only study of how noncompetes affect prices—the Hausman
and Lavetti study—finds that decreased
non-compete enforceability decreases
prices in the healthcare market, rather
than increasing them. Moreover, while
it is theoretically possible that higher
labor costs could be passed on to
consumers in the form of higher prices,
there are several countervailing effects
from prohibiting non-competes that
would tend to lower prices.
Additionally, empirical research shows
that labor cost pass-through cannot
explain decreases in prices in healthcare
markets associated with non-competes
becoming less enforceable.597
An insurance company stated that
insurance premiums would increase if
the rule allows non-profit hospitals to
dominate the hospital market and have
more leverage in network negotiations.
These commenters do not provide any
empirical evidence to support this
assertion. Moreover, for the reasons
described in Part V.D.5, the Commission
disagrees that the ability to use noncompetes will provide a material
competitive advantage to non-profit
hospitals. Another commenter stated
that if non-competes are prohibited,
physicians will leave States with lower
market reimbursement rates for those
with higher rates, increasing healthcare
costs and shortages. Commenters did
not cite any empirical evidence that
supports this hypothetical assertion that
the final rule would increase healthcare
costs or shortages due to physicians
leaving States with lower
reimbursement rates, and the
Commission is aware of none. However,
the Commission notes that it received
many comments from doctors, nurses,
and other healthcare professionals
597 Hausman
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38399
asserting that non-competes worsen
healthcare shortages.598
Some commenters stated that noncompetes may improve access to
physicians due to non-compete-led
consolidation or more efficient patientsharing within practices, and that
Hausman and Lavetti’s study is unable
to quantify these benefits. In response,
the Commission notes that there is no
empirical literature bearing out this
theory, and that the commenters
overwhelmingly stated that noncompetes decrease patients’ access to
the physicians of their choice, increase
healthcare shortages, and negatively
affect the quality of health care.599
iv. Non-Competes May Reduce Product
and Service Quality and Consumer
Choice
The negative effects of non-competes
on competition may also degrade
product and service quality and
consumer choice. Competition
encourages firms to expand their
product offerings and innovate in ways
that lead to new and better products and
services.600 However, by inhibiting new
business formation, increasing
concentration, and reducing innovation,
non-competes reduce competitive
pressure in product and service markets,
which may reduce product quality and
consumer choice. In addition, poor
working conditions and less optimal
matching of workers and firms may lead
to reductions in the quality of products
and services. For these reasons, noncompetes may tend to negatively affect
competitive conditions in product and
service markets by reducing product
quality and consumers’ options.
Such effects are less readily
quantifiable than the other negative
effects of non-competes on product and
service markets—i.e., the negative
effects on new business formation,
innovation, concentration, and
consumer prices. It is thus unsurprising
that there are not reliable empirical
studies of these effects. However, the
Commission received an outpouring of
public comments on this issue.
Hundreds of commenters, primarily
from the healthcare field, described how
598 These comments are summarized in greater
detail in Part IV.B.3.b.iv.
599 See Part IV.B.3.b.iv.
600 In the NPRM, the Commission noted that
innovation and entrepreneurship can, in turn, have
positive effects on product quality. See NPRM at
3492. The Commission did not make specific
findings on the effect of non-competes on consumer
choice. However, the Commission discussed the
closely related questions of how non-competes
affect new business formation, innovation,
concentration, and consumer prices. See id. at
3490–93.
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non-competes reduce product and
service quality and consumer choice.
The large number of comments the
Commission received on this issue, the
wide variety of impacts commenters
describe, and the fact that the impacts
commenters describe are
overwhelmingly negative, indicate that
non-competes reduce product quality
and consumer choice, further bolstering
the Commission’s finding that noncompetes tend to negatively affect
competitive conditions in product and
service markets.601
The commenters who addressed the
effects of non-competes on product
quality and consumer choice primarily
discussed the healthcare industry. The
majority of these comments focused on
how non-competes harm patient care.
Hundreds of physicians and other
commenters in the healthcare industry
stated that non-competes negatively
affect physicians’ ability to provide
quality care and limit patient access to
care, including emergency care. Many of
these commenters stated that noncompetes restrict physicians from
leaving practices and increase the risk of
retaliation if physicians object to the
practices’ operations, poor care or
services, workload demands, or
corporate interference with their clinical
judgment. Other commenters from the
healthcare industry said that, like other
industries, non-competes bar
competitors from the market and
prevent providers from moving to or
starting competing firms, thus limiting
access to care and patient choice.
Physicians and physician organizations
said non-competes contribute to
burnout and job dissatisfaction, and said
burnout negatively impacts patient care.
In addition, physicians and physician
organizations stated that, to escape noncompetes, physicians often leave the
area, and that this severs many
physician/patient relationships. These
commenters stated that non-competes
therefore cause patients to lose the
knowledge, trust, and compatibility that
comes with long-established
relationships. These commenters also
said that strong physician/patient
relationships and continuity of care
improve health outcomes, particularly
for complex, chronic conditions or
patients who need multiple surgeries.
These commenters described how
patients who lose their physicians to
non-competes either travel long
601 As described in Parts IV.B.3.b.i and ii, the
Commission finds that the effects of non-competes
on new business formation and innovation,
standing alone, are sufficient to sustain its finding
that non-competes tend to negatively affect
competitive conditions in product and service
markets.
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distances to see that physician, switch
physicians, or lose access entirely if no
other physicians are available. One
physician argued that taking away a
patient’s ability to choose their provider
violates the Patients’ Bill of Rights.602
One medical society cited a 2022
survey of Louisiana surgeons in which
64.4% of the surgeons believed noncompetes force patients to drive long
distances to maintain continuity of care,
and 76.7% believed they force surgeons
to abandon their patients if they seek
new employment.603 This study had a
small sample size and thus the
Commission gives it limited weight, but
the Commission notes that it accords
with the many comments the
Commission received describing how
patients must drive long distances to
maintain continuity of care—or are
unable to do so, resulting in harms to
their health. Illustrative comments on
how non-competes affect the quality of
patient care include the following:
• As a primary care physician I truly hope
to see [the rule] move forward. I recently left
my position at one company and for a year
commuted an hour to be outside of my noncompete radius. I recently returned to my
community and discovered I have more
patients than I can count who simply didn’t
get care for over a year because they didn’t
want to find a new [primary care physician]
but also couldn’t make the hour drive to see
me at my new location. The commute was
annoying for me, but ultimately the only ones
truly hurt were patients. Let’s stop hurting
our patients by restricting their ability to see
their physicians.604
• My practice has operated since the 1990s
in Danville, Kentucky. We are the only
cardiology practice that has been present and
has worked tirelessly to serve this rural
community. The practice was a private
practice originally. Unfortunately, just as
most cardiac practices throughout the
country have had to, our practice had to
come under the control of these hospital
systems to maintain its viability. . . . The
CEO and the administration . . . have
squeezed us out and forced us to leave the
area with the employment contract noncompete in place. . . . I have spent the last
6 months hugging patients, medical staff,
nursing who are stricken by the fact that we
are being pushed out. Patients desperately
ask me how they can maintain care if they
have to travel up to an hour to see their
602 See President’s Advisory Commission on
Consumer Protection and Quality in the Health Care
Industry, Consumer Bill of Rights and
Responsibilities, Executive Summary (1997),
https://govinfo.library.unt.edu/hcquality/cborr/
index.htm.
603 See William F. Sherman et al., The Impact of
a Non-Compete Clause on Patient Care and
Orthopaedic Surgeons in the State of Louisiana:
Afraid of a Little Competition?, 14 Orthopedic Revs.
(Oct. 2022), https://www.ncbi.nlm.nih.gov/pmc/
articles/PMC9569414/.
604 Individual commenter, FTC–2023–0007–
19853.
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doctors with this change. They worry how
they can pay for the steep gas prices to see
their doctors. . . . They are truly concerned
for the health of their families. All the while
all I can do is tell them that my non-compete
does not allow me, their cardiologist for the
past decade, to give them any advice on how
to maintain their care.605
• As a Physician, I had a non compete
clause in my contract that extended two
counties wide (100 square miles). . . .
[W]hen I would not sign a contract
amendment regarding pay that was very
unfavorable and nebulous I was called in and
summarily dismissed ‘no cause.’ Because of
that I had to work out of state and my
patients were instantly without a physician.
The community did not have enough
physicians to be able to care for the patients
who now had no medical provider. During
COVID this lack of access to healthcare for
patients most certainly led to increased
unnecessary illness and death. . . . Patients
are suffering with access to healthcare, and
physician shortages are being exacerbated
because every time a physician has to leave
because of a non compete clause they start
hiring and credentialing all over again and it
can take months for them to be able to work
again.606
• Being a therapist, non-competes are
extremely scary when it comes to patient
care. Some include date ranges in which we
cannot communicate with our patients, some
of whom have severe trauma histories or
suicidal ideations. If a clinician changes
companies but is unable to continue meeting
a patient, who is at fault if there is an injury
or death? . . . Some non-competes include
mileage in which a clinician cannot create
their own company or rent out an office
within a certain radius—how is this a safe
practice? How can clients continue to work
on their mental health and desire to stay
alive if they have to change clinicians due to
a noncompete clause? 607
• Due to mistreatment and to escape
workplace toxicity, one of my colleagues left
our practice in compliance to our noncompete conditions, even though they caused
great hardship. I, too, wanted to leave, but
could not because doing so would have
harmed my family’s well being. What I
witnessed in the aftermath was
unconscionable. There was a void in patient
care and months later, there still is a void.
Not only was this physician required to move
quite a distance from the practice, he was
forbidden to even inform his patients that he
was leaving. The practice in turn, did not
inform the patients, and when asked, just
informed them that he was no longer with
the practice. Consequently, wait times to
treat cancers doubled and now have
tripled.608
• I would like to open a new clinic in my
town, but my noncompete would disallow
that from happening immediately.
Furthermore, I worry that my patients that
need medical care wouldn’t be able to access
it at my current clinic because the providers
605 Individual
commenter, FTC–2023–0007–4072.
commenter, FTC–2023–0007–4440.
607 Individual commenter, FTC–2023–0007–4270.
608 Individual commenter, FTC–2023–0007–2384.
606 Individual
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are booked out 6+ months, and if one left that
would make those immediately increase to
nearly a year, which could potentially cause
my patient lasting damage. If I could open
my own clinic locally without the constraints
of the noncompete, those patients would be
able to continue care as necessary with me,
and I wouldn’t feel stuck with poor
management worsening patient care for my
patients.609
• As a veterinarian, I can personally assure
the FTC that such restrictions have caused
both death and permanent disability of
pets. . . . In nearly every scenario I have
heard of, the veterinary business that requires
and enforces non-compete clauses is
underserving the pet-owning public. This is
the current situation for veterinary medicine
on a national level. Hospitals are so
overwhelmed that they are not accepting new
patients, turning away emergency cases, and
imposing extremely long (several months or
more) waiting lists for appointments and/or
scheduled procedures. If a hospital cannot
accommodate the patients who require
veterinary care, that hospital is not able to
compete with the existing demand for
services. . . . Is it fair for pet owners who
cannot get their pets in to see a veterinarian
(even on emergency situations) to have the
veterinary hospitals who refuse to see their
pets remove other options for care via noncompete clauses? These clauses are being
blatantly abused by certain large veterinary
businesses so that these organizations can
maintain a pool of potential patients (on
waiting lists) to draw from. Unfortunately,
many of these dogs and cats die while
waiting to be seen. At least in my profession,
the non-compete concept has reached an
epitome of unethical conduct. In addition,
economic growth has been stunted due to
self-serving greedy people in power. Please
get rid of this horrible clause and lets make
sure pets and their owners get what they
need, when they need it.610
Some hospital associations argued
that a study of physician markets 611
shows that non-competes improve
patient care. According to these
commenters, this research finds that
non-competes make in-practice referrals
more likely, increasing revenue and
wages and providing patients with more
integrated and better care. In response,
the Commission notes that while the
study finds that non-competes make
physicians more likely to refer patients
to other physicians within their
practice—increasing revenue for the
practice—it makes no findings on the
impact on the quality of patient care.
The Commission further notes that
pecuniary benefits to a firm cannot
justify an unfair method of
competition.612
Some medical practices argued that
within-group referrals allow physicians
609 Individual
commenter, FTC–2023–0007–1206.
commenter, FTC–2023–0007–0677.
611 Lavetti, Simon, & White, supra note 82.
612 See supra note 305 and accompanying text.
610 Individual
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to coordinate care plans and simplify
logistics, and that non-competes protect
the stability of those care teams to
patients’ benefit. Some industry
associations and hospitals argued that
non-competes improve patient choice
and continuity of care because they stop
physicians from leaving a health
provider, benefiting patients who
cannot follow the provider due to
geographic or insurance limitations.
One physician association said
physicians leaving jobs can be costly to
patients, who must transfer records and
reevaluate insurance coverage.
The Commission notes that the vast
majority of comments from physicians
and other stakeholders in the healthcare
industry assert that non-competes result
in worse patient care. The Commission
further notes that the American Medical
Association discourages the use of noncompetes because they ‘‘can disrupt
continuity of care, and may limit access
to care.’’ 613 In addition, there are
alternatives for improving patient
choice and quality of care, and for
retaining physicians, that burden
competition to a much less significant
degree than non-competes.
A related issue frequently raised in
the comments is the impact noncompetes have on healthcare shortages.
According to many commenters, noncompetes contribute to shortages by
preventing physicians from moving to
areas where their skills and specialties
are needed; forcing physicians out of
such areas; or forcing them out of
practice entirely due to contractual
restrictions or burnout. Such shortages,
according to these commenters,
decrease access to care, increase wait
times, lead to canceled procedures, and
decrease the quality of care. Many
commenters stated that these effects of
non-competes are particularly acute in
rural, underserved, and less affluent
areas that already have difficulty
attracting healthcare professionals.
Some commenters argued that provider
shortages can, in combination with noncompetes, create monopolies.
A smaller number of commenters
from the healthcare industry argued that
non-competes alleviate healthcare
613 See, e.g., Comment of Am. Med. Ass’n, FTC–
2023–0007–21017, at 4–5 (citing AMA Code of
Medical Ethics Opinion 11.2.3.1). After the
comment period closed, the AMA adopted a policy
supporting banning non-competes for physicians in
clinical practice who are employed by hospitals,
hospital systems, or staffing companies, though not
those employed by private practices. This policy
change does not have legal effect. Andis
Robeznieks, AMA Backs Effort to Ban Many
Physician Noncompete Provisions, Am. Med. Ass’n
(Jun. 13, 2023), https://www.ama-assn.org/medicalresidents/transition-resident-attending/ama-backseffort-ban-many-physician-noncompete.
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38401
shortages and prevent hospital or
facility closures by keeping physicians
from leaving underserved areas and
reducing fluctuations in labor costs.
Some of these commenters asserted that
a ban on non-competes would upend
healthcare labor markets, thereby
exacerbating healthcare workforce
shortages, especially in rural and
underserved areas. A medical society
argued that non-competes can allow
groups to meet contractual obligations
to hospitals, as physicians leaving can
prevent the group from ensuring safe
care. As the Commission notes, there are
not reliable empirical studies of these
effects, and these commenters do not
provide any. However, the Commission
notes that the rule will increase labor
mobility generally, which makes it
easier for firms to hire qualified
workers.
Commenters in a variety of industries
beyond healthcare markets also
provided a wide range of examples of
how non-competes diminish the quality
of goods and services, including
preventing businesses from hiring
experienced staff and creating worker
shortages. Commenters stated that,
where firms in a market use noncompetes, it can be difficult for other
firms to remain in the market, and
consumers thus lose the freedom to
choose providers. Several comments
pointed favorably to the American Bar
Association’s longstanding ban on noncompetes for most lawyers to protect
clients’ freedom to choose their lawyer,
in contrast with other highly paid and
highly skilled professions such as
physicians and their patients or
clients.614
Commenters from outside the
healthcare industry mainly focused on
how non-competes increase
concentration within industries, which
reduces firms’ incentive to innovate and
results in consumers having fewer
choices. Other commenters described
how non-competes lock highly talented
workers out of their fields or force them
into jobs where they are less productive,
depriving the marketplace of the
products and services they would have
developed. Illustrative examples of
these comments include the following:
• As a software developer who often works
under contracts containing sections
stipulating non-compete agreements, I have
observed first hand how they can harm the
economy by bolstering monopolies, such as
in sectors where clientele only have a single
choice for meeting their engineering needs.
Often, these clients have no other options
and are forced to meet whatever arbitrary
price point is set by the leading (sole)
614 See
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company, and that company may in turn
operate howsoever they choose without
feeling the need to adopt reasonable business
practices that might exist were there
competition.615
• As an aspiring tree care professional,
non-compete agreements prevent me from
switching employers/companies to access
better work conditions or opportunities. No
tree service company has ever invested in
me. I learned to climb and saw while
working for Federal agencies (USDA and
NPS), and also through self-education and
practice on my own. I believe that noncompete agreements have adversely limited
competition in the tree service industry. This
hurts employees who could do better if they
were free to change their place of
employment, and it hurts consumers who
have fewer tree service providers to choose
from.616
• I worked in a business supplying
technology and materiel considered critical
for national defense. I was labeled an expert
in the field by my DoD customers and
commended multiple times for solving
logistical and technical problems with
protective equipment during the previous
two wars. I lead development contracts from
the DoD to advance the state-of-the-art in
warfighter protection, which set multiple
records for figures of merit within my
business, and which our program manager
volunteered was the most exciting
technology she had ever managed. When my
business decided to discontinue that
technology and transfer me, my noncompete
agreement prevented me from continuing to
support the DoD. I was removed from
consideration at another firm in the third
round of interviews because of my
noncompete agreement—again, for a
technology my business had decided to not
pursue and had transferred me out of. So,
instead of having the opportunity to advance
my career into management in the service of
protecting warfighters, I had to exit that
industry and move laterally, into a different
industry that cannot value 20 years of my
expertise, and which will not further the
defense of my country. If the FTC had
nationalized a prohibition on noncompete
clauses two years ago, this would not have
happened, and I would have had the
opportunity to advance my career, improve
my family’s economic fortune, and continue
to contribute to our nation’s defense.617
Overall, the Commission believes that
the large number of comments it
received on the issue of product quality
and consumer choice and the wide
variety of overwhelmingly negative
impacts commenters describe further
bolsters the Commission’s finding that
non-competes tend to negatively affect
competitive conditions in product and
service markets.
4. Prohibitions in Section 910.2(a)(1)
Based on the totality of the evidence,
including its review of the empirical
615 Individual
commenter, FTC–2023–0007–5818.
616 Individual commenter, FTC–2023–0007–1980.
617 Individual commenter, FTC–2023–0007–4446.
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literature, its review of the full comment
record, and its expertise in identifying
practices that harm competition, the
Commission adopts § 910.2(a)(1), which
defines unfair methods of competition
related to non-competes with respect to
workers other than senior executives.
Section 910.2(a)(1) provides that, with
respect to a worker other than a senior
executive, it is an unfair method of
competition for a person to enter into or
attempt to enter into a non-compete
clause; enforce or attempt to enforce a
non-compete clause; or represent that
the worker is subject to a non-compete
clause.
Part IV.A sets forth the Commission’s
determination that the foregoing
practices are unfair methods of
competition under section 5, and Parts
IV.B.1 through IV.B.3 explain the
findings that provide the basis for this
determination. In this Part IV.B.4, the
Commission explains the three prongs
of § 910.2(a)(1) and addresses comments
on proposed § 910.2(a).618
a. Entering Into or Attempting To Enter
Into (§ 910.2(a)(1)(i))
Proposed § 910.2(a) would have
provided that it is an unfair method of
competition for an employer to, among
other things, ‘‘enter into or attempt to
enter into a non-compete clause with a
worker.’’ The Commission adopts this
same language in the final rule in
§ 910.2(a)(1)(i). As a result, the final rule
prohibits persons from entering into or
attempting to enter into non-competes
with workers other than senior
executives as of the effective date.
(Section 910.2(a)(2)(i) separately
prohibits persons from entering into or
attempting to enter into non-competes
with senior executives as of the effective
date.)
A business commenter requested that
the Commission remove ‘‘attempt to
enter into’’ from § 910.2(a) on the basis
that it may encourage workers to sue
employers for contractual provisions
that have no practical effect on the
worker or which are not finalized in any
employment agreement. The
Commission disagrees that conduct that
would be covered by the attempt
provision—such as presenting the
worker with a non-compete, even if the
employer and worker do not ultimately
execute the non-compete—has no
practical effect on the worker. The
Commission is concerned that such
attempts to enter into non-competes still
have in terrorem effects that deter
618 Several commenters requested changes to
proposed § 910.2(a) to provide various exceptions to
coverage under the final rule. The Commission
addresses these comments in Part V.C.
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competition. For example, workers
presented with non-competes may not
realize they are not bound by them.
Such workers may therefore refrain from
seeking or accepting other work or
starting a business, yielding the same
tendency of non-competes to negatively
affect competitive conditions that
motivate this final rule.
The Commission accordingly finalizes
the language as proposed.
b. Enforcing or Attempting To Enforce
(§ 910.2(a)(1)(ii))
Proposed § 910.2(a) would have
provided that it is an unfair method of
competition for an employer to, among
other things, ‘‘maintain with a worker a
non-compete clause.’’ In addition,
proposed § 910.2(b)(1) would have
provided that, to comply with this
prohibition on maintaining a noncompete, an employer that entered into
a non-compete with a worker prior to
the compliance date must ‘‘rescind the
non-compete no later than the
compliance date.’’
As elaborated in Part IV.E, the
Commission has decided not to finalize
a rescission requirement. As a result, the
Commission also removes ‘‘maintain’’
from the text of § 910.2(a), to avoid any
ambiguity about whether the final rule
contains a rescission requirement.
Instead of a rescission requirement, the
final rule focuses more narrowly on the
future enforcement of existing noncompetes with workers other than
senior executives. It provides that, with
respect to a worker other than a senior
executive, it is an unfair method of
competition for a person to enforce or
attempt to enforce a non-compete
clause. An employer attempts to enforce
a non-compete where, for example, it
takes steps toward initiating legal action
to enforce the non-compete, even if the
court does not enter a final order
enforcing the non-compete.
For workers other than senior
executives, this prohibition on enforcing
a non-compete applies to all noncompetes, but affects only enforcement
or attempted enforcement conduct taken
after the effective date of the rule. In so
doing, the Commission reduces the
burden on employers by eliminating the
need to take steps to formally rescind
provisions of existing contracts, instead
simply requiring that employers refrain
from enforcing or attempting to enforce
in the future (after the effective date)
non-competes that are rendered
unenforceable by this provision of the
rule.
As explained in Part IV.C, the
Commission in the final rule does not
prohibit the future enforcement or
attempted enforcement of existing non-
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competes with senior executives. The
Commission considered whether to take
this approach for workers other than
senior executives, but based on the
totality of the evidentiary record
concludes that such non-competes
should not remain in force after the
effective date for three main reasons.
First, existing non-competes with
workers other than senior executives
negatively affect competitive conditions
to a significant degree, for the same
reasons as new non-competes. The
Commission believes that non-competes
with such workers that were entered
into before the effective date implicate
the concerns described in Part IV.B.3—
relating to the negative effects of noncompetes on competitive conditions in
labor, product, or service markets—to
the same degree as non-competes
entered into as of the effective date. Of
course, the Commission notes that the
empirical evidence quantifying the
harms to competition from noncompetes by definition relates to
existing non-competes.
Second, for workers other than senior
executives, existing non-competes not
only impose acute, ongoing harms to
competition, they also impose such
harms on individual workers by
restricting them from engaging in
competitive activity by seeking or
accepting work or starting their own
business after their employment ends.
As described in Part IV.B.2.b, the
Commission received thousands of
comments from workers that described
non-competes as pernicious forces in
their lives that forced them to make
choices that were detrimental to their
finances, their careers, and their
families. These concerns are less present
for senior executives, who are far more
likely than other workers to have
negotiated their non-compete and
received compensation in return,
thereby mitigating this kind of acute,
ongoing harm.
Third, because the Commission finds
that non-competes with workers other
than senior executives generally are not
bargained for and such workers
generally do not receive meaningful, if
any, compensation for non-competes,
the practical considerations that are
present with respect to existing noncompetes for senior executives
(discussed in Part IV.C.3) are far less
likely to be present for other workers.
For these reasons, the Commission
concludes that, consistent with the
proposed rule, existing non-competes
with workers other than senior
executives should not remain in force
after the effective date.
Several commenters argued that the
Commission should allow all existing
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non-competes to remain in effect. Some
of these commenters argued that the
rule would upset bargained-for
agreements. Commenters asserted that
workers who received benefits in
exchange for agreeing to non-competes
would receive a windfall if such clauses
cannot be maintained and are no longer
enforceable. A few of these commenters
also argued that invalidating existing
non-compete agreements will upset
workers’ economic interests because
they will lose out on enhanced
compensation that they have received or
expect to receive in exchange for their
non-competes. Some commenters
contended that invalidating existing
non-competes would be especially
harmful to workers’ interests in noncompetes tied to particularly large
amounts of compensation, complex
compensation arrangements, or unique
forms of compensation such as equity
grants. Relatedly, some commenters
expressed concern that the NPRM did
not explain whether employers could
recoup benefits already paid in
exchange for non-competes. A few
commenters suggested that they have
given workers confidential and trade
secret information in exchange for the
worker agreeing to a non-compete that
may no longer be enforceable.
The Commission is not persuaded by
comments arguing that the rule would
upset existing bargained-for agreements.
As noted in Part IV.B and Part IV.C, the
Commission finds that workers who are
not senior executives are unlikely to
negotiate non-competes or to receive
compensation for them. Moreover, the
Commission has also determined that
non-competes with senior executives
that predate the effective date may be
enforced,619 which will substantially
reduce the number of workers with
complex compensation arrangements
whose non-competes are rendered
unenforceable after the effective date.
Other commenters argued that
employers relied on the expectation of
a non-compete when deciding how
much to invest in training their workers
or the extent to which they share trade
secrets with their workers. In response,
the Commission notes that firms that are
concerned about retention have tools
other than non-competes for retaining
workers, including fixed-duration
employment contracts (i.e., forgoing atwill employment and instead making a
mutual contractual commitment to a
period of employment) and providing
improved pay and benefits (i.e.,
competing on the merits to retain the
worker’s labor services). In addition,
while some workers that have received
619 See
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training may leave a firm for a
competitor, firms will also be able to
attract highly trained workers from
competitors, and this increased jobswitching will likely lead to more
efficient matching between workers and
employers overall.620
The Commission is not persuaded by
commenters who contended that
invalidating existing non-competes
would disturb employer expectations
with respect to sharing trade secrets or
other commercially sensitive
information. As explained in Part
IV.D.2, the Commission finds that
employers have adequate alternatives to
non-competes to protect these interests,
including trade secret law and NDAs,
and that these alternatives do not
impose the same burden on competition
as non-competes. Some commenters
contended that employers may not have
adequate alternatives in place for
existing non-competes and that former
workers may not agree to new NDAs.
But the Commission finds that it is rare
for an employer who entered into a noncompete agreement as a means of
protecting trade secrets or commercially
sensitive information to have not also
entered into an NDA with the worker.621
This is especially true given that noncompetes are generally less enforceable
than NDAs.622 In any event, nothing in
the final rule prevents employers from
entering new NDAs with workers.
Some commenters contended that
invalidating existing non-competes
would enable new employers to ‘‘free
ride’’ off former employers’ investments
in training. The Commission addresses
comments about ‘‘free riding’’ and
training investments in Part IV.D.2.
Several comments argued that a final
rule should not invalidate existing noncompetes because the economic impact
is too unpredictable. These commenters
maintained that the number of
individual employment contracts that
would be invalidated means that the
economic impact would be
exceptionally widespread, and likely
impossible to accurately predict. In
response, the Commission notes that it
620 See
Part IV.B.3.a.
e.g., Balasubramanian, Starr, &
Yamaguchi, supra note 74 at 35 (finding that 97.5%
of workers with non-competes are also subject to a
non-solicitation agreement, NDA, or a nonrecruitment agreement, and 74.7% of workers with
non-competes are subject to all three provisions).
622 Camilla A. Hrdy & Christopher B. Seaman,
Beyond Trade Secrecy: Confidentiality Agreements
that Act Like Noncompetes, 133 Yale L. J. 669, 676
(2024) (‘‘Courts across jurisdictions routinely give
confidentiality agreements ‘more favorable
treatment’ than noncompetes. And confidentiality
agreements are not typically subject to the same
limitations that are applied to noncompetes. . . .
Overall, courts tend to apply a default rule of
enforceability.’’) (internal citations omitted).
621 See,
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has assessed the benefits and costs of
the final rule and finds that the final
rule has substantial benefits that clearly
justify the costs (even in the absence of
full monetization).623
c. Representing (§ 910.2(a)(1)(iii))
Proposed § 910.2(a) would have
provided that it is an unfair method of
competition for an employer to, among
other things, ‘‘represent to a worker that
the worker is subject to a non-compete
clause where the employer has no good
faith basis to believe that the worker is
subject to an enforceable non-compete
clause.’’ The Commission adopts the
same language in the final rule.
Pursuant to § 910.2(a)(1)(iii), it is an
unfair method of competition for an
employer to represent that a worker
other than a senior executive is subject
to a non-compete clause. The ‘‘good
faith’’ language remains in the final rule
but, for clarity, it has been moved to
§ 910.3, which contains exceptions to
the final rule.624
Under this ‘‘representation’’ prong,
the final rule prohibits an employer
from, among other things, threatening to
enforce a non-compete against the
worker; advising the worker that, due to
a non-compete, they should not pursue
a particular job opportunity; or telling
the worker that the worker is subject to
a non-compete. The Commission
believes that this prohibition on
representation is important because
workers often lack knowledge of
whether employers may enforce noncompetes.625 In addition, the evidence
indicates that employers frequently use
non-competes even when they are
unenforceable under State law,
suggesting that employers may believe
workers are unaware of or unable to
vindicate their legal rights.626
Employers can exploit the fact that
many workers lack knowledge of
whether non-competes are
unenforceable under State law by
representing to workers that they are
subject to a non-compete when they are
not or when the non-compete is
unenforceable. Such misrepresentations
can have in terrorem effects on workers,
causing them to refrain from looking for
work or taking another job, thereby
furthering the adverse effects on
competition that the Commission is
concerned about.
In addition, threats to litigate against
a worker—even where the worker is
aware of the Commission’s rule and
623 See
Part X.E.
Part V.C.
625 See Prescott & Starr, supra note 413 at 10–11.
626 See Starr, Prescott, & Bishara, supra note 68
at 81.
believes the non-compete is
unenforceable—may deter the worker
from seeking or accepting work or
starting their own business. As
explained in Part IV.B.2.b.ii, many
commenters—including highly paid
workers—explained in their comments
that they believed their non-compete
was unenforceable, but they
nevertheless refrained from seeking or
accepting work or starting their own
business because they could not afford
to litigate against their employer for any
length of time. For this reason, the
Commission believes it is important for
the final rule to prohibit employers not
only from enforcing or attempting to
enforce non-competes against workers
other than senior executives, but also
threatening to do so.
A commenter suggested limiting the
‘‘representation’’ prong to instances
where the employer has no good-faith
basis to believe the non-compete is valid
‘‘under local or State law,’’ even if the
non-compete is invalid under the final
rule. The Commission does not adopt
this approach because representing to
workers that they are subject to a noncompete, where the rule provides that
the non-compete is unenforceable,
would mislead the worker and would
tend to deter them from competing
against the employer by seeking or
accepting work or starting a business.
C. Section 910.2(a)(2): Unfair Methods
of Competition—Non-Competes With
Senior Executives
In the NPRM, the Commission
proposed to prohibit non-competes—
including non-competes entered into
before the effective date—with all
workers.627 The Commission
preliminarily found that all noncompetes, whether with senior
executives or other workers, were
restrictive conduct that negatively
affected competitive conditions.628
However, while the Commission
preliminarily found that non-competes
with workers other than senior
executives were exploitative and
coercive, the Commission stated that
this finding did not apply to senior
executives.629 The Commission
requested comment on that preliminary
finding, as well as on whether noncompetes with senior executives should
be excluded from the rule or otherwise
subject to a different standard. The
NPRM did not define the term ‘‘senior
executive,’’ but sought comment on
624 See
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proposed § 910.2(a).
at 3500.
629 Id. at 3502–04.
potential approaches to defining the
term.630
In the final rule, the Commission does
not find that senior executives—
specifically, highly paid workers with
the highest levels of authority in an
organization—are exploited or coerced
in connection with non-competes, and it
describes the record on this issue in Part
IV.C.1. The Commission does, however,
find that non-competes with senior
executives are an unfair method of
competition, based on the totality of the
evidence, including its review of the
empirical literature, its review of the
full comment record, and its expertise
in identifying practices that impair
competitive conditions in the economy.
Specifically, the Commission finds that
such non-competes are restrictive and
exclusionary conduct that tends to
negatively affect competitive conditions
in product and service markets and
labor markets. Indeed, non-competes
with senior executives may tend to
negatively affect competitive conditions
in product and service markets to an
even greater degree than non-competes
with other workers, given the outsized
role senior executives play in forming
new businesses and setting the strategic
direction of firms with respect to
innovation. The Commission explains
the basis for these findings in Part
IV.C.2.
Because non-competes with senior
executives are not exploitative or
coercive, however, this subset of
workers is less likely to be subject to the
kind of acute, ongoing harms currently
being suffered by other workers subject
to existing non-competes. In addition,
commenters raised credible concerns
about the practical impacts of
extinguishing existing non-competes for
senior executives. For these reasons, as
described in Part IV.C.3, the
Commission allows existing noncompetes with senior executives to
remain in force—unlike existing noncompetes with all other workers, which
employers may not enforce after the
effective date.
In Part IV.C.4, the Commission
explains the final rule’s definition of
‘‘senior executive’’ and the related
definitions it is adopting.631 The
Commission finds that the final rule’s
definition of ‘‘senior executive’’
appropriately captures the workers that
are more likely to have complex
compensation packages that present
practical challenges to untangle, and
who are less likely to be exploited or
coerced in connection with their noncompetes. To capture this subset of
627 NPRM,
628 Id.
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at 3520.
§ 910.1.
631 See
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workers for whom the Commission
decides to leave existing non-competes
unaffected, the final rule adopts a
definition of senior executive that uses
both an earnings test and a job duties
test. Specifically, the final rule defines
the term ‘‘senior executive’’ to refer to
workers earning more than $151,164
who are in a ‘‘policy-making position’’
as defined in the final rule.632
Finally, in Part IV.C.5, the
Commission explains the regulatory text
it is adopting in § 910.2(a)(2), which
defines unfair methods of competition
related to non-competes with senior
executives.
1. The Commission Does Not Find That
Non-Competes With Senior Executives
Are Exploitative or Coercive
The Commission stated in the NPRM
that its preliminary finding that noncompetes are exploitative and coercive
did not apply to senior executives. The
Commission stated that non-competes
with senior executives are unlikely to be
exploitative or coercive at the time of
contracting, because senior executives
are likely to negotiate the terms of their
employment and may often do so with
the assistance of counsel.633 The
Commission also stated that such noncompetes are unlikely to be exploitative
or coercive at the time of the executive’s
potential departure, because senior
executives are likely to have bargained
for a higher wage or more generous
severance package in exchange for
agreeing to the non-compete.634 The
Commission sought comment on
whether there are other categories of
highly paid or highly skilled workers
(i.e., other than senior executives) who
are not exploited or coerced in
connection with non-competes.635
Based on the totality of the record,
including the many comments
submitted on these questions, the
Commission finds that senior
executives—specifically, highly paid
workers with the highest levels of
authority in an organization—are
substantially less likely than other
workers to be exploited or coerced in
connection with non-competes. For
these reasons, the Commission does not
find that non-competes with senior
executives are exploitative or coercive.
There is little empirical evidence on
the question of whether non-competes
with senior executives are exploitative
or coercive. A 2006 study of noncompetes with CEOs finds that many of
these workers negotiated a severance
632 Id.
633 NPRM
at 3503.
at 3504.
635 Id. at 3503–04.
634 Id.
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period as long or longer than their noncompete period, making it easier to sit
out of the market.636 However, this
study was limited to very-high-earning
CEOs at large public companies—the
average total compensation of the CEOs
studied was $1.65 million 637—so its
findings do not necessarily capture the
experiences of other senior executives.
Many Americans work in positions with
‘‘senior executive’’ classifications.
According to BLS, there were almost 3.4
million ‘‘top executives’’ in the U.S. in
2022 at firms under private ownership,
and the median income for these
workers was $99,240.638
The comment record on whether
senior executives experience
exploitation and coercion in relation to
their non-competes is mixed. Many
commenters asserted that, because some
senior executives negotiate their noncompetes with the assistance of expert
counsel, they are likely to have
bargained for a higher wage or more
generous severance package in exchange
for agreeing to the non-compete, and
thus their non-competes are not
exploitative or coercive. Several
commenters stated that senior
executives frequently negotiate noncompetes for valuable consideration
and/or typically agree to non-competes
only in exchange for compensation.
Some senior executives said they were
not exploited or coerced in connection
with non-competes.639 Several
commenters agreed with the
Commission’s preliminary finding that
senior executives often obtain the
assistance of counsel with respect to
non-competes. Some commenters stated
that to the extent a non-compete is not
exploitative or coercive at the time of
contracting, it is also not exploitative or
coercive at the time of departure. One
CEO stated that non-competes should be
permissible for senior executives when
they are entered into in exchange for
severance and when the senior
executive leaves voluntarily.
The Commission notes that a
relatively small number of selfidentified senior executives submitted
636 Stewart J. Schwab & Randall S. Thomas, An
Empirical Analysis of CEO Employment Contracts:
What Do Top Executives Bargain For?, 63 Wash. &
Lee L. Rev. 231, 256–57 (2006).
637 Id. at 244.
638 BLS, Occupational Employment and Wage
Statistics, Tables Created by BLS, https://
www.bls.gov/oes.tables.htm. These data are from
the May 2022 National XLS table for Top
Executives under private ownership.
639 For the sake of readability, the Commission
refers to the commenters based on how they
described themselves. For example, if a commenter
said they were a senior executive, the Commission
refers to them as a senior executive (rather than as
a ‘‘self-described senior executive’’).
PO 00000
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comments in their personal capacity.
While the Commission did receive some
comments from self-identified senior
executives suggesting that their noncompetes were exploitative and
coercive, such comments were far less
common than for other workers.
However, some senior executives did
report experiencing similar issues of
exploitation and coercion. Several
senior executives said that their noncompetes were required and nonnegotiable. Multiple senior executives
described their own non-competes as
‘‘one-sided’’ in favor of the employer.
Some senior executives said they were
not given consideration for the noncompete, and even some who said they
received consideration still said their
non-competes were exploitative and
coercive. For example, some senior
executives said they: (1) were required
to sign a non-compete under threat of
losing their job or their earned
compensation; (2) were forced into a
stock share buyout that included a noncompete; or (3) could obtain long-term
compensation only if they signed a noncompete. Two advocacy groups stated
that many senior executives may lack
power to avoid non-competes and that
employers still hold most of the leverage
in employment negotiations, even with
respect to senior executives. An
employment law firm stated that in its
experience, it had not seen higher
compensation for senior executives and
other highly paid workers in
jurisdictions where non-competes were
allowed, and that employers rarely
provide compensation for noncompetes. The firm said that senior
executives and other highly paid
workers are more likely to receive
severance payments, but such payments
are paid only in some cases. It said that
even when paid, the severance
payments often do not fully compensate
for what a senior executive could have
otherwise earned during the noncompete period.
Furthermore, several self-identified
senior executives said they felt unable
to leave their company because of their
non-competes. Many of these
commenters said they feared being
unemployed. Some senior executives
said they feared or could not afford
litigation, while two senior executives
said that they could not afford to fight
non-competes they believed were
unenforceable. Several self-identified
senior executives, having spent their
careers in one industry, said they were
forced to sit out of the market for long
periods, forgoing earnings and the
ability to work. Others reported
struggling to find a job and suffering
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financially, including living on Social
Security or nearing bankruptcy.
One law firm specializing in
executive compensation said many
senior executives may have achieved
top roles at companies because they
have spent decades in the same industry
and would struggle to find work with
firms other than competitors. Another
law firm said senior executives blocked
from an industry could lose their longcultivated reputation in the industry
and, as a result, time out of an industry
could harm their careers. Worker
advocacy organizations and a law firm
said senior executives tend to be
relatively older and, as older workers
are forced out of the job market, they are
likely to be losing out on increasingly
scarce employment opportunities
relative to their younger counterparts.
Another advocacy group argued that the
Commission did not provide sufficient
evidence to support its preliminary
finding that non-competes are not
exploitative and coercive for senior
executives. A few commenters
suggested that senior executives from
historically marginalized groups may be
paid less and have less bargaining
power than other senior executives.640
Critically, the Commission received
an outpouring of comments indicating
that highly paid workers who are not
senior executives (i.e., who are not
workers with the highest levels of
authority in an organization) are often
coerced or exploited via non-competes.
The Commission received many
comments from workers in relatively
higher-wage fields—such as medicine,
engineering, finance and insurance, and
technology—who stated that employers
exploited and coerced them through the
use of non-competes.641 The vast
640 One of those commenters cited two USA
Today articles that examined Federal workforce
records for 88 companies in the S&P 100 to assess
the number of Asian and Latina women in
executive positions. The articles did not include the
underlying data used for the evaluation. See Jessica
Guynn & Jayme Fraser, Asian Women Are Shut Out
of Leadership at America’s Top Companies. Our
Data Shows Why, USA Today (Apr. 25, 2022),
https://www.usatoday.//money/2022/04/25/asianwomen-executives-discrimination-us-companies/
7308310001/?gnt-cfr=1; Jessica Guynn & Jayme
Fraser, Only Two Latinas Have Been CEOs at a
Fortune 500 Company: Why So Few Hispanics
Make It to the Top, USA Today (Aug. 2, 2022),
https://www.usatoday.com/story/money/2022/08/
02/hispanic-latina-business-demographicsexecutive//?gnt-cfr=1. These news reports find a
disparity in the number of Asian and Latina women
in senior executive roles at these companies but
make no specific findings on bargaining power.
While lack of representation and other factors may
impact bargaining power, the Commission believes
that these two articles (with no underlying data
provided) are insufficient evidence at this time to
find exploitation and coercion with respect to this
subset of senior executives.
641 See Part IV.B.2.b.i–ii.
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majority of higher-wage workers who
are not senior executives reported that
they lacked bargaining power in relation
to their employer; did not negotiate
their non-compete or receive
compensation for it; and/or were not
informed of the non-compete until after
they received the job offer. Many of
these workers stated that their noncompete was hidden or obscured; that
their employers misled them about the
terms of a non-compete; and/or that the
non-compete was confusingly worded
or vague. In addition, many high-wage
workers recounted how non-competes
coerced them into refraining from
competing against their employer by
forcing them to stay in jobs they wanted
to leave or forcing them to leave their
profession, move their families far away,
and/or commute long distances. And a
large share of high-wage workers argued
that even where their non-competes
were overbroad and likely
unenforceable, they were deterred from
seeking or accepting other work or
starting a business by the threat of a
lawsuit from their employer, which they
said would be ruinous to their finances
and professional reputations.642 The
Commission accordingly finds that
higher-wage workers who are not senior
executives are often exploited and
coerced through employers’ use of noncompetes.
In addition, the Commission believes
it is appropriate to conclude that lowerearning workers, regardless of their job
title or function in an organization, are
more likely to be exploited or coerced
in connection with non-competes. As
noted, many workers classified as ‘‘top
executives’’ make under $100,000.
Commenters did not self-report their
income, so the Commission cannot
definitively determine that the selfidentified senior executives who
reported exploitation and coercion are
lower-wage senior executives. Because
of their incomes, however, lower-wage
senior executives are likely subject to
many of the same exploitative and
coercive factors that affect other
workers, such as the inability to afford
a non-compete lawsuit, forgo work for a
lengthy period, leave the field, or
relocate.643 Comments from some senior
executives confirmed that they did not
have sufficient bargaining power to
negotiate the non-compete or
consideration for it, suffered serious
financial harm from non-competes, and
could not afford to litigate their noncompetes. Accordingly, the Commission
finds that a mere job title alone is
insufficient to confer bargaining power
642 See
643 See
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id.
Frm 00066
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on a worker, and lower-wage senior
executives can be subject to the same
exploitation and coercion that other
workers face.
However, having considered the
comments and the available empirical
evidence on this question, the
Commission does not find that noncompetes with highly paid workers who
are also senior executives are likely to
be exploitative or coercive. The
Commission stresses that it is not
affirmatively finding that such noncompetes can never be exploitative or
coercive. The Commission has simply
determined the record before it is
insufficient to support such a finding at
this time.
2. The Use of Non-Competes With
Senior Executives is an Unfair Method
of Competition Under Section 5
While the Commission does not find
that non-competes with senior
executives are exploitative and coercive,
the Commission determines that these
non-competes are nonetheless unfair
methods of competition, for the reasons
described herein.
To determine whether conduct is an
unfair method of competition under
section 5, the Commission assesses two
elements: (1) whether the conduct is a
method of competition, as opposed to a
condition of the marketplace and (2)
whether it is unfair, meaning that it goes
beyond competition on the merits. The
latter inquiry has two components: (a)
whether the conduct has indicia of
unfairness and (b) whether the conduct
tends to negatively affect competitive
conditions. These two components are
weighed according to a sliding scale.644
Non-competes with senior executives
satisfy all the elements of the section 5
inquiry. As described in Part IV.C.2.a,
these non-competes are methods of
competition. As described in Part
IV.C.2.b, these non-competes are facially
unfair conduct because they are
restrictive and exclusionary. And as
described in Part IV.C.2.c, these noncompetes tend to negatively affect
competitive conditions in product and
service markets and in labor markets.
Because the Commission finds that noncompetes with senior executives are
unfair methods of competition, the
Commission declines to exclude them
from the final rule. However, as
described in Part IV.C.3, the final rule
allows existing non-competes with
senior executives to remain in effect,
due to the considerations described
therein.
644 See
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a. The Commission Finds That NonCompetes With Senior Executives are a
Method of Competition, Not a Condition
of the Marketplace
With respect to the first element—
whether conduct is a method of
competition—the Commission finds that
non-competes with senior executives
are a method of competition for the
same reasons as non-competes with
other workers.645
Here, non-competes with senior
executives are not unfair methods of
competition under section 5 because
they are unfair to the individual
executive, but because they tend to
negatively impact competitive
conditions—i.e., harm competition in
product and service markets, as well as
in labor markets—by imposing serious
negative externalities on other workers,
rivals, and consumers.647
b. Non-Competes With Senior
Executives are Facially Unfair Conduct
Because They are Restrictive and
Exclusionary
In Part IV.B.2.a, the Commission finds
that non-competes with workers other
than senior executives are facially unfair
conduct because they are restrictive and
exclusionary. The Commission finds
that non-competes with senior
executives are facially unfair conduct
for the same reasons.
Like non-competes for all other
workers, the restrictive nature of noncompetes with senior executives is
evident from their name and function:
non-competes restrict competitive
activity. They prevent senior executives
from seeking or accepting other work or
starting a business after leaving their
job. And like non-competes for all other
workers, non-competes with senior
executives are exclusionary because
they impair the opportunities of rivals.
Where a worker is subject to a noncompete, the ability of a rival firm to
hire that worker is impaired. In
addition, where many workers in a
market are subject to non-competes, the
ability of firms to expand into that
market, or entrepreneurs to start new
businesses in that market, is impaired.
While non-competes may impair the
opportunities of rivals in all labor
markets, non-competes for senior
executives are especially pernicious in
this regard. Senior executives are
relatively few in number, are bound by
non-competes at high rates,646 and have
highly specialized knowledge and skills.
Therefore, it can be extremely difficult
for existing firms and potential new
entrants to hire executive talent and to
form the most productive matches.
Because senior executives are often
compensated in return for their promise
not to compete, some commenters argue
that non-competes with senior
executives are not unfair methods of
competition. However, agreements can
present concerns under the antitrust
laws even when both parties benefit.
c. Non-Competes With Senior
Executives Tend To Negatively Affect
Competitive Conditions
The Commission finds non-competes
with senior executives tend to
negatively affect competitive conditions
in product and service markets and in
labor markets. As explained in Part II.F,
the legal standard for an unfair method
of competition under section 5 requires
only a tendency to negatively affect
competitive conditions. The inquiry
does not turn on whether the conduct
directly caused actual harm in a specific
instance. Here, the tendency of noncompetes to impair competition is
obvious from their nature and function,
as it is for non-competes with workers
who are not senior executives. And even
if this tendency were not facially
obvious, the evidence confirms that
non-competes with senior executives do
in fact negatively affect competitive
conditions.
645 See
Part IV.B.1.
Part I.B.2 (noting studies estimating that
about two-thirds of senior executives work under
non-competes).
646 See
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i. Non-Competes With Senior
Executives Tend To Negatively Affect
Competitive Conditions in Product and
Service Markets
In the NPRM, the Commission stated
that non-competes with senior
executives may harm competition in
product and service markets in unique
ways.648 The Commission stated that
non-competes with senior executives
may contribute more to negative effects
on new business formation and
innovation than non-competes with
other workers, to the extent that senior
executives may be likely to start
competing businesses, be hired by
potential entrants or competitors, or
develop innovative products and
services.649 The Commission also stated
that non-competes with senior
executives may also block potential
entrants, or raise their costs, to a high
degree, because such workers are likely
to be in high demand by potential
entrants.650 The Commission
647 See Part IV.C.2.i–ii (describing the negative
effects of non-competes with senior executives on
markets for products and services and labor
markets).
648 NPRM at 3502.
649 Id. at 3513.
650 Id.
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preliminarily concluded that, as a
result, prohibiting non-competes for
senior executives may have relatively
greater benefits for consumers than
prohibiting non-competes for other
workers.651
Based on the Commission’s expertise
and after careful review of the
rulemaking record, including the
empirical research and the public
comments, the Commission finds that
non-competes with senior executives
tend to negatively affect competitive
conditions in markets for products and
services, inhibiting new business
formation and innovation.
Non-Competes With Senior Executives
Inhibit New Business Formation and
Innovation
In Part IV.B.3.b, the Commission
described the extensive empirical
evidence indicating that non-competes
inhibit new business formation and
innovation. The Commission’s finding
in Part IV.B.3.b that non-competes
inhibit new business formation and
innovation does not examine noncompetes with senior executives
specifically. However, the Commission
finds that non-competes with senior
executives inhibit new business
formation and innovation at least as
much as non-competes with other
workers and likely to a greater extent,
given the outsized role of senior
executives in forming new businesses,
serving on new businesses’ executive
teams, and setting the strategic direction
of businesses with respect to
innovation.
Specifically, non-competes with
senior executives tend to negatively
affect competitive conditions in product
and service markets in three ways. First,
non-competes with senior executives
inhibit new business formation. In Part
IV.B.3.b.i, the Commission finds that
non-competes with workers other than
senior executives inhibit new business
formation. The Commission finds that
non-competes with senior executives
inhibit new business formation as much
as non-competes with other workers and
likely to a greater extent, due to the
important role senior executives play in
new business formation.
Senior executives are particularly
well-positioned to form new businesses
because of their strategic expertise and
business acumen; knowledge of
multiple facets of their industries;
experience making policy decisions for
businesses; and ability to secure
financing. Senior executives are also
often crucial to the formation of
startups, because startups often begin by
651 Id.
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forming a leadership team, which is
often comprised of experienced and
knowledgeable executives from
elsewhere in the industry.652 Empirical
research shows that when startups hire
top management teams from other firms,
they are more likely to grow beyond
their initial stages 653 and that top
managers’ experience in an industry
allows startups to grow more quickly.654
Additionally, empirical research finds
that startups that hire top management
teams with experience are more likely to
become successful businesses.655
Empirical research also finds that, in
addition to experience, top management
teams that have worked together in the
past are more successful than those that
have not.656 For these reasons, noncompetes with senior executives not
only inhibit new business formation by
blocking the executives from forming
new businesses; they also prevent other
potential founders from forming new
businesses, because potential founders
are less likely to start new businesses
when they are unable to assemble the
executive team they need because so
many executives in the industry are tied
up by non-competes. By inhibiting new
business formation, these non-competes
deprive product and service markets of
beneficial competition from new
entrants—competition that in turn tends
to benefit consumers through lower
prices or better product quality.
Second, non-competes with senior
executives inhibit innovation. In Part
IV.B.3.b.ii, the Commission finds that
non-competes with workers other than
senior executives inhibit innovation.
The Commission finds that noncompetes with senior executives inhibit
innovation at least as much as noncompetes with other workers and likely
to a greater extent, because senior
executives play a crucial role in setting
the strategic direction of firms with
respect to innovation.
Non-competes with senior executives
inhibit innovation by impeding efficient
matching between workers and firms.
As described in Part IV.B.3.a, labor
652 See, e.g., Leslie Crowe, How to Hire Your First
Leadership Team (Oct. 24, 2023), https://
baincapitalventures.com/insight/how-to-hire-yourfirst-leadership-team-as-a-startup-founder/.
653 Bradley Hendricks, Travis Howell, &
Christopher Bingham, How Much Do Top
Management Teams Matter in Founder-Led Firms?,
40 Strategic Mgmt. J. 959 (2019).
654 Yasemin Y. Kor, Experience-Based Top
Management Team Competence and Sustained
Growth, 14 Org. Sci. 707 (2003).
655 Agnieszka Kurczewska & Micha5 Mackiewicz,
Are Jacks-of-All-Trades Successful Entrepreneurs?
Revisiting Lazear’s Theory of Entrepreneurship, 15
Baltic J. of Mgmt. 411 (2020).
656 Kathleen M. Eisenhardt, Top Management
Teams and the Performance of Entrepreneurial
Firms, 40 Small Bus. Econ. 805 (2013).
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markets function by matching workers
and employers. The same is true for
senior executives. Executives compete
for roles at firms, and firms compete to
attract (often highly sought-after)
executives; executives choose the role
that best meets their objectives, and
firms choose the executive who best
meets theirs. Non-competes impede this
competitive process by blocking
executives from pursuing new
opportunities (i.e., positions that are
within the scope of their non-compete)
and by preventing firms from competing
to attract their talent. Thus, because
non-competes are prevalent, the quality
of the matches between executives and
firms suffers.
By inhibiting efficient matching
between firms and executives, noncompetes frustrate the ability of firms to
hire executives who can best maximize
the firm’s capacity for innovation.
Senior executives play an important role
in advancing innovation at firms.657
Senior executives are often a
fundamental part of the innovative
process, guiding the strategic direction
of the firm in terms of topics of new
research and the depth of new research;
determining the allocation of R&D
funding; and making the decision to
develop (and supervising the
development of) new products and
services.658
Research shows that labor mobility
among senior executives may tend to
foster innovation. Empirical research
finds that executives with shorter job
tenures tend to engage in more
innovation than those who are longer
tenured at firms.659 In addition,
empirical research shows that the
strength of executives’ external
networks—which are likely stronger
among executives hired externally—
657 See, e.g., Jean-Philippe Deschamps, Innovation
Leaders: How Senior Executives Stimulate, Steer
and Sustain Innovation (John Wiley & Sons, 2009);
Jean-Philippe Deschamps & Beebe Nelson,
Innovation Governance: How Top Management
Organizes and Mobilizes For Innovation (John
Wiley & Sons, 2014).
658 Christopher Kurzhals, Lorenz Graf-Vlachy, &
Andreas Ko¨nig, Strategic Leadership and
Technological Innovation: A Comprehensive
Review and Research Agenda, 28 Corp. Governance:
An Int’l Review 437 (2020); Pascal Back & Andreas
Bausch, Not If, But How CEOs Affect Product
Innovation: A Systematic Review and Research
Agenda, 16 Int’l J. of Innovation and Tech. Mgmt.
1930001 (2019); Vassilis Papadakis & Dimitris
Bourantas, The Chief Executive Officer as Corporate
Champion of Technological Innovation: An
Empirical Investigation, 10 Tech. Analysis &
Strategic Mgmt. 89 (1998) (finding that CEO
characteristics significantly influence technological
innovation, and that the influence is particularly
powerful for new product introductions).
659 Vincent L. Barker III & George C. Mueller, CEO
Characteristics and Firm R&D Spending, 48 Mgmt.
Sci. 782 (2002).
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increase the rate of innovation.660
Finally, when senior executives are
hired by new companies, they bring
their experience and understanding of
the industry, which may cross-pollinate
with the capabilities of the new
company, cultivating new research
which would not otherwise be
achieved.661 By inhibiting efficient
matching between executives and firms,
non-competes impede the ability of
firms to develop innovative products
and services that benefit consumers.
Furthermore, empirical research
shows that better matching among
executives and firms drives productivity
as well as innovation. When firms and
executives have a higher quality match,
the firm as a whole is more
productive.662 By inhibiting efficient
matching between firms and executives,
non-competes tend to reduce the
productivity of firms.
In theory, firms that seek to hire an
executive could just pay the executive’s
employer (or former employer) to escape
the non-compete. However, research by
Liyan Shi describes how non-competes
with senior executives force firms to
make inefficiently high buyout
payments. Shi ultimately concludes that
‘‘imposing a complete ban on
noncompete clauses would be close to
implementing the social optimum.’’ 663
Shi explains that firms and executives
jointly create market power by entering
into non-competes and excluding rivals
from hiring experienced labor in a
competitive labor market. The existence
of a non-compete forces rivals to make
an inefficiently high buyout payment,
where the inefficiency arises due to the
market power of the incumbent firm
created by the non-compete. Rival firms
must either make these payments,
which therefore lead to deadweight
economic loss, or forgo the payment—
and, consequently, the ability to hire a
talented executive (and perhaps the
ability to enter the market at all, for
potential new firms).664 New and small
businesses in particular might be unable
to afford these buyouts. By calibrating
660 Qing Cao, Zeki Simsek, & Hongping Zhang,
Modelling the Joint Impact of the CEO and the TMT
on Organizational Ambidexterity, 47 J. of Mgmt.
Stud. 1272 (2010); Olubunmi Faleye, Tunde
Kovacs, & Anand Venkateswaran, Do BetterConnected CEOs Innovate More?, 49 J. of Fin. And
Quant. Analysis 1201 (2014).
661 See, e.g., Orly Lobel, Talent Wants to Be Free
(Yale Univ. Press, 2013).
662 Yihui Pan, The Determinants and Impact of
Executive-Firm Matches, 63 Mgmt. Sci. 185 (2017);
Matthew Ma, Jing Pan, & Xue Wang, An
Examination of Firm-Manager Match Quality in the
Executive Labor Market (2021), https://
papers.ssrn.com/sol3/papers.cfm?abstract_
id=3067808.
663 Shi, supra note 84 at 427.
664 Id.
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this theoretical model to data on
executive non-competes and executive
compensation, the study shows that
banning non-competes would result in
nearly optimal social welfare gains.
Shi notes that such a mechanism
could be tempered by the ability of a
labor market to provide viable
alternative workers for new or
competing businesses. However, when a
particular type of labor is somewhat
scarce, when on-the-job experience
matters significantly, or when frictions
prevent workers from moving to new
jobs—all of which tend to be the case for
senior executives—there is no way for
the market to fill the gap created by noncompetes.
Some of the evidence in this study
arises from analysis of non-compete use
coupled with non-compete
enforceability. Other evidence in the
study, including the finding that a ban
on non-competes is close to optimal,
relies not on use at the individual level,
but on prevalence of non-competes
across a labor market. The latter
approach does not rely, therefore, on
comparing individuals with and
without non-competes, and is therefore
not subject to the estimation bias that
leads the Commission to give less
weight to evidence based on the use of
non-competes.
Relevant Comments and Commission
Responses
Many commenters stated that noncompetes with senior executives reduce
new business formation and innovation,
confirming the Commission’s findings.
Several senior executives recounted
personal experiences in which a noncompete prevented them from starting a
business. A tech executive stated that
they knew many tech executives who
would have left their roles to start
within-industry spinoffs if not for their
non-competes. A senior executive stated
that they had planned to start a small
business that would not have harmed
the former employer but had signed a
non-compete that prevented them from
doing so. A former executive stated that
they were sued after starting a new
business despite confirming with the
CEO of their former employer that doing
so would not violate the non-compete.
Another senior executive said their noncompete prevented them from taking a
job at a smaller, more innovative
company in their industry. Some
commenters warned that permitting
non-competes for senior executives
would reinforce dominant positions for
industry incumbents who can foreclose
new entrants from access to critical
talent and expertise. An advocate for
startups stated that small businesses
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significantly benefit from mentorship
from experienced founders, which can
be inhibited by non-competes.
Other commenters argued that the
Commission should exclude senior
executives from coverage under the final
rule because doing so would benefit
competition in product and service
markets. These commenters generally
stated that non-competes may promote
innovation by encouraging firms to
make productivity-enhancing
investments, such as investments in
developing trade secrets. The
Commission does not believe that noncompetes are needed to protect valuable
firm investments. As discussed in Part
IV.D, the Commission finds that
employers have less restrictive
alternatives for protecting valuable
investments and that these alternatives
are available for senior executives as
well as for other workers.
In addition, when assessing how noncompetes with senior executives affect
competition in product and service
markets, the Commission believes it is
important to consider the net impact. It
is possible that the effects described by
these commenters and the effects
described by the Commission earlier in
this Part IV.C.2.c.i can be occurring at
the same time. That is, a non-compete
with a senior executive might in some
instances be protecting a firm’s
investments in a manner that is
productivity-enhancing, holding all else
equal. At the same time, however, that
same non-compete may restrict the
executive’s ability to start a new
business after leaving the firm. And
even that same non-compete can—and
certainly non-competes in the aggregate
do—prevent the most efficient match
between senior executives and the firms
that can make the highest and best use
of their talents, and decrease knowledge
flow between firms, which limits the
cross-pollination of innovative ideas.
What the empirical evidence shows is
that overall, i.e., in net effect, noncompetes reduce new business
formation and innovation,665 indicating
that the tendency of non-competes to
inhibit new business formation and
innovation more than counteracts any
effect of non-competes on promoting
new business formation and innovation
by protecting a firm’s investments.
A commenter—referencing the Shi
study—argued that banning buyout
clauses in non-competes would enhance
economic efficiency relative to banning
non-competes altogether. Other
commenters, including Shi, the author
of the study, disagreed with this
665 See
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claim.666 In response to these
comments, the Commission finds that
prohibiting buyout clauses would not
enhance efficiency relative to
prohibiting non-competes altogether.
The Commission does not believe
prohibiting buyout clauses would
address the tendency of non-competes
for senior executives to negatively affect
competitive conditions, because it
would mean that fewer executives could
escape their non-competes, reducing
labor mobility and efficient matching
between executives and firms even
further.
Some commenters disputed the
Commission’s legal rationale for
prohibiting non-competes with senior
executives. One comment stated that the
NPRM did not cite any case law where
a non-compete for a senior executive
violated antitrust law and argued that
there is no widespread case law to
support a per se ban. In response, the
Commission notes that it is determining
that non-competes are an unfair method
of competition under section 5, not a
per se violation of the Sherman Act. For
the reasons described in this Part IV.C.2,
the Commission finds that noncompetes are restrictive and
exclusionary and that, based on the
totality of the evidence, they tend to
negatively affect competitive conditions
at least as much as non-competes with
other workers, and likely even more so,
given the outsize role of senior
executives in new business formation
and innovation. For these reasons, the
Commission finds that these noncompetes are an unfair method of
competition under section 5.
Another commenter stated that the
NPRM did not satisfy the standard for
finding a tendency to negatively affect
competitive conditions for senior
executives as set forth in the
Commission’s section 5 Policy
Statement.667 The commenter stated
that a per se ban on non-competes
considers neither the size, power, or
purpose of the firm nor how noncompetes interact with individual
markets. The commenter argued that the
evidence cannot justify an economywide ban.
The Commission finds that noncompetes for senior executives are an
unfair method of competition under
section 5 for all the reasons described in
this Part IV.C.2. The Commission states
the applicable legal standard under
section 5 in Part II.F, which is
consistent with the standard set forth in
the Policy Statement. As noted in Part
666 Comment of Liyan Shi, FTC–2023–0007–
19810.
667 See FTC Policy Statement, supra note 286.
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II.F, the Commission need not make a
separate showing of market power or
market definition. Nor must the
Commission show that the conduct
directly caused actual harm in the
specific instance at issue. Instead, the
inquiry under section 5 focuses on the
nature and tendency of the conduct.
Moreover, as noted in Part II.F, the
Commission may consider the aggregate
effect of conduct as well. The language
in the Policy Statement stating that the
size, power, and purpose of the
respondent may be relevant is not
limiting, but instead provides guidance
regarding factors the Commission may
consider in evaluating potentially unfair
methods of competition. This guidance
may be especially relevant in individual
cases and less so in section 5
rulemakings. Finally, as described in
Part II.F, a finding that conduct is an
unfair method of competition does not
require definition of a market or
consideration of individual markets.
Moreover, as described in Part V.D, the
Commission considered and finds no
basis for excluding particular industries
or workers.
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ii. Non-Competes With Senior
Executives Tend to Negatively Affect
Competitive Conditions in Labor
Markets
The effects of non-competes with
senior executives on product and
service markets are the primary reason
why the Commission finds that noncompetes with senior executives are an
unfair method of competition. However,
non-competes also tend to negatively
affect competitive conditions in labor
markets.
Non-Competes With Senior Executives
Suppress Labor Mobility and Earnings
In Part IV.B.3.a, the Commission
describes extensive empirical evidence
that non-competes reduce labor mobility
and worker earnings. The Commission’s
finding in Part IV.B.3.a that noncompetes suppress labor mobility and
earnings does not examine noncompetes with senior executives
specifically. However, the evidence
cited by the Commission is also
probative with respect to non-competes
with senior executives.
Non-competes reduce labor mobility
for senior executives for the same
reasons they reduce labor mobility for
other workers—they directly restrict
workers from seeking or accepting other
work or starting a business after they
leave their job. In Part IV.B.3.a.i, the
Commission cites empirical evidence
that non-competes reduce labor
mobility. This evidence shows that noncompetes reduce labor mobility for all
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subgroups of workers that have been
studied, including inventors, high-tech
workers, low-wage workers, and
workers across the labor force. The
impact of non-competes on labor
mobility is direct, since non-competes
directly prohibit certain types of
mobility. Therefore, the Commission
finds the non-competes restrict the labor
mobility of senior executives as well.
This finding is supported by Mark
Garmaise’s study of the relationship
between non-compete enforceability
and the labor mobility and earnings of
executives.668 Garmaise finds that
stricter non-compete enforceability
reduces within-industry executive
mobility by 47% and across-industry
executive mobility by 25%. The study,
which is limited to senior executives,
uses multiple legal changes in noncompete enforceability, measured along
multiple dimensions in a binary
fashion. The Shi study qualitatively
confirms these results—that executives
experience greater labor mobility in the
absence of non-competes.669 However,
that study examines use, and not just
enforceability, of non-competes, so the
Commission gives it less weight.
Furthermore, by inhibiting efficient
matching between executives and
firms—through a similar mechanism as
for all other workers 670—non-competes
reduce executives’ earnings. Like noncompetes for other workers, noncompetes block senior executives from
switching to a job in which they would
be better paid. And by doing so, noncompetes decrease opportunities (and
earnings) for senior executives who are
not subject to non-competes—as well as
for workers who are not senior
executives, but who would otherwise
move into one of those roles.
As described in Part IV.B.3.a.ii, the
empirical research indicates that noncompetes suppress wages for a wide
range of subgroups of workers across the
spectrum of income and job function,
including workers who are not subject
to non-competes. Importantly, an
empirical study that does focus on
senior executives finds that noncompetes suppress earnings of senior
executives. The Garmaise study finds
that decreased enforceability of noncompetes increases executives’ earnings
by 12.7%.671 Garmaise also finds that
decreased enforceability of noncompetes increases earnings growth for
CEOs by 8.2%. Since much of the
668 Garmaise,
supra note 584.
supra note 84.
670 See Part IV.B.3.a.
671 Garmaise, supra note 584 at 403. The
reduction in earnings is calculated as e¥1.3575*0.1
¥1, where ¥1.3575 is taken from Table 4.
669 Shi,
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increase in earnings is attributable to an
increase in earnings growth (as opposed
to earnings at the start of the
employment relationship), Garmaise
hypothesizes that earnings increase
because CEOs are more likely to invest
in their own human capital when they
have no non-compete.672 However,
Garmaise also notes that while noncompetes may offer benefits to firms
which use them, there may be negative
impacts across the labor markets in
which they are used.673 This is the only
study of executive earnings that does
not examine the use of non-competes: it
examines multiple legal changes in noncompete enforceability, measured along
multiple dimensions (though in a binary
fashion).
As noted in Part IV.C.1, many senior
executives negotiate valuable
consideration for non-competes.
However, the evidence suggests that
non-competes still have a net negative
effect on senior executives’ earnings,
because the suppression of earnings
through reduced labor market
competition more than cancels out the
compensation that some of these
executives individually receive for their
non-competes.
A second study, by Kini, Williams,
and Yin,674 simultaneously estimates
the impact of non-compete
enforceability and non-compete use on
earnings and finds a positive
correlation. The Commission gives this
study less weight because it analyzes
the use of non-competes. As described
in Part IV.A.2, such studies cannot
easily differentiate between correlation
and causation. Kini, Williams, and Yin
use an enforceability measure to
generate their estimates, but do not
estimate models that omit use of noncompetes, meaning that the Commission
does not interpret the findings as
representing a causal relationship.
Relevant Comments and Commission
Responses
Many commenters addressed negative
effects of non-competes with senior
executives on competition in labor
markets. Non-competes, these
commenters stated, can negatively affect
a senior executive’s career when they
leave their field or sit out of the
workforce for a period, causing their
skills and knowledge (particularly in
fast-paced fields) to stagnate and
affecting their reputations. Like other
workers, some senior executives said
their non-compete limited their options
and earnings in their specialized field.
672 Id.
at 402.
at 379.
674 Kini, Williams, & Yin, supra note 83.
673 Id.
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Other commenters argued the
Commission should exclude senior
executives from the rule because they
earn more compensation, including
higher wages, for non-competes than
they would gain under the final rule.
Many of these commenters argued that
because senior executives have
bargaining power, any findings on
decreased wages would not apply to
them. Some employers stated they
compensated their senior executives for
non-competes. Some industry
organizations stated that some
additional compensation and bonuses
might not be offered if non-competes are
banned. One business stated the
compensation it pays executives takes
their non-competes into account.
Another business stated it provides
severance benefits in exchange for noncompetes that fully compensate the
executive for the duration of the noncompete.
In response to these comments, the
Commission notes the Garmaise study
indicates that non-competes have a net
negative effect on earnings for senior
executives in the aggregate because they
suppress competition, even if individual
senior executives receive some amount
of compensation for their personal noncompete. Garmaise’s analysis accounts
for any compensation the executive
receives for the non-compete.
An industry trade organization stated
that non-competes create job
opportunities for executives and other
highly skilled workers, rather than
restricting them, because, without noncompetes to protect confidential
information, employers will often be
reluctant to expand their executive
teams. The Commission notes this
assertion is unsupported by empirical
evidence, and the Commission finds
that firms have less restrictive
alternatives for protecting confidential
information.675
An investment industry organization
stated that the Commission cannot
assume senior executives will be
equally or more effective at new firms
compared to their old firms. In
response, the Commission notes that
voluntary labor mobility—for senior
executives and all workers—typically
reflects a mutually beneficial outcome.
To the extent a firm is willing to pay
more to attract a particular worker to
come work for them, it is typically
because the firm places a higher value
on the worker’s productivity than the
worker’s current employer. In addition,
the Commission notes that many
commenters stated that non-competes
often force senior executives to sit out
675 See
Part IV.D.2.
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of the workforce, causing them to lose
valuable knowledge and skills. In
general, senior executives are more
likely to be effective when they can
remain in the industry in which they
have experience and expertise, rather
than starting over in a new industry
because of a non-compete.
An industry trade organization stated
that the Commission’s assertion that
wages are reduced across the labor
market is inconsistent with the NPRM’s
preliminary finding that non-competes
are not coercive or exploitative for
senior executives, because when more
issues are left for negotiation, the job
market is increasingly competitive, as
workers can differentiate themselves
through their terms and tailor their
terms to each employer. The
Commission does not believe these
findings are in tension. Agreements do
not need to be exploitative or coercive
to inhibit efficient matching between
workers and firms or to negatively affect
competitive conditions. Furthermore,
the Commission believes that executives
have many other ways to differentiate
themselves other than based on noncompete terms.
One commenter argued that the
findings in the Kini, Williams, and Yin
study should not be interpreted as
representing a causal relationship. Upon
further consideration, the Commission
agrees with this comment and does not
interpret this study causally, as
described in this Part IV.C.2.c.ii.
For these reasons, the Commission
finds that non-competes with senior
executives are an unfair method of
competition. As a result, the
Commission declines to exclude senior
executives from the final rule altogether.
3. The Final Rule Allows Existing NonCompetes With Senior Executives To
Remain in Effect
The final rule prohibits employers
from, among other things, entering into
or enforcing new non-competes with
senior executives—i.e., non-competes
entered into on or after the effective
date.676 However, the Commission
decides to allow existing non-competes
with senior executives—i.e., noncompetes entered into before the
effective date—to remain in effect. The
Commission describes the basis for this
determination in this Part IV.C.3.
The Commission believes the
evidence could provide a basis for
prohibiting employers from enforcing
existing non-competes with senior
executives, as the final rule does for all
other workers, given the tendency of
such agreements to negatively affect
676 § 910.2(a)(2).
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competitive conditions.677 However, the
Commission has decided to allow
existing non-competes for senior
executives to remain in effect, based on
two practical considerations that are far
more likely to be present for senior
executives than other workers. First, as
described in Part IV.C.1, senior
executives are substantially less likely
than other workers to be exploited or
coerced in connection with noncompetes. As a result, this subset of
workers is substantially less likely to be
subject to the kind of acute, ongoing
harms currently being suffered by other
workers with existing non-competes
(even if senior executive’s existing noncompetes are still harming competitive
conditions in the economy overall).
Second, commenters raised credible
concerns about the practical impacts of
extinguishing existing non-competes for
senior executives, as described in this
Part IV.C.3.678
Numerous businesses and trade
associations argued that, if the final rule
were to invalidate existing noncompetes for senior executives, that
would present practical challenges for
employers, because many such noncompetes were exchanged for
substantial consideration. According to
commenters, consideration exchanged
for non-competes includes long-term
incentive plans, bonuses, stock awards,
options, or severance payments, among
other arrangements.
Some commenters were concerned
about a potential windfall for workers.
They argued that if the non-compete
portion of the contract were rescinded
or otherwise invalidated, the worker
may be left with any benefits already
received in exchange for the noncompete, such as equity or bonuses, and
could also compete. An industry
association stated that some of its
members’ workers have already received
thousands or hundreds of thousands of
dollars in additional compensation
alongside non-competes, though it was
unclear what each worker received.
Some business associations said
businesses do not have a clear way to
recover those payments or benefits. A
commenter asked whether a worker who
forfeited equity for competing could get
the equity back or if executives who
were compensated by their new
677 See
Part IV.C.2
the Commission proposed to require
employers to rescind existing non-competes—see
NPRM, proposed § 910.2(b)(1)—many of these
comments addressed the proposed rescission
requirement specifically. Comments that pertain
only to the issue of rescission, and that do not apply
to whether existing non-competes for senior
executives may remain in effect generally, are
addressed in Part IV.E.
678 Because
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employers for the non-compete would
be paid twice.
The Commission views the problem
as more complex than these commenters
suggest. First, the empirical evidence
and comments illustrate that in many
cases, non-competes are currently
trapping workers, including senior
executives, in their jobs, meaning the
employer is getting not only the benefit
of trapping that individual worker, but
also the benefit of non-competition.679
In such circumstances, employers may
have already received part or all of the
benefit they sought from entering a noncompete, though the value would be
difficult if not impossible to
quantitatively assess. Moreover, it is
impracticable for the Commission to
untangle whether, to the extent some
workers received compensation that was
denominated consideration for a noncompete, that non-compete
simultaneously suppressed other
compensation to the worker such as
wages. For example, some commenters
who described negotiating their noncompetes stated the employer used it as
a tactic to drive down wages.
In addition, most workers subject to a
non-compete are subject to other
restrictive covenants,680 both mitigating
any purported harm and complicating
any quantitative valuation of a noncompete.
The Commission also notes that, to
the extent equity was provided as
consideration, owning a share in the
prior employer may induce workers not
to risk lowering the value of that equity
by competing. However, the concern
about workers seeking already-forfeited
compensation is misplaced, as the final
rule will not impact workers who
forfeited compensation for competing
under a then-valid non-compete.
Overall, however, where an employer
has provided meaningful consideration
in exchange for a non-compete, the
comments indicate that being unable to
enforce that non-compete may
complicate that exchange in a way that
would be difficult to value and
untangle. These difficult practical
assessments indicate that the final rule
should contain a limited, easily
administrable exception for existing
non-competes with senior executives,
who are considerably more likely than
other workers to have negotiated noncompetes and received substantial
consideration in return.
679 See
Part IV.B.2.b.
Balasubramanian, Starr, & Yamaguchi,
supra note 74 (finding that 97.5% of workers with
non-competes are also subject to a non-solicitation
agreement, NDA, or non-recruitment agreement,
and 74.7% of workers with non-competes are also
subject to all three other types of provisions).
680 See
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In addition, an employment attorney
suggested that employers may suspend
any mid-stream benefits and terminate
unvested options and stock and cancel
bonuses. One commenter suggested
employers may seek refunds from
workers, which could create
uncertainty. Similarly, an industry
association said senior workers who
signed a non-compete as part of a
severance agreement might see their
severance payments taken away, as
employers would need to decide
whether to continue paying despite the
elimination of non-competes or, to the
extent they legally can, attempt to
renegotiate any outstanding severance
agreements. Finally, a business said
executives in the middle of their
contracts might need to renegotiate
those contracts. The Commission shares
these concerns about the practicalities
of untangling non-competes that are
more likely to have been bargained for.
Senior executives who engaged in a fair
bargaining process may have obtained
significant consideration and planned
accordingly, as have their employers.
While employers’ ability to stop
payments or claw back consideration is
uncertain, any efforts to do so could be
disruptive.
Other commenters stated that they
believed rescission could result in
litigation against workers. An
employment lawyer said litigation was
difficult to predict but that there could
be litigation seeking declarations from
courts on how the rule impacts existing
contracts. A group of commenters stated
that rescinding or invalidating
agreements would lead to increased
litigation against workers who received
the benefit of the bargain but were no
longer bound by a non-compete in
exchange, and that such litigation
would seek to nullify severance
agreements, employment agreements,
clawback agreements, and others.
One business said the NPRM was
silent on how to address specially taxed
arrangements, but the business did not
provide additional details on any such
arrangements. A law firm said workers
who received consideration in a prior
year would have paid taxes on it and
would now need to amend their prior
tax return to get a refund if they have
to pay back that consideration, while
employers might have to amend their
return to reflect the loss of a deduction.
That law firm also said some executives
and other workers use and plan for noncompetes to reduce their ‘‘golden
parachute’’ tax burden.
Finally, an accountant explained that
valuations of senior executive noncompetes are conducted during many
merger and acquisition transactions.
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Similarly, an industry association said
acquisition prices may include the value
of non-competes that ensure the buyer
retains certain talent, so if non-competes
were rescinded or invalidated the buyer
would lose the value of what they paid
for with no way to recoup the costs. The
commenter stated that the bargained-for
value of such sales may decrease if
existing senior executive non-competes
cannot be enforced. The exemption for
existing non-competes addresses this
concern. Moreover, this concern does
not exist for future transactions in any
event, since they would not account for
non-competes that have been banned.
In response to the foregoing
comments, the Commission finds it
plausible that rendering existing noncompetes with senior executives
enforceable could create some of these
practical implementation challenges.
The Commission accordingly elects to
exclude existing non-competes with
senior executives from the rule,
reducing the burden of implementation
of the final rule.
The Commission also understands
that some of these practical concerns
could arise for workers other than senior
executives if they received substantial
consideration in exchange for a noncompete. However, the evidence
indicates that any such agreements with
workers other than senior executives are
very rare, and that such workers are
more likely to experience exploitation
and coercion in connection with noncompetes. Therefore, allowing only
existing non-competes with senior
executives to remain in force will
significantly reduce these practical
concerns for employers. In contrast, a
wider exemption for all existing
agreements would leave in place a large
number of non-competes that tend to
harm competitive conditions, including
a large number of exploitative and
coercive non-competes for which no
meaningful consideration was received.
Some commenters suggested the
Commission exempt from the final rule
non-competes in exchange for which the
worker received consideration. One
business asked for an exception to the
final rule for paid non-competes,
asserting that such an exception would
allow workers to receive guaranteed
payments while accessing information
and training and would allow workers
to start their own businesses after the
non-compete period. Another business
recommended allowing non-competes
that provide severance equal to a
worker’s salary for the non-compete
period. An employment attorney
suggested an exception from the rule for
non-competes that are part of a
severance agreement or where the
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worker receives a paid non-compete
period or garden leave, which the
attorney says do not align with the
Commission’s concerns about noncompetes and represent a balanced
trade-off.
The Commission declines to adopt an
exception for non-competes in exchange
for which the worker received
consideration (whether under an
existing or future non-compete). The
fact that a worker received
compensation for a non-compete does
not mean the worker received fair
compensation, i.e., compensation
commensurate with earnings that would
be received in a competitive labor
market. In addition, such an exception
would raise significant administrability
concerns. For example, a rule that
exempts non-competes exchanged for
‘‘substantial consideration’’ or
‘‘meaningful consideration’’ would not
provide sufficient clarity to employers
and workers to avoid significant
compliance costs and litigation risks.
Requiring a brighter-line specific
amount (or standard) of compensation
would be unlikely to appropriately
capture highly fact-specific, varying
financial circumstances of workers and
firms. Moreover, it would be difficult to
prevent employers from suppressing
compensation or benefits along other
dimensions (e.g., a requirement for
severance equal to the worker’s salary
during the non-compete period as one
commenter suggested could lead to the
salary being suppressed). The
Commission also notes, however, that
while it is not adopting a blanket
exemption from the final rule for noncompetes in exchange for which the
worker received consideration, it is
satisfying this request to some extent by
adopting an exemption for existing noncompetes for senior executives, which
are the non-competes most likely to
have been exchanged for consideration.
Finally, the Commission concludes
that allowing existing non-competes for
senior executives to remain in effect is
appropriate despite the significant
negative effects of such non-competes
on competition described in Part IV.C.2.
The Commission took into
consideration that non-competes with
senior executives are less likely to be
causing ongoing harm to individuals by
preventing them from seeking or
accepting other work or starting their
own business, because such noncompetes were likely to have been
negotiated or exchanged for
consideration. In addition, the negative
effects of these non-competes on
competitive conditions will subside
over time as these non-competes expire.
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4. Defining Senior Executives
As noted earlier, the Commission did
not define the term ‘‘senior executive’’
in the NPRM. Instead, the Commission
requested comment on how the term
should be defined.681 In this final rule,
the Commission adopts a definition of
‘‘senior executive’’ to isolate the
workers who are least likely to have
experienced exploitation and coercion
and most likely to have bargained for
meaningful compensation for their noncompete. Workers for whom
exploitation and coercion concerns are
likely most relevant and who are
unlikely to have bargained for or
received meaningful consideration for a
non-compete—namely, lower-earning
workers, and relatively higher paid or
highly skilled workers who lack policymaking authority in an organization—do
not fall within this final definition.
This definition is relevant because, as
explained in Part IV.C.2, the basis for
the Commission’s findings that noncompetes with senior executives are
unfair methods of competition differs in
some ways from the evidence and
rationales underpinning its findings that
non-competes with other workers are
unfair methods of competition.
Furthermore, as explained in Part
IV.C.3, the final rule allows existing
non-competes with senior executives to
remain in force, while prohibiting
employers from enforcing existing noncompetes with other workers after the
effective date.
The Commission defines ‘‘senior
executives’’ based on an earnings test
and a job duties test. In general, the term
‘‘senior executives’’ refers to workers
earning more than $151,164 682 who are
in a ‘‘policy-making position’’ as
defined in the final rule. The
Commission adopted this definition
after considering the many comments
on who senior executives are and how
to define them. Notably, the
Commission concluded that, unlike
highly paid senior executives, highly
paid workers other than senior
executives and lower-wage workers
with senior executive titles as a formal
matter likely experience exploitation
and coercion and are unlikely to have
engaged in bargaining in connection
with non-competes, much like lowerwage workers.683 In other words, the
Commission finds that the only group of
workers that is likely to have bargained
for meaningful compensation in
exchange for their non-compete is
senior executives who are both highly
paid and, as a functional matter,
exercise the highest levels of authority
in an organization.684 The Commission
estimates that approximately 0.75% of
workers are such senior executives.685
a. Definition of ‘‘Senior Executive’’
The NPRM requested comment on
how to define senior executives while
providing sufficient clarity to employers
and workers.686 The NPRM stated that
there is no generally accepted legal
definition of ‘‘senior executive’’ and that
the term is challenging to define given
the variety of organizational structures
used by employers.687 The NPRM raised
the possibility of looking to existing
Securities and Exchange Commission
(‘‘SEC’’) definitions; adopting a
definition closely based on a definition
in an existing Federal regulation;
adopting a new definition; defining the
category according to a worker’s
earnings; using some combination of
these approaches; or using a different
approach.688 Commenters proposed a
wide variety of definitions, largely
focused on two types: an exception
based on a worker’s job duties or title,
and an exception based on a
compensation threshold. Upon review
of the full record, the Commission
determines that a test that combines
both of these criteria best captures the
subset of workers who are likely to have
bargained for meaningful compensation
in exchange for their non-compete in a
readily administrable manner.
i. The Need for a Two-Part Test
Many commenters suggested
combining a compensation threshold
with a job duties test. For example, one
business supported excepting workers
who met a combination of tests based on
a compensation threshold, FLSA
exemption status, and access to trade
secrets. A law firm suggested the final
rule should account for both pay,
exempting only low-wage hourly
workers, and job duties in determining
an exception. One commenter suggested
defining ‘‘senior executive’’ based on
total compensation, job title, and job
duties. Though the Commission does
not adopt these specific duties and wage
combinations, the Commission agrees
that a combined approach is necessary.
The Commission has determined that
the definition of ‘‘senior executive’’
should include both a compensation
threshold and job duties test, similar to
681 NPRM
684 See
682 This
685 See
at 3520.
threshold is based on the 85th percentile
of earnings of full-time salaried workers nationally.
See Part IV.C.4.b.
683 See Part IV.C.1.
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id.
Part X.F.11.
686 NPRM at 3520.
687 Id.
688 Id.
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the DOL regulations that define and
delimit the FLSA’s exemption for
executive employees.689 The key
advantage of a compensation threshold,
as one industry organization commenter
stated, is that compensation thresholds
are objective and easily understood by
all stakeholders—yielding significant
administrability benefits. However,
since not all workers above any given
compensation threshold are senior
executives, a job duties test is also
needed to identify senior executives.
The two-part test isolates the workers
most likely to have bargaining power to
negotiate meaningful consideration for a
non-compete and least likely to
experience exploitation and coercion in
connection with non-competes. A
compensation threshold ensures that
stakeholders do not need to spend time
assessing the job duties of workers
below the threshold—minimizing the
amount of detailed analysis
stakeholders must undertake. A
compensation threshold also helps
ensure that workers who work in
positions with ‘‘senior executive’’
classifications but likely lack
meaningful bargaining power due to
their relatively low incomes and who
likely did not receive meaningful
consideration for a non-compete are
excluded from the definition. The job
duties test ensures that the definition
identifies the individuals most likely to
have bespoke, negotiated agreements—
those with the highest level of authority
over the organization—while also
ensuring that high-earning workers who
are not senior executives, who likely
experience exploitation and coercion
from non-competes and do not generally
bargain over them, are not captured by
the definition.690
Clarity from a compensation
threshold is essential, as without clarity
workers and employers would often be
uncertain about a non-compete’s
enforceability (absent adjudication), and
such uncertainty often fosters in
terrorem effects.691 For example, an
attorney commenter stated that an
exception for executive, management,
and professional employees and those
with access to trade secrets would
inherently lack clarity. A lack of clarity
could also facilitate evasion by
employers, as one law firm commented.
While there may be some workers
other than senior executives as defined
here who may have bargained for
consideration for a non-compete, the
689 The FLSA is the Federal statute establishing
minimum wage, overtime, recordkeeping, and
youth employment standards. See 29 U.S.C. 201 et
seq.
690 See Part IV.C.1.
691 See Part IX.C.
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benefits to workers and employers of a
clear and administrable definition
outweigh the risk that some bargainedfor non-competes are invalidated. In
Part IV, the Commission finds even
bargained-for non-competes tend to
negatively affect competitive conditions.
The Commission finds that the need to
avoid an overinclusive exception that
increases those harms to competitive
conditions outweighs the risk that in
rare instances private parties with noncompetes other than with senior
executives may need to restructure their
employment agreements to utilize less
restrictive alternatives that burden
competition to a lesser degree.
Many commenters sought an
exception for senior executives and/or
highly paid and highly skilled workers
based on justifications such as access to
trade secrets or confidential
information, rather than compensation
thresholds. Some argued that
compensation thresholds do not align
with or allow individualized
assessments of which workers meet a
given justification such as access to
confidential information. One law firm
commented that a bright-line
compensation threshold would
eliminate non-competes for lower wage
workers while allowing non-competes
for what the commenter viewed as
legitimate business purposes. Some
commenters opposed an exception for
senior executives because they believed
‘‘senior executive’’ would be too
difficult to define. In Part V.D.2, the
Commission explains why it is not
adopting an exception for workers based
on their access to trade secrets and other
intellectual property. Further, in the
Commission’s view, eliminating the
need for individualized assessments for
most workers is the primary advantage
of a compensation threshold, not a
drawback (although the Commission
declines to adopt a compensation
threshold alone for reasons stated
previously and in Part V.D.1). However,
the evidence indicates that an exception
for existing senior executive noncompetes is appropriate, which the
Commission defines here.
Commenters, both those supporting
and opposing the rule, pointed out
several issues with compensation
thresholds standing alone. Some
commenters were concerned a
compensation threshold would exclude
some workers, such as many physicians,
from the final rule’s benefits based on
their income level. Two commenters
said an exception would penalize the
advancement of workers near a
threshold and those workers may have
to choose between higher wages or
being free from a non-compete.
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Including the job duties tests alongside
the compensation threshold mitigates
the risk of such cliff effects, assuming
they exist (which is far from clear).
Some commenters asserted a
threshold would need to be updated for
inflation, while one law firm
commented that frequent updates would
make the final rule more difficult to
understand and implement.
Commenters also pointed out the need
to explain when the threshold would be
measured. While adjusting for inflation
could be important to ensure the final
rule continues serving its intended
function if the compensation threshold
governed a total exemption from the
rule (as these commenters assume), it is
unnecessary to the final rule because the
exception adopted applies only to
existing non-competes (i.e., it has only
one-time application). The Commission
explains in Part IV.C.4.b its reasons for
declining to adopt a locality adjustment.
ii. The Final Rule’s Definition of
‘‘Senior Executive’’
Based on the considerations described
in Part IV.C.4.a.i, the Commission
adopts a two-pronged definition of
‘‘senior executive’’ in § 910.1. Under
§ 910.1, a senior executive is a worker
who was in a policy-making position
and who received from a person for the
employment:
• Total annual compensation of at
least $151,164 in the preceding year
(under paragraph (2)(i)); or
• Total compensation of at least
$151,164 when annualized if the worker
was employed during only part of the
preceding year (under paragraph (2)(ii));
or
• Total compensation of at least
$151,164 when annualized in the
preceding year prior to the worker’s
departure if the worker departed from
employment prior to the preceding year
and the worker is subject to a noncompete (under paragraph (2)(iii)).
Paragraph (2)(ii) applies to workers
who were in a policy-making position
during only part of the preceding year,
which includes workers who were hired
or who left a business entity within the
preceding year as well as workers who
were promoted to or demoted from a
policy-making position in the preceding
year. Paragraph (2)(iii) ensures that the
exception applies to senior executives
who departed from the employer more
than one year before the effective date
but are still subject to a non-compete
(e.g., a worker who left more than a year
ago and has a non-compete term of 18
months). To account for those senior
executives, paragraph (2)(iii) considers
total annual compensation in the year
preceding their departure.
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To clarify the definition’s
compensation threshold, the final rule
includes definitions of ‘‘total annual
compensation’’ and ‘‘preceding year.’’
To clarify the job duties test, the final
rule includes definitions of ‘‘policymaking position’’ as well as two
additional terms that are in the
definition of ‘‘policy-making position’’:
‘‘officer’’ and ‘‘policy-making
authority.’’ These definitions are
described in Parts IV.C.4.b and IV.C.4.c.
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b. Defining the Compensation Threshold
Pursuant to § 910.1, the senior
executive exception applies only to
workers who received total annual
compensation of at least $151,164 from
a person for employment in a policymaking position in the most relevant
preceding year. Section 910.1 further
defines ‘‘total annual compensation’’
and ‘‘preceding year,’’ respectively. This
threshold is based on the 85th
percentile of earnings of full-time
salaried workers nationally.692
The Commission draws this line
between more highly paid and less
highly paid workers based on its
assessment of which workers are more
likely to experience exploitation and
coercion and less likely to have engaged
in bargaining in connection with noncompetes and the need to implement a
two-part test. As commenters noted,
there is no single compensation
threshold above which zero workers
will have been coerced and exploited
and below which zero workers will have
been uncompensated for the noncompete that binds them. Based on the
Commission’s expertise and after careful
review of the rulemaking record,
including relevant data, the empirical
research, and the public comments, the
Commission concludes $151,164 in total
annual compensation reflects a
compensation threshold under which
workers are likely to experience such
exploitation and coercion and are less
likely to have bargained for their noncompetes, while providing employers a
readily administrable line. With this
line, market participants can easily
know that workers below the line
cannot be subject to non-competes,
minimizing both in terrorem effects and
eliminating the administrative burden of
conducting a job duties test for those
workers.
The Commission looked to several
sources and suggestions from the
comments in selecting a threshold.
Numerous commenters suggested the
692 BLS, Labor Force Statistics from the Current
Population Survey, https://www.bls.gov/cps///
nonhourly-workers.htm (based on the data from the
table ‘‘Annual average 2023’’).
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Commission should look to the FLSA,
and some specifically recommended the
FLSA regulations’ threshold for highly
compensated employees.693 DOL sets
the compensation threshold for highly
compensated employees in its overtime
regulations under the FLSA based on
earnings of full-time salaried workers.
Since January 2020, based on a
regulation adopted in 2019, that
threshold is $107,432 and reflects the
80th percentile of full-time salaried
workers nationally using combined
2018 and 2019 data.694 In September
2023, DOL proposed raising that
threshold to the 85th percentile of fulltime salaried workers nationally and,
inter alia, updating the amount to reflect
more current earnings data. For 2023,
the 85th percentile of full-time salaried
workers nationally is $151,164.695 The
Commission recognizes DOL’s expertise
in determining who qualifies as a highly
compensated worker and employers’
likely familiarity with DOL regulations.
Given this familiarity, the Commission
borrows from DOL’s definition of
compensation to minimize compliance
burdens on employers.
Another Federal regulatory threshold
for high wage workers noted by
commenters also aligns with the 85th
percentile of full-time salaried workers
nationally in 2023 or approximately
$150,000. In the retirement context, the
IRS sets a threshold for highly
compensated employees at $150,000 for
2023 and $155,000 for 2024.696
Additionally, the District of Columbia
bans non-competes for workers making
less than $150,000.697
693 However, at the time of commenting the
highly compensated employee threshold was
$107,432 and the Department had not proposed a
new threshold.
694 29 CFR 541.601; see also Defining and
Delimiting the Exemptions for Executive,
Administrative, Professional, Outside Sales, and
Computer Employees, NPRM, 88 FR 62152, 62157
(Sept. 8, 2023) (hereinafter ‘‘2023 FLSA NPRM’’).
695 See Bur. Of Labor Stats., Research Series on
Percentiles of Usual Weekly Earnings of Nonhourly
Full-Time Workers, at https://www.bls.gov/cps/
research/nonhourly/earnings-nonhourlyworkers.htm (based on the table ‘‘Annual average
2023’’); 2023 FLSA NPRM at 62153. The DOL
proposed a threshold at $143,998, the 85th
percentile of full-time salaried workers at the time
the 2023 FLSA NPRM was proposed. When the
highly compensated employee test was originally
created in 2004, its $100,000 threshold exceeded
the annual earnings of 93.7% of salaried workers.
Id. at 62159.
696 IRS, Definitions, (Aug. 29, 2023) (Highly
Compensated Employees), https://www.irs.gov/
retirement-plans/plan-participant-employee/
definitions; IRS, COLA Increases for Dollar
Limitations on Benefits and Contributions, (updated
Nov. 7, 2023), https://www.irs.gov/retirementplans/cola-increases-for-dollar-limitations-onbenefits-and-contributions.
697 DC Code sec. 32–581.02(a)(1) (effective Oct. 1,
2022) (where the employee’s compensation is less
than $150,000, or less than $250,000 if the
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The Commission analyzed
occupational wage data to identify a
threshold that would capture more
highly paid senior executives, who are
likely to have bespoke, negotiated noncompetes. BLS’s most recent wage data
indicates that workers in the ‘‘chief
executive’’ category have a median wage
of $209,810.698 Thus, most ‘‘chief
executives,’’ most if not all of whom
would meet the duties component of the
two-part test in this final rule, earn well
above the $151,164 compensation
threshold, ensuring that the threshold is
likely not underinclusive. The
Commission notes that some very highwage occupations have a median wage
above $151,164, including: physicians;
surgeons; computer and information
systems managers; and dentists.699 To
qualify for the exemptions, these
workers would have to also meet the job
duties portion of the senior executive
test, which is appropriate because the
Commission finds that workers in these
professions are often subject to coercion
and exploitation and rarely have
bespoke, negotiated non-competes.
The Commission also considered a
lower wage threshold of approximately
$100,000, which would be closer in
range to the DOL highly compensated
employee threshold of $107,432 that
DOL adopted in 2019. According to
2022 BLS data, the median wage for
‘‘top executives’’ in the U.S. is
$99,240.700 Workers in the ‘‘top
executive’’ category include ‘‘chief
executives,’’ but also include officials
with less authority like ‘‘general and
operations managers.’’ The latter have
an annual median wage of $97,030 with
their earnings at the 75th percentile
being $154,440.701 The Commission
believes that a significant number of
general and operations managers (some
of whom may be in a policy-making
position) likely do not have bespoke,
negotiated non-competes. For example,
a vice president of operations of a local
retail chain with only a few locations
would likely be in this category. The
same vice president—unlike the vice
president of a multinational
employee is a medical specialist, employers may
not require or request that the employee sign an
agreement or comply with a workplace policy that
includes a non-compete).
698 BLS Occupational Employment and Wage
Statistics, supra note 49. These data are from the
May 2022 National XLS table for Chief Executives
under private ownership.
699 See id. These data are from the May 2022
National XLS table for private ownership.
700 Id. These data are from the May 2022 National
XLS table for Top Executives under private
ownership.
701 Id. These data are from the May 2022 National
XLS table for General and Operations Managers
under private ownership.
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corporation—is unlikely to possess the
same bargaining power or to have a
bespoke, negotiated employment
agreement. Moreover, to the extent an
individual’s total compensation is under
$151,164, in the unlikely event the
individual received consideration for
their non-compete, such consideration
is unlikely to represent a significant part
of their compensation.
Similarly, the Commission believes a
$107,432 (or thereabouts) threshold
would be overinclusive and individuals
who likely do not have bespoke,
negotiated non-competes—and who
were likely to be exploited and
coerced—could meet the threshold test.
The $107,432 threshold was adopted
based on earnings in 2018 and 2019.
Adjusting for inflation, $107,432 in June
2019 is the equivalent of $130,158 in
February 2024. Moreover, as noted
previously, BLS data reflect that chief
executives generally earn significantly
more than $130,158. In contrast,
occupations with a median wage below
$151,164 but above $107,432 include:
advertising, marketing, promotions,
public relations, purchasing, and sales
managers; financial managers; software
developers; physician assistants;
optometrists; nurse practitioners; and
pharmacists.702 These are occupations
that the comment record reflects often
experience coercion and exploitation
with respect to non-competes and rarely
have negotiated or compensated noncompetes. A civic organization
commenter also argued that the DOL
regulations’ ‘‘highly compensated
employee’’ definition’s $107,432
threshold was close to the median wage
in some industries and areas and cited
several cases that it said demonstrate
that adopting this threshold would
exclude workers who are vulnerable to
exploitation and coercion.
Accordingly, the Commission adopts
a threshold of $151,164. This threshold,
combined with the duties test, reflects
highly compensated individuals who
are most likely to have the bespoke,
complex non-competes that the
Commission elects to leave undisturbed,
and who the Commission finds are less
likely to experience coercion and
exploitation. This threshold also has
significant administrability benefits, as
it is calculated in accord with
definitions used in FLSA compliance,
with which employers are generally
familiar. This alignment will yield
efficiency benefits that reduce
compliance burdens on employers.
After careful review, the Commission
decided not to choose a threshold
higher or lower in part because as the
compensation threshold in the rule
increased, fewer small businesses and
firms in areas with lower wages and
costs of living would have senior
executives with non-competes who
would qualify for the exception as
compared to larger businesses.
Similarly, the lower a threshold is, the
more workers who live in areas with
higher wages and costs of living would
fall above the threshold.703
The Commission also declines to
adopt a locality adjustment. Some
commenters said that a uniform national
threshold could lead to geographic
disparities because of the different cost
of living and average incomes in
different areas. Geographic disparities
are difficult to resolve, as disparities
often exist not just between States, but,
for example, between urban and rural
areas within a State. The Commission
considered this factor in selecting the
$151,164 threshold compared to other
options. Tailoring a compensation
threshold to every locality or even State
or region would be burdensome and
generate significant confusion for
workers and employers. The
Commission finds that the importance
of a uniform threshold to avoid
confusion and for administrability
outweighs the drawbacks of any
geographic disparities, particularly in
light of comments from employers
stating that the existing patchwork of
State laws is burdensome to navigate.
The Commission notes that neither DOL
nor IRS have adopted thresholds for
highly compensated individuals that
vary geographically. Given the rise in
remote work, applying geographic
variation to employers and workers
would also prove burdensome.
Moreover, total annual compensation
under § 910.1 includes traditional
bonuses or compensation a senior
executive might receive, such as a bonus
tied to performance that is paid
pursuant to any prior contract,
agreement, or promise. The rule also
allows for the entire amount of such
bonuses to be credited to total annual
compensation, thus, increasing the
likelihood of capturing highly
compensated policy-making individuals
across the nation.
The Commission estimates that
approximately 92% of workers will fall
below this compensation threshold,
ensuring that existing non-competes
will be unenforceable for the vast
majority of workers most likely to
experience exploitation and coercion in
connection with non-competes.704 The
703 See
also 2023 FLSA NPRM at 62176.
Steven Ruggles, Sarah Flood, Matthew
Sobek, Daniel Backman, Annie Chen, Grace Cooper,
704 See
702 Id.
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Commission also estimates that
approximately 0.75% of workers are
likely to be considered senior
executives.705 The compensation
threshold reflects the Commission’s
finding that non-competes are very
rarely bargained for, and to the extent
they are, below $151,164 such
bargaining is almost non-existent and
consideration for a non-compete, if any,
is likely to be relatively small. Pairing
the compensation threshold with the
duties test will also minimize
compliance costs, as employers and the
Commission will not need to conduct
job duties tests for those workers whose
compensation fall below the threshold.
i. Definition of ‘‘Total Annual
Compensation’’
Section 910.1 provides that ‘‘total
annual compensation’’ is based on the
worker’s earnings over the preceding
year. It is based on DOL’s regulation
defining ‘‘total annual compensation’’
for highly compensated employees in 29
CFR 541.601(b)(1) and matches DOL’s
determination of what types of
compensation can count towards total
annual compensation for highly
compensated employees.
Section 910.1, like DOL’s definition,
states that total annual compensation
may include salary, commissions,
nondiscretionary bonuses and other
nondiscretionary compensation earned
during that 52-week period.
Nondiscretionary bonuses and
compensation includes compensation
paid pursuant to any prior contract,
agreement, or promise, including
performance bonuses the terms of which
the worker knows and can expect.706
The definition further states that total
annual compensation does not include
board, lodging and other facilities as
defined in 29 CFR 541.606, and does not
include payments for medical
insurance, payments for life insurance,
contributions to retirement plans and
the cost of other similar fringe benefits.
Section 541.606 is part of DOL’s
regulations concerning salary
requirements for employees employed
in a bona fide executive, administrative,
or professional capacity, and applies to
Stephanie Richards, Renae Rodgers, & Megan
Schouweiler. IPUMS USA: Version 15.0 [dataset].
Minneapolis, MN: IPUMS, 2024. https://doi.org/
10.18128/D010.V15.0 (American Community
Survey 2022 data, adjusted to 2023 dollars and
excluding government and non-profit workers).
705 See Part X.F.11.
706 29 CFR 778.211(c); see also U.S. DOL, Fact
Sheet #56C: Bonuses under the Fair Labor
Standards Act (FLSA) (Dec. 2019), https://
www.dol.gov/agencies/whd/fact-sheets/56cbonuses.
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highly compensated employees.707 That
regulation cross-references DOL’s
regulations on wage payments under the
FLSA in 29 CFR part 531, including the
term ‘‘other facilities’’ defined in 29
CFR 531.32.
This regulatory text makes one
modification to the DOL approach to
correspond to the final rule’s purposes
and the non-compete context. Based on
comments received, the Commission
decided not to adopt DOL’s base salary
requirement for highly compensated
employees in its definition of
compensation, which serves a different
purpose than the definition adopted
here. The 2019 DOL regulation requires
that a portion of the worker’s total
annual compensation must be paid on a
salary or fee basis in order to qualify as
a highly compensated employee, to
ensure that the worker receives at least
a base salary and to guard against
potential abuses.708 In contrast, the
exception in § 910.2(a)(2) applies only
to senior executives. The Commission
understands that compensation for
senior executives can be structured in
many different ways. A law firm
commented that senior executive
compensation can be particularly
complex, as base salary may be 20% or
less of a senior executive’s annual pay,
and much of their pay is variable and
does not vest until the end of the year.
One comment said some CEOs receive
only a $1 salary and receive the rest of
their compensation in other forms. The
definition of total annual compensation
in the final rule is designed to allow for
different forms of nondiscretionary
compensation without requiring
employers to pay a particular amount as
salary.
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ii. Definition of ‘‘Preceding Year’’
The definitions of ‘‘senior executive’’
and ‘‘total annual compensation’’ in
§ 910.1 use the term ‘‘preceding year.’’
To provide clarity and facilitate
compliance, the Commission defines the
term ‘‘preceding year’’ in § 910.1 as a
707 29 CFR 541.601(a)(1) (‘‘[A]n employee with
total annual compensation of at least $107,432 is
deemed exempt under section 13(a)(1) of the Act if
the employee customarily and regularly performs
any one or more of the exempt duties or
responsibilities of an executive, administrative or
professional employee as identified in subparts B,
C or D of this part.’’).
708 29 CFR 541.601(b)(1); Defining and Delimiting
the Exemptions for Executive, Administrative,
Professional, Outside Sales and Computer
Employees, 69 FR 22122, 22175 (Apr. 23, 2004)
(‘‘This change will ensure that highly compensated
employees will receive at least the same base salary
throughout the year as required for exempt
employees under the standard tests, while still
allowing highly compensated employees to receive
additional income in the form of commissions and
nondiscretionary bonuses.’’).
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person’s choice among the following
time periods: the most recent 52-week
year, the most recent calendar year, the
most recent fiscal year, or the most
recent anniversary of hire year. The
term ‘‘preceding year’’ is drawn from
DOL’s FLSA regulations in 29 CFR
541.601(b)(4), which states that ‘‘[t]he
employer may utilize any 52-week
period as the year, such as a calendar
year, a fiscal year, or an anniversary of
hire year. If the employer does not
identify some other year period in
advance, the calendar year will apply.’’
Here, the Commission similarly gives
employers flexibility to minimize
compliance costs, as many employers
may have compensation more readily
available based on the last calendar
year, their fiscal year, or the anniversary
of a worker’s hire as part of tax and
other reporting requirements.
iii. Other Proposed Compensation
Thresholds
In seeking to exempt senior
executives and highly paid workers
from the rule altogether, commenters
suggested several possible wage-related
thresholds, including specific dollar
thresholds (e.g., $100,000) not tied to
any existing metric or standard; whether
the worker is an hourly worker; annual
compensation at or above some multiple
of the Federal poverty level or minimum
wage, as in New Hampshire, Maine, and
Rhode Island statutes; State average
wages or ten times the local median
wage; and $330,000, the IRS annual
compensation limit for 401(k)
retirement contributions.709
As explained in Part V.D, the
Commission declines to exempt workers
from the rule altogether based on their
earnings. With respect to defining the
workers whose existing non-competes
the Commission exempts, the
Commission also declines to use these
thresholds or standards. For the reasons
described in this Part IV.C.4.b, the
Commission believes the compensation
threshold it is adopting—in
combination with the job duties test it
is adopting—most effectively isolates
the workers (namely, senior executives)
who are likely to bargain with
employers and receive compensation for
their non-competes and who are
unlikely to be exploited or coerced in
connection with non-competes. While
thresholds based on State lines or
metrics would reflect differences in
wages and costs of living among States,
they would not reflect differences
709 IRS, COLA Increases for Dollar Limitations on
Benefits and Contributions, (updated Nov. 7, 2023),
https://www.irs.gov/retirement-plans/colaincreases-for-dollar-limitations-on-benefits-andcontributions; Treas. Reg. sec. 1.401(a)(17)–1.
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38417
between, for example, urban and rural
areas within a State and could generate
confusion where the threshold varies
between States, in addition to increasing
compliance burdens by requiring
employers to assess which State
adjustment applies—a particularly
challenging task in increasingly crossborder and remote work environments.
Using the local median wage would
generate too much unpredictability for
employers and workers and would face
the same administrability and confusion
challenges to an even higher degree. In
contrast, a uniform national
compensation threshold as part of the
test provides clarity that reduces the
risks of in terrorem effects and increases
ease of compliance. Finally, the
$330,000 threshold is an annual
compensation limit, while the IRS has a
different test to identify highly
compensated employees. A $330,000
threshold would be too high for
employers in areas with lower average
incomes and costs of living and would
likely exclude from the definition many
senior executives who bargained for
their non-compete in exchange for
consideration.
One business recommended an
exception for individuals in the top
10% income tier at their respective
employers to exempt workers at startups that might not be able to
compensate their workers at a high level
but whose workers may still be exposed
to trade secrets. Another proposed using
Internal Revenue Code section 414(q),
defining highly compensated employee
as the highest paid 1% or 250
employees in the corporation. A
percentage threshold, however, has
significant practical issues including
workers entering and exiting, earnings
changes, and factoring in independent
contractors, workers at subsidiaries, or
workers at parent companies. It would
also lead to disparities between large
and small firms, as large firms could use
non-competes for far more workers than
could small firms.
Other commenters pointed to State
laws setting a compensation threshold
to support excluding highly paid
workers from the final rule or suggested
the Commission look to those States as
an example. A public policy
organization that supported a
categorical ban said any threshold
should be at least higher than $100,000,
citing research on Washington’s noncompete reforms that indicated
employers did not value non-competes
up to that threshold.710 The
compensation threshold the
710 Hiraiwa,
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Commission is adopting is higher than
this amount.
c. Defining the Job Duties Component
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i. Definitions of ‘‘Officer,’’ ‘‘PolicyMaking Authority,’’ and ‘‘Policy-Making
Position’’
In NPRM, the Commission suggested
that the final rule’s definition of senior
executive could be based on SEC Rule
3b–7.711 The Commission did not
receive comments specifically
addressing this option, but the
Commission carefully considered
arguments for and against job duties or
job title distinctions as well as
numerous comments on potential job
duties tests, alone or in combination
with compensation thresholds, before
determining that a modified version of
SEC Rule 3b–7’s job duties requirements
would best meet the exception’s goals.
The duties test adopted by the
Commission is precise and more
tailored than the other definitions
proposed by commenters 712 and
minimizes the risk that workers who
likely experienced exploitation and
coercion are included in the definition
of senior executive. The test focuses
primarily on job duties, rather than
solely on job titles, because businesses
do not all use the same job titles, and
a job title might not reflect the worker’s
actual level of authority in an
organization, which is a key indicator of
whether a worker is likely to face
exploitation and coercion or to have
bargained in connection with noncompetes.
Section 910.1 defines ‘‘policy-making
position’’ as a business entity’s
president, chief executive officer or the
equivalent, any other officer of a
business entity who has policy-making
authority, or any other natural person
who has policy-making authority for the
business entity similar to an officer with
policy-making authority. The definition
of ‘‘policy-making position’’ further
states that an officer of a subsidiary or
affiliate of a business entity that is part
of a common enterprise who has policymaking authority for the common
enterprise may be deemed to have a
policy-making position for the business
entity for purposes of this paragraph.
Finally, the definition of ‘‘policymaking position’’ states that a natural
person who does not have policymaking authority over a common
enterprise may not be deemed to have
a policy-making position even if the
person has policy-making authority over
a subsidiary or affiliate of a business
711 17
CFR 240.3b–7; NPRM at 3520.
Part IV.C.4.c.ii.
712 See
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entity that is part of the common
enterprise.
Section 910.1 also defines terms used
in the definition of ‘‘policy-making
position.’’ Section 910.1 defines
‘‘officer’’ as a president, vice president,
secretary, treasurer or principal
financial officer, comptroller or
principal accounting officer, and any
natural person routinely performing
corresponding functions with respect to
any business entity whether
incorporated or unincorporated. To
account for differences in the way
business entities may use and define job
titles, the definition includes workers in
equivalent roles. By incorporating this
definition of ‘‘officer,’’ ‘‘senior
executive’’ applies to workers at the
highest levels of a business entity.
This definition is nearly verbatim of
the SEC definition of ‘‘officer’’ in 17
CFR 240.3b–2. That term ‘‘officer’’ is
used in SEC Rule 3b–7.713 To maintain
consistency with the SEC regulations by
ensuring that ‘‘officer’’ has the same
meaning, and to utilize the SEC’s
expertise in this area, the Commission
adopts the SEC’s definition of ‘‘officer.’’
Section 910.1 defines ‘‘policy-making
authority’’ as final authority to make
policy decisions that control significant
aspects of a business entity or a
common enterprise. The definition
further states that policy-making
authority does not include authority
limited to advising or exerting influence
over such policy decisions or having
final authority to make policy decisions
for only a subsidiary of or affiliate of a
common enterprise.
Accordingly, for a worker to be a
senior executive, in addition to meeting
the compensation threshold, the worker
must be at the level of a president, chief
executive officer or the equivalent,
officer (defined in § 910.1), or in a
position that has similar authority to a
president or officer. Further, an officer
or other qualifying person must have
policy-making authority. Presidents,
chief executive officers, and their
equivalents are presumed to be senior
713 17 CFR 240.3b–7 (‘‘The term executive officer,
when used with reference to a registrant, means its
president, any vice president of the registrant in
charge of a principal business unit, division or
function (such as sales, administration or finance),
any other officer who performs a policy making
function or any other person who performs similar
policy making functions for the registrant.
Executive officers of subsidiaries may be deemed
executive officers of the registrant if they perform
such policy making functions for the registrant.’’);
17 CFR 240.3b–2 (‘‘The term officer means a
president, vice president, secretary, treasury or
principal financial officer, comptroller or principal
accounting officer, and any person routinely
performing corresponding functions with respect to
any organization whether incorporated or
unincorporated.’’).
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executives (i.e., employers do not need
to consider the further element of
‘‘policy-making authority’’). The term
‘‘chief executive officer or the
equivalent’’ was added to the definition
of ‘‘policy-making position’’ to increase
clarity on who was included and to
reflect the wider range of businesses
with various structures that are subject
to the final rule (as compared to SEC
Rule 3b–7). The definition of ‘‘policymaking position’’ includes workers with
equivalent authority because job titles
and specific duties may vary between
companies. This ensures that the term
‘‘senior executive’’ is broad enough to
cover more than just a president or chief
executive officer, especially for larger
companies, as others may have final
policy-making authority over significant
aspects of a business entity.
For example, many executives in
what is often called the ‘‘C-suite’’ will
likely be senior executives if they are
making decisions that have a significant
impact on the business, such as
important policies that affect most or all
of the business. Partners in a business,
such as physician partners of an
independent physician practice, would
also generally qualify as senior
executives under the duties prong,
assuming the partners have authority to
make policy decisions about the
business. The Commission notes that
such partners would also likely fall
under the sale of business exception in
§ 910.3 if the partner leaves the practice
and sells their shares of the practice. In
contrast, a physician who works within
a hospital system but does not have
policymaking authority over the
organization as a whole would not
qualify.
The Commission changed some
aspects of SEC Rule 3b–7 to fit the
context of this rulemaking. First,
because § 910.2(a)(2) will extend to nonpublic companies, unlike SEC
regulations, the final rule’s definition of
‘‘policy-making position’’ does not
include the phrase ‘‘any vice president
of the registrant in charge of a principal
business unit, division or function (such
as sales, administration or finance)’’ in
the definition of ‘‘executive officer.’’ 714
The Commission believes that in the
context of this final rule, in which the
definition is relevant to a broader array
of entities than public companies, that
phrase would encompass workers who,
despite their titles, are among those who
are likely to be coerced or exploited by
non-competes. For example, this aspect
of the definition can be too easily
applied to managers of small
departments, who the Commission finds
714 17
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are unlikely to have bargained for their
non-competes. At the same time, a
manager who does in fact have policymaking authority would meet the
definition of ‘‘officer’’ in § 910.1 and
thus be included in the definition of
senior executives (if the manager also
meets the compensation threshold).
Similarly, depending on the
organization, a vice president may have
final policy-making authority over
significant aspects of a business entity.
The adapted definition is based on
functional job duties rather than formal
job titles.
Second, SEC Rule 3b–7 uses the term
‘‘policy making function’’ as part of its
definition of the types of job duties that
could classify a person as an ‘‘executive
officer.’’ 715 While the term ‘‘policy
making function’’ is undefined in SEC
Rule 3b–7 and other SEC regulations,
the Commission believes that defining
the term ‘‘policy-making authority’’ in
§ 910.1 would provide greater clarity
and facilitate compliance with the final
rule. The final rule applies to a wider
range of business entities than SEC
rules, and the Commission seeks to
minimize the need to consult with
counsel about the meaning of this term.
The Commission is also concerned that
if the term is left undefined, employers
could, inadvertently or otherwise, label
too many workers who have any
involvement in the employer’s policy
making as senior executives, especially
workers without bargaining power.
In defining this term, the Commission
seeks to broadly align with the SEC’s
definition of ‘‘executive officer’’ while
focusing on senior executives in a wider
variety of entities, who are less likely to
experience exploitation and coercion.
As explained in Part IV.C.4.b with
respect to the compensation threshold,
there is no job duties test that will
exclude every worker who experiences
exploitation and coercion with respect
to non-competes while including every
worker who does not. Building on the
SEC definition provides firms and
workers with a more administrable
definition that isolates workers at the
most senior level of an organization.
To ensure that the final rule’s job
duties test for senior executives broadly
aligns with the SEC definition, the
Commission looked to case law
interpreting that SEC definition. Few
courts have interpreted SEC Rule 3b–7’s
‘‘policy making function’’ language,
though some courts view it as an officer
test.716 In the most in-depth discussion,
715 Id.
716 See,
e.g., SEC v. Enters. Solutions, 142 F.
Supp. 2d 561, 570, 574 (S.D.N.Y. 2001) (finding that
a so-called consultant’s role was ‘‘sufficiently
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the U.S. District Court for DC
considered a defendant who was a
member of a corporate body that
discussed important policy decisions
and made recommendations to the CEO,
and supervised and had ‘‘substantial
influence’’ over a major aspect of the
company’s business. However, the court
held that only the CEO, and not the
defendant, had authority to make
company policy and ultimate decisions
on significant issues.717 The court
conducted a fact-intensive analysis of
the defendant’s duties and held that the
defendant did not have the authority to
make policy. The court also held that
the term did not include individuals
solely ‘‘involved in discussing company
strategy and policy.’’ 718
The Commission finds this case law
instructive and thus defines ‘‘policymaking authority’’ in the final rule as
‘‘final authority to make policy
decisions that control significant aspects
of a business entity and does not
include authority limited to advising or
exerting influence over such policy
decisions.’’ Adding this definition
provides stakeholders with additional
clarity as to what type of authority
meets the definition of ‘‘senior
executive’’ and prevents overbroad
application of the definition. It
expressly does not include workers who
merely advise on or influence policy, as
a wide range of workers in an
organization can advise on or influence
policy without being a senior executive.
In order to ensure that lower-level
workers, whom the Commission finds
likely experience exploitation and
coercion, are not included in the
definition of senior executive, policymaking authority is assessed based on
the business as a whole, not a particular
office, department, or other sublevel. It
considers the authority a worker has to
make policy decisions that control a
significant aspect of a business entity
without needing a higher-level worker’s
approval. For example, if the head of a
marketing division in a manufacturing
firm only makes policy decisions for the
marketing division, and those decisions
do not control significant aspects of the
similar to the duties of an officer or director of the
company that his involvement, along with his
history of criminal and regulatory violations, ought
to have been disclosed’’ where the consultant
controlled the company, including hiring the CEO,
arranging loans from companies controlled by the
consultant, negotiating acquisitions, and putting his
daughter on the board in his place); In re Weeks,
SEC Release No. 8313 at *9 (Oct. 23, 2003) (finding
a consultant was de facto in charge of the company
while the officers and directors were figureheads
who lacked authority and influence over the
company).
717 SEC v. Prince, 942 F. Supp. 2d 108, 133–36
(D.D.C. 2013).
718 Id. at 136.
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38419
business (which would likely be
decisions that impact the business
outside the marketing division), that
worker would not be considered a
senior executive. Similarly, in the
medical context, neither the head of a
hospital’s surgery practice nor a
physician who runs an internal medical
practice that is part of a hospital system
would be senior executives, assuming
they are decision-makers only for their
particular division. The definition is
limited to the workers with sufficient
pay and authority such that they are
more likely to have meaningful
bargaining power and actually
negotiated their non-competes.
For the same reason, the Commission
added language to the definitions of
‘‘policy-making authority’’ and ‘‘policymaking position’’ to exclude from the
definition of ‘‘senior executives’’
workers with policy-making authority
over only a subsidiary or affiliate of a
common enterprise who do not have
policy-making authority over the
common enterprise. One commenter
argued that the proposed definition of
‘‘business entity’’ would allow firms to
divide themselves into separate entities
to evade the final rule. In addition to
sharing this concern, the Commission is
concerned that executives of
subsidiaries or affiliates of a common
enterprise 719 could rely on their final
authority to make policy decisions for
only that subsidiary or affiliate to
classify the head of each office as a
senior executive even though that
individual only has authority over one
component of a coordinated common
enterprise. Rather, the worker must have
policy-making authority with respect to
the common enterprise as a whole, not
just a segment of it, to be a senior
executive. Workers who head a
subsidiary or affiliate of a common
enterprise are similar to department
heads; the senior executives controlling
the entire common enterprise control
those individual subsidiaries and
affiliates. As the Commission has
explained, the Commission finds that
department heads and other highly paid
non-senior executives do not have
sufficient bargaining power to avoid
exploitation and coercion and are
unlikely to have bargained in
connection with non-competes. The job
duties test identifies the workers with
the highest levels of authority in an
organization, i.e., the workers most
likely to have bargaining power and a
bespoke, negotiated agreement, and a
719 FTC v. WV Universal Mgmt., LLC, 877 F.3d
1234, 1240 (11th Cir. 2017) (‘‘[C]ourts have justly
imposed joint and several liability where a common
enterprise exists’’).
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common enterprise is effectively a
single organization. Such workers may
have a senior executive job title, but
they are unlikely to meet the job duties
test.
To be considered a ‘‘common
enterprise’’ for the purposes of defining
policy-making authority and policymaking position, the Commission looks
beyond legal corporate entities to
whether there is a common enterprise of
‘‘integrated business entities.’’ 720 This
means that the various components of
the common enterprise have, for
example, one or more of the following
characteristics: maintain officers,
directors, and workers in common;
operate under common control; share
offices; commingle funds; and share
advertising and marketing.721 Therefore,
the definitions of policy-making
authority and policy-making position
include provisions whose purpose is to
exclude those executives of a subsidiary
or affiliate of a common enterprise from
being considered senior executives. For
example, if a business operates in
several States and its operations in each
State are organized as their own
corporation, assuming these businesses
and the parent company meet the
criteria for a common enterprise, the
head of each State corporation would
not be a senior executive. Rather, only
the senior executives of the parent
company (or whichever company is
making policy decisions for the
common enterprise) could qualify as
senior executives for purposes of this
final rule, because they are the workers
with the highest level of authority in the
organization and most likely to have
bargaining power and a bespoke,
negotiated agreement. However, a
worker could qualify as a senior
executive even if they were an executive
of one or more subsidiaries or affiliates
of the common enterprise, so long as
that senior executive exercised policymaking authority over the common
enterprise in its entirety. These
720 See FTC v. E.M.A. Nationwide, Inc., 767 F.3d
611, 636–37 (6th Cir. 2014).
721 See id. (‘‘‘If the structure, organization, and
pattern of a business venture reveal a ‘common
enterprise’ or a ‘maze’ of integrated business
entities, the FTC Act disregards corporateness.
Courts generally find that a common enterprise
exists ‘if, for example, businesses (1) maintain
officers and employees in common, (2) operate
under common control, (3) share offices, (4)
commingle funds, and (5) share advertising and
marketing.’’’) (quoting FTC v. Wash. Data. Res., 856
F. Supp. 2d 1247, 1271 (M.D. Fla. 2012)). In
assessing a common enterprise, ‘‘no one factor is
controlling,’’ and ‘‘federal courts routinely consider
a variety of factors.’’ FTC v. Wyndham Worldwide
Corp., No. CIV.A. 13–1887 ES, 2014 WL 2812049,
at *7 (D.N.J. Jun. 23, 2014); see also Del. Watch Co.
v. FTC, 332 F.2d 745, 746 (2d Cir. 1964) (‘‘[T]he
pattern and frame-work of the whole enterprise
must be taken into consideration.’’)
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provisions are consistent with the
approach taken elsewhere in this final
rule to focus on real-world implications
and authority rather than formal titles,
labels, or designations. This exclusion
from the definitions of ‘‘policy-making
authority’’ and ‘‘policy-making
position’’ applies only to common
enterprises; for subsidiaries or affiliates
that are not part of a common
enterprise, a worker could qualify as a
senior executive if they have policymaking authority over that subsidiary or
affiliate and meet all of the
requirements.
The Commission has also substituted
‘‘business entity’’ in the definitions of
‘‘officer’’ and ‘‘policy-making position’’
where SEC Rule 3b–7 uses the word
‘‘registrant’’ and 17 CFR 240.3b–2 uses
‘‘organization,’’ because ‘‘registrant’’ has
a specific meaning in the SEC context
that is inapplicable to the wider array of
business entities covered by this final
rule and because ‘‘business entity’’ is
defined in § 910.1 and is used
throughout this final rule. The
Commission substituted ‘‘natural
person’’ where SEC Rule 3b–7 and 17
CFR 240.3b–2 use ‘‘person’’ because
‘‘person’’ is separately defined for
purposes of this final rule in § 910.1.
ii. Other Proposed Job Duties Tests
The FLSA
Numerous commenters suggested
basing a job duties test on the categories
of occupations that are exempt from
requirements under the FLSA. Some
commenters suggested using only some
of the exemptions such as executive
employees,722 administrative
employees, learned or creative
professionals, or workers in the practice
of medicine.723 DOL’s regulations also
set a salary threshold at not less than
$684 per week ($35,568 annually),724
though other commenters suggested
using a higher compensation threshold.
One civic organization opposed
applying any FLSA exemptions, stating
that the FLSA provides numerous
exemptions that do not relate to any
non-compete policy considerations, and
an exception or more lenient standards
for FLSA-exempt workers would not
solve the problems caused by noncompetes. It opposed using the FLSA’s
executive, administrative, or
professional exemptions, arguing that
updates to the FLSA’s salary threshold
722 See
29 CFR 541.100(a).
DOL, Fact Sheet #17A: Exemption for
Executive, Administrative, Professional, Computer
& Outside Sales Employees Under the Fair Labor
Standards Act (FLSA) (revised Sept. 2019), https://
www.dol.gov/agencies/whd/fact-sheets/17aovertime.
724 Id.
723 See
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are often delayed and outdated, often
falling below the poverty threshold, and
the duties test serves as a loophole for
wage and hour protections.
Commenters offered several reasons
for adopting the FLSA exemptions:
these categories are already wellestablished in Federal law; nonexempt
workers under the FLSA tend not to
have access to trade secrets or be able
to take an employer’s goodwill and are
thus less likely to harm the employer;
the exemptions would capture both
wage and job duties tests; some States
use a similar standard to the FLSA in
their non-compete statutes; and the
exemptions would ban non-competes
for low-skilled workers for whom there
are insufficient justifications for noncompetes. An employment attorney also
pushed back on the NPRM’s concerns
that the FLSA exemptions could enable
misclassification,725 asserting that
misclassification under the FLSA is
unlawful and penalized, and thus
usually inadvertent.
The Commission does not adopt the
FLSA exemptions for purposes of this
final rule because it would exempt
millions of non-competes that harm
competition and workers. For example,
the FLSA exempts most highly paid and
highly skilled workers,726 who the
Commission finds experience
exploitation and coercion (except where
those workers are also senior
executives).727 The Commission also
adopts brighter-line rules than the FLSA
to ease compliance burdens and address
in terrorem effects that result from
uncertainty about whether a noncompete is unenforceable.728 Although
the Commission does not believe that
the FLSA job duties tests are
appropriate for this final rule, it does
view the FLSA wage threshold
methodology for ‘‘highly compensated
employees’’ as a useful benchmark.729
Trade Secret and Confidential
Information Exceptions
Numerous commenters urged the
Commission not to ban non-competes
for workers who have access to trade
secrets and confidential information,
often noting this justification is
commonly used for highly paid and
highly skilled workers, including senior
executives. One comment expressly
stated that this exception should apply
regardless of earnings, though many
725 See
NPRM at 3511.
2023 FLSA NPRM at 62190 (estimating
that 36.4 million salaried, white-collar employees
currently qualify as FLSA-exempt executive,
administrative, or professional employees).
727 See Part IV.C.1.
728 See Part IX.C.
729 See Part IV.C.4.b.
726 See
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others did not mention compensation
thresholds. One business suggested a
bright-line rule for the types of
confidential business information that
can be protected by a non-compete
based on existing State statutes, to
increase certainty about what is
allowed. Commenters suggested
exceptions based on a variety of job
types they viewed as more likely to be
exposed to trade secrets and
confidential information, including all
highly skilled workers; key scientific,
technical, R&D, or sales workers; or
workers with highly detailed knowledge
of business and marketing plans. The
Commission explains why it is not
adopting exceptions based on access to
trade secrets or other intellectual
property in Parts V.D.1 and V.D.2.
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Additional Proposed Job Duties and Job
Title Tests
The Commission carefully considered
several other proposed tests. The NPRM
stated that the Commission could base
the definition of senior executive on
SEC Regulation S–K’s definition of
senior executives.730 Commenters did
not discuss this potential option. The
Commission is not adopting this
approach because it bears little relation
to the likelihood that a senior executive
bargained for a non-compete, and
because it would designate roughly
seven individuals per company as
‘‘senior executives’’ regardless of their
compensation level or the size of the
company, meaning it would not apply
equally among employers or workers.731
For example, a ten-person company
could potentially use non-competes for
most of its workforce irrespective of
whether they are senior executives,
whereas a company with ten thousand
employees would be limited to the same
number.732
One commenter proposed adopting a
definition similar to the tax code
provision on ‘‘golden parachute
payments.’’ 733 Several commenters
drafted their own definition of senior
executive based on job duties, titles, or
ownership status, such as C-suite
730 See NPRM at 3520 (citing 17 CFR
229.402(a)(3)).
731 See 17 CFR 229.402(a)(3).
732 Additionally, while the reporting obligations
of public companies may provide them with an
incentive to avoid generating a profusion of ‘‘senior
executives,’’ privately held companies would not
face a similar constraint and could potentially avoid
any ‘‘per-company’’ limitations through corporate
restructuring.
733 This provision determines who is an ‘‘officer’’
‘‘on the basis of all the facts and circumstances in
the particular case (such as the source of the
individual’s authority, the term for which the
individual is elected or appointed, and the nature
and extent of the individual’s duties) . . . .’’ Treas.
Reg. sec. 1.280G–1, Q/A–18.
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executives and their immediate
subordinates, partners and equity
holders, managers, workers involved in
strategic decision-making, and more.
The Commission carefully considered
each proposed definition and how it
would operate in practice before
selecting the two-part test. Elements of
some of these proposals, such as
strategy development or decisionmaking, are also similar to the job duties
test the Commission is finalizing. The
Commission believes that definitions
based on job titles alone would be
inadequate because, as one industry
association commented, employers
define job titles differently, and a title
might not accurately reflect a worker’s
job duties. The other definitions
proposed by commenters, such as the
provision on golden parachute
payments, would generally require a
more fact-intensive analysis than the job
duties test the Commission is adopting.
Market participants would need to
conduct the analysis for more workers,
including workers who are exploited
and coerced by non-competes. A more
fact-intensive analysis would require
more resources for litigation and is thus
likely to have in terrorem effects for
lower-wage workers.734 Moreover, many
of these proposals would exempt more
workers than the Commission’s
definition, such as managers, even
though workers in such roles and
occupations are often coerced and
exploited by non-competes.
As explained in this Part, the
Commission pairs a relatively easy-toapply job duties test with a
compensation threshold to maximize
administrability and clarity while
identifying those senior executives most
likely to have bargained for noncompetes. In addition, proposals to
except partners, shareholders, and
similar groups are likely covered by the
sale of business exception if they sell
their share of the business upon leaving.
5. Prohibitions in Section 910.2(a)(2)
Based on the totality of the evidence,
including its review of the empirical
literature, its review of the full comment
record, and its expertise in identifying
practices that harm competition, the
Commission adopts § 910.2(a)(2), which
defines unfair methods of competition
related to non-competes with respect to
senior executives. Section 910.2(a)(2)
provides that, with respect to a senior
executive, it is an unfair method of
competition for a person: (i) to enter
into or attempt to enter into a noncompete clause; (ii) to enforce or
attempt to enforce a non-compete clause
734 See
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38421
entered into after the effective date; or
(iii) to represent that the senior
executive is subject to a non-compete
clause, where the non-compete clause
was entered into after the effective date.
Part IV.A.1 sets forth the Commission’s
determination that the foregoing
practices are unfair methods of
competition under section 5, and Part
IV.C.2 explains the findings that provide
the basis for this determination.
Section 910.2(a)(2) uses similar
language as § 910.2(a)(1); however, there
are two key differences. First, the
prohibition in § 910.2(a)(2)(ii) on
enforcing or attempting to enforce a
non-compete applies only to noncompetes entered into after the effective
date. Second, the prohibition in
§ 910.2(a)(2)(iii) on representing that a
senior executive is subject to a noncompete applies only where the noncompete was entered into after the
effective date. Sections 910.2(a)(2)(ii)
and (iii) include this language because,
for the reasons described in Part IV.C.3,
the Commission has determined not to
prohibit existing non-competes with
senior executives—i.e., non-competes
entered into before the effective date—
from remaining in effect.
Otherwise, the explanation of the
three prongs of § 910.2(a)(1) in Part
IV.B.4—relating to issues such as, for
example, what ‘‘attempt to enter into’’
and ‘‘attempt to enforce’’ mean, and
what conduct the ‘‘representation’’
prong applies to—is applicable to the
corresponding language in § 910.2(a)(2).
The good-faith exception in § 910.3 is
also applicable to the relevant
prohibitions with respect to senior
executives and is explained in Part V.C.
D. Claimed Justifications for NonCompetes Do Not Alter the
Commission’s Finding That NonCompetes Are an Unfair Method of
Competition
For the reasons described in Parts
IV.B and IV.C, the Commission
determines that certain practices related
to non-competes are unfair methods of
competition under section 5. In this Part
IV.D, the Commission finds the claimed
justifications for non-competes do not
alter the Commission’s determination
that non-competes are an unfair method
of competition.
As noted in Part II.F, some courts
have declined to consider justifications
altogether and the Commission and
courts have consistently held that
pecuniary benefit to the party
responsible for the conduct in question
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is not cognizable as a justification.735
However, where defendants raise
justifications as an affirmative defense,
they must be legally cognizable,736 and
non-pretextual,737 and any restriction
used to bring about the benefit must be
narrowly tailored to limit any adverse
impact on competitive conditions.738
In the NPRM, the Commission
considered the commonly cited
business justifications for non-competes
and preliminarily found they did not
alter the Commission’s determination
that non-competes are an unfair method
of competition.739 The Commission has
reviewed and considered the comments
on its analysis of the justifications for
non-competes. For two reasons, the
claimed justifications for non-competes
do not alter the Commission’s
determination that non-competes are an
unfair method of competition. First,
employers have more narrowly tailored
alternatives to non-competes for
protecting valuable investments that
tend to negatively affect competitive
conditions to a lesser degree. Second,
the asserted benefits from the claimed
business justifications from noncompetes do not justify the considerable
harm from non-competes.
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1. Claimed Business Justifications for
Non-Competes and Empirical Evidence
Claimed business justifications for
non-competes relate to increasing
735 Atl. Refin. Co., 381 U.S. at 371 (considering
that defendant’s distribution contracts at issue
‘‘may well provide Atlantic with an economical
method of assuring efficient product distribution
among its dealers’’ and holding that the
‘‘Commission was clearly justified in refusing the
participants an opportunity to offset these evils by
a showing of economic benefit to themselves’’); FTC
v. Texaco, 393 U.S. 223, 230 (1968) (following the
same reasoning as Atlantic Refining and finding
that the ‘‘anticompetitive tendencies of such system
[were] clear’’); L.G. Balfour Co. v. FTC, 442 F.2d 1,
15 (7th Cir. 1971) (‘‘While it is relevant to consider
the advantages of a trade practice on individual
companies in the market, this cannot excuse an
otherwise illegal business practice.’’). For
provisions of the antitrust laws where courts have
not accepted justifications as part of the legal
analysis, the Commission will similarly not accept
justifications when these claims are pursued
through section 5.
736 See, e.g., FTC v. Ind. Fed’n of Dentists, 476
U.S. 447, 463 (1986); Fashion Originators’ Guild of
Am. v. FTC, 312 U.S. 457, 467–68 (1941); FTC v.
Superior Ct. Trial Lawyers Ass’n, 493 U.S. 411,
423–24 (1990).
737 See, e.g., Ind. Fed’n of Dentists, 476 U.S. at
464. See also United States v. Microsoft Corp., 253
F.3d 35, 62–64, 74 (D.C. Cir. 2001); Eastman Kodak
Co. v. Image Tech. Svcs., 504 U.S. 451, 484–85
(1992); Aspen Skiing Co. v. Aspen Highlands Skiing
Corp., 472 U.S. 585, 608–10 (1985).
738 NCAA v. Alston, 594 U.S. 69, 99–104 (2021);
Polygram Holding, Inc. v. FTC, 416 F.3d 29, 38
(D.C. Cir. 2005); 2000 Collaboration Guidelines, sec.
3.36b. See also Union Circulation Co. v. FTC, 241
F.2d 652, 658 (2d Cir. 1957) (‘‘The agreements here
went beyond what was necessary to curtail and
eliminate fraudulent practices.’’).
739 NPRM at 3504–08.
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employers’ incentives to make
productive investments, such as
investments in worker human capital
(worker training), client and customer
attraction and retention, or in creating
or sharing trade secrets or other
confidential information with workers.
According to these asserted
justifications, without non-competes,
employment relationships are subject to
an investment hold-up problem.
Investment hold-up would occur where
an employer—faced with the possibility
that a worker may depart after receiving
some sort of valuable investment or
obtaining valuable information—opts
not to make that investment in the first
place, thereby decreasing the firm’s
productivity and overall social welfare.
For example, according to this claimed
justification, an employer may be more
reticent to make capital investments or
invest in workers’ human capital by
training its workers if it knows the
worker may depart for or may establish
a competing firm. Similarly,
commenters argued that employers may
decrease investments or experience
harm if a worker takes a trade secret or
other confidential information to a
competitor.
Courts have cited these justifications
when upholding non-competes under
State common law and in cases
challenging non-competes under the
Sherman Act.740 However, courts have
not considered non-competes’ aggregate
harms, and neither legislatures nor
courts have had occasion to consider
these justifications in the context of
section 5. The Commission has
considered them and found them
unavailing in cases in which it has
successfully obtained consent decrees
against non-competes alleged to be an
unfair method of competition in
violation of section 5.741
There is some empirical evidence that
non-competes increase investment in
human capital of workers, capital
investment, and R&D investment.
However, the Commission also finds
that there are alternatives that burden
740 See, e.g., United States v. Addyston Pipe &
Steel Co., 85 F. 271, 281 (6th Cir. 1898); Polk Bros.,
Inc. v. Forest City Enters., 776 F.2d 185, 189 (7th
Cir. 1985).
741 See FTC, In the Matter of O–I Glass, Inc and
In the Matter of Ardagh Group S.A., Ardagh Glass
Inc., and Ardagh Glass Packaging Inc., Analysis of
Agreements Containing Consent Order to Aid
Public Comment, FTC File No. 2110182 (Jan. 4,
2023) at 6–7; FTC, In the Matter of Prudential
Security, Inc., et al., Analysis of Agreement
Containing Consent Order to Aid Public Comment,
FTC File No. 2210026 (Jan. 4, 2023) at 7; FTC, In
the Matter of Anchor Glass Container Corp. et al.,
FTC File No. 2210182 Analysis of Agreement
Containing Consent Order to Aid Public Comment
(Mar. 15, 2023) at 6.
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competition to a lesser degree,742 and,
in any event, these claimed benefits do
not justify the harms from noncompetes.743
As explained in the NPRM, a study by
Evan Starr finds that moving from mean
non-compete enforceability to no noncompete enforceability would decrease
the number of workers receiving
training by 14.7% in occupations that
use non-competes at a high rate (relative
to a control group of occupations that
use non-competes at a low rate).744 The
study further finds that changes in
training are primarily due to changes in
firm-sponsored, rather than employeesponsored, training.745
Firm-sponsored training is the type of
investment in human capital that noncompetes are often theorized to protect,
as the firm may be unwilling to make an
unprotected investment. However, the
study does not distinguish between core
training, i.e., training required to
perform job duties, and advanced
training, i.e., training with potential to
increase productivity beyond the
baseline requirements for job
performance. When non-competes are
more enforceable, workers may receive
additional core training rather than
advanced training, but this may actually
reflect a reduction in efficiency. When
non-competes are more enforceable,
labor mobility decreases and workers
may also move to new industries to
avoid potentially triggering noncompete clause violations (as discussed
in Part IV.B.2.b.ii), both of which make
experienced workers less often available
for hire. Firms therefore may need to
train workers at a greater rate because
they will hire inexperienced workers
who require more core training. On the
other hand, advanced training can be
associated with productivity gains, and
firms using non-competes may increase
rates of advanced training for
experienced workers because noncompetes increase the likelihood that
firms receive a return on the training
investment. The study does not
distinguish between these types of
training, and thus leaves unclear
whether the observed increases in
training reflect productivity gains or
losses (or neither in net).
Additionally, the Starr study uses
data on the use of non-competes,
comparing high- and low-use
occupations, rather than changes in
enforceability; however, the study does
not examine differences between
individuals who are bound by non742 See
Part IV.D.2.
Part IV.D.3.
744 Starr, supra note 445 at 796–97.
745 Id. at 797.
743 See
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competes and individuals who are not.
This study is the only study that
attempts to identify the causal link
between non-competes and worker
human capital investment, and the
Commission gives it some weight,
though not as much weight as it would
receive if it examined changes in noncompete enforceability. The
Commission also weights it less highly
because it does not distinguish between
core and advanced training.
The second study, by Jessica Jeffers,
finds knowledge-intensive firms invest
substantially less in capital equipment
following decreases in the enforceability
of non-competes, though the effect is
much more muted (and statistically
insignificant) when considering all
industries.746 While firms may invest in
capital equipment for many different
reasons, Jeffers examines this outcome
(as opposed to labor-focused outcomes)
to avoid looking at R&D expenditure as
a whole, which is in large part
composed of labor expenses. This
allows the study to isolate the effects of
non-compete enforceability on
investment from other effects of noncompetes, such as reduced worker
earnings.
Jeffers finds that there are likely two
mechanisms driving these effects: first,
that firms may be more likely to invest
in capital when they train their workers
because worker training and capital
expenditure are complementary (i.e., the
return on investment in capital
equipment is greater when workers are
more highly trained); and second, that
non-competes reduce competition, and
firms’ returns to capital expenditure are
greater when competition is lower,
incentivizing firms to invest more in
capital.747 Jeffers does not find any
impact of non-compete enforceability on
R&D expenditure (intangible
investment). The sample in this study’s
examination of capital investment is
limited to incumbent firms, and the
study also finds decreases in new firm
entry due to increases in non-compete
enforceability. The study therefore does
not offer clear insights into the overall
net effect on capital investment (which
includes investment by incumbent firms
as well as investment by entering firms).
Additionally, the Commission notes that
if Jeffers’ hypothesis—that firms
increase investment in capital because
of decreased competition—is correct,
then this increased capital investment
746 Jeffers, supra note 450 at 28. Jeffers reports
34%–39% increases in capital investment due to
increases in non-compete enforceability at
knowledge-intensive firms in the 2024 version of
the study, and the Commission calculates increases
of 7.9% across all sectors (see Part X.F.9.a.i).
747 Id. at 29.
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may not necessarily reflect increased
economic efficiency. Jeffers uses
multiple changes in non-compete
enforceability, measured in a binary
fashion, and the Commission therefore
gives this study substantial weight, but
less weight than studies which
additionally measure enforceability in a
non-binary fashion.
Two studies published after the
release of the NPRM also assess the
effects of non-competes on firm
investments. A study by Johnson,
Lipsitz, and Pei revisits the form of the
regressions used by Jeffers. The authors
find that greater non-compete
enforceability increases R&D
expenditure.748 This is consistent with
the NPRM’s preliminary finding, and
the finding of the Jeffers study, that
there is evidence that non-competes
increase employee human capital
investment and other forms of
investment. The Commission gives this
study substantial weight because it
examines multiple changes in noncompete enforceability measured in a
non-binary fashion.
Similarly, a study by Liyan Shi
examines the relationship between noncompete enforceability, the use of noncompetes among executives, and firm
investment.749 Shi finds that intangible
capital (expenditure on R&D) is
positively associated with use of noncompetes, especially in States that
enforce non-competes more strictly.
However, Shi finds that—unlike in the
Jeffers study—physical capital
expenditure has no relationship with
the use of non-competes, even in high
enforceability States. The Commission
notes that this evidence pertains
specifically to non-competes with
highly paid senior executives: the
executives in Shi’s study earned
$770,000 in cash compensation, on
average. The Commission also notes that
this evidence arises from analysis of
non-compete use coupled with noncompete enforceability. The
Commission therefore gives less weight
to these empirical findings.
As the NPRM described, there are also
two studies examining the impact of
non-compete use (as opposed to noncompete enforceability) on investment.
However, these studies simply compare
differences between samples of workers
that do and do not use non-competes, a
methodology the Commission gives less
weight to.750 The first is a study by
Starr, Prescott, and Bishara using their
2014 survey of non-compete use. They
find no statistically significant
748 Johnson,
Lipsitz, and Pei, supra note 526.
supra note 84.
750 See Part IV.A.2.
749 Shi,
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association with either training or the
sharing of trade secrets (after inclusion
of control variables) but do not examine
other investment outcomes.751 The
second study, by Johnson and Lipsitz,
examines investment in the hair salon
industry. That study finds that firms
that use non-competes train their
employees at a higher rate and invest in
customer attraction through the use of
digital coupons (on so-called ‘‘deal
sites’’) to attract customers at a higher
rate, both by 11 percentage points.752
As the Commission stated in the
NPRM, it gives these two studies (the
2021 Starr, Prescott, and Bishara studies
and the 2021 Johnson and Lipsitz
studies) minimal weight, because they
do not necessarily represent causal
relationships, a point recognized by the
authors of both of these studies.753
Similar to other studies of non-compete
use—as opposed to changes in noncompete enforceability—these studies
are less reliable because the use of noncompetes and the decision to invest may
be jointly determined by other
characteristics of the firms, labor
markets, or product markets.754
One additional study, by Younge and
Marx, finds that the value of publicly
traded firms increased by 9% due to an
increase in non-compete
enforceability.755 As the Commission
noted in the NPRM, the authors
attribute this increase to the value of
retaining employees, which comes with
the negative effects to parties other than
the firm (employees, competitors, and
consumers) described in Parts IV.B and
IV.C. As the NPRM stated, if the benefits
to the firm arise primarily from
reductions in labor costs, then the
increase in the value of firms is in part
a transfer from workers to firms and is
therefore not necessarily a benefit of
non-competes. However, the authors do
not explore the extent to which
increases in firm value arise from
decreases in labor costs. The authors
additionally note that since the time
frame used in the study is short, ‘‘there
may be deleterious effects of noncompetes in the long run’’ which are
absent in their findings.756 This study
751 Starr,
Prescott, & Bishara, supra note 68 at 76.
& Lipsitz, supra note 80 at 711.
753 Starr, Prescott, & Bishara, supra note 68 at 73;
Johnson & Lipsitz, supra note 80 at 711.
754 See Part IV.A.2 (describing the analytical
framework the Commission is applying to weigh the
empirical studies, including why it assigns greater
weight to studies assessing changes in non-compete
enforceability than to studies of non-compete use).
755 Kenneth A. Younge & Matt Marx, The Value
of Employee Retention: Evidence from a Natural
Experiment, 25 J. Econ. & Mgmt. Strategy 652
(2016).
756 Id. at 674.
752 Johnson
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does not address the effects of noncompetes on firm investments
specifically.
As the Commission stated in the
NPRM, it is unaware of any evidence of
a relationship between the
enforceability of non-competes and the
rate at which companies invest in
creating or sharing trade secrets.757
Similarly, the Commission is unaware
of any evidence non-competes reduce
trade secret misappropriation or the loss
of other types of confidential
information, difficult areas for
researchers to study given the lack of
reliable data on firms’ trade secrets and
confidential information.758 As
explained in Part IV.D.2, even assuming
non-competes do reduce
misappropriation or information loss,
the Commission finds that there are
alternatives to protect these investments
that burden competition to a lesser
degree.
2. Employers Have Alternatives to NonCompetes for Protecting Valuable
Investments
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a. The Proposed Rule
In the NPRM, the Commission
preliminarily found that employers have
alternatives to non-competes for
protecting valuable investments.759 The
Commission stated that these
alternatives may not be as protective as
employers would like, but they
reasonably accomplish the same
purposes as non-competes while
burdening competition to a less
significant degree.760
The Commission stated that trade
secret law—a form of intellectual
property law that protects confidential
business information—already provides
significant legal protections for an
employer’s trade secrets.761 The
Commission also stated that employers
that seek to protect valuable
investments are able to enter into NDAs
with their workers. NDAs, which are
also commonly known as
confidentiality agreements, are contracts
in which a party agrees not to disclose
757 Recent evidence suggests that trade secret
litigation does not increase following bans on noncompetes. Brad N. Greenwood, Bruce Kobayashi,
Evan Starr, Can You Keep a Secret? Banning
Noncompetes Does Not Increase Trade Secret
Litigation (2024), https://papers.ssrn.com/sol3/
papers.cfm?abstract_id=4771171. The Commission
does not rely on this study to support the findings
described in this Part IV.D.
758 See, e.g., David S. Levine & Christopher B.
Seaman, The DTSA at One: An Empirical Study of
the First Year of Litigation Under the Defend Trade
Secrets Act, 53 Wake Forest L. Rev. 106, 120–22
(2018).
759 NPRM at 3505–07.
760 Id.
761 Id. at 3505–06.
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or use information designated as
confidential.762 The Commission further
stated that, if an employer wants to
prevent a worker from leaving right after
receiving valuable investment in their
human capital, the employer can sign
the worker to an employment contract
with a fixed duration.763 In addition, the
Commission stated that employers that
wish to retain their workers can also pay
their workers more, offer them better
hours or better working conditions, or
otherwise improve the conditions of
their employment—i.e., compete to
retain their labor services.764
The Commission also noted that in
three States—California, North Dakota,
and Oklahoma—employers generally
cannot enforce non-competes, so they
must protect their investments using
one or more of these less restrictive
alternatives.765 The Commission stated
that the economic success in these three
States of industries that are highly
dependent on trade secrets and other
confidential information illustrates that
companies have viable alternatives to
non-competes for protecting valuable
investments.766
b. The Commission’s Final Findings
Based on the totality of the evidence,
including its review of the empirical
literature, its review of the full comment
record, and its expertise in identifying
practices that harm competition, the
Commission in this final rule finds that
the asserted business justifications for
non-competes do not alter the
Commission’s determination that noncompetes are an unfair method of
competition. Employers have
alternatives to non-competes for
protecting valuable investments that
burden competition to a less significant
degree. Rather than restraining a broad
scope of beneficial competitive
activity—by barring workers altogether
from leaving work with the employer or
starting a business and by barring
competing employers and businesses
from hiring those workers—these
alternatives are much more narrowly
tailored to limit impacts on competitive
conditions.
For the protection of trade secrets and
other confidential information, these
alternatives include enforcement of
intellectual property rights under trade
secret and patent law, NDAs, and
invention assignment agreements.
762 Id.
763 Id.
at 3506–07.
at 3507.
764 Id.
765 Since the NPRM was issued, Minnesota has
become the fourth State to make non-competes
unenforceable. See Minn. Stat. Ann. sec. 181.988
(effective July 1, 2023).
766 NPRM at 3507.
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Employers also have alternative
mechanisms to protect their investments
in worker human capital, including
fixed duration contracts, and competing
on the merits to retain workers by
providing better pay and working
conditions.
The experiences of certain States in
banning non-competes bolster this
conclusion. Non-competes have been
void in California, North Dakota, and
Oklahoma since the 1800s.767 In these
three States, employers generally cannot
enforce non-competes, so they must
protect their investments using one or
more less restrictive alternatives. There
is no evidence that employers in these
States have been unable to protect their
investments (whether in human capital,
physical capital, intangible assets, or
otherwise) or have been disincentivized
from making them to any discernible
degree. Rather, in each of these States,
industries that depend on highly trained
workers and trade secrets and other
confidential information have
flourished. California, for example, is
home to four of the world’s ten largest
companies by market capitalization, and
it also maintains a vibrant startup
culture.768 Technology firms are highly
dependent on highly-trained and skilled
workers as well as protecting trade
secrets and other confidential
information—and, since the 1980s,
California has become the epicenter of
the global technology sector, even
though employers cannot enforce noncompetes.769 Indeed, researchers have
posited that high-tech clusters in
California may have been aided by
increased labor mobility due to the
unenforceability of non-competes.770 In
767 Non-competes have been void in California
since 1872, in North Dakota since 1865, and in
Oklahoma since 1890. See Ronald J. Gilson, The
Legal Infrastructure of High Technology Industrial
Districts: Silicon Valley, Route 128, and NonCompete Clauses, 74 N.Y.U. L. Rev. 575, 616 (1999)
(California); Werlinger v. Mut. Serv. Casualty Ins.
Co., 496 NW2d 26, 30 (N.D. 1993) (North Dakota);
Brandon Kemp, Noncompetes in Oklahoma Mergers
and Acquisitions, 88 Okla. Bar J. 128 (2017)
(Oklahoma). Minnesota also recently prohibited
non-competes, through a law that took effect in July
2023. See Minn. Stat. sec. 181.988. However,
Minnesota’s experience is too new to draw
conclusions about the ability of industries that
depend on trade secrets to thrive where noncompetes are unenforceable.
768 Josh Dylan, What Is Market Cap In Stocks?,
Nasdaq.com (Aug, 12, 2022), https://
www.nasdaq.com/articles/whatmarketcap-in-stocks;
Ewing Marion Kauffman Found., State
Entrepreneurship Rankings, https://www..com/
public_affairs//02/25/_foundation_state_
entrepreneurship_rankings.html.
769 See, e.g., Gilson, supra note 767 at 594–95.
770 See, e.g., id. at 585–86, 590–97; Bruce Fallick,
Charles A. Fleischman, & James B. Rebitzer, JobHopping in Silicon Valley: Some Evidence
Concerning the Microfoundations of a HighTechnology Cluster, 88 Rev. Econ. & Statistics 472,
477 (2006).
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North Dakota and Oklahoma, the energy
industry has thrived, and firms in the
energy industry depend on highlytrained workers as well as the ability to
protect trade secrets and other
confidential information.
The Commission finds that the
economic success in these three States
of industries that are highly dependent
on highly trained workers, trade secrets,
and other confidential information
illustrates that non-competes are not
necessary to protect employers’
legitimate interests in trained workers or
securing their intellectual property and
confidential information. These
alternatives are available to employers
and viable both with respect to senior
executives and to workers other than
senior executives. The Commission
addresses these alternatives in this Part
IV.D.2.b and summarizes and responds
to the comments on these alternatives in
Part IV.D.2.c.
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i. Trade Secret Law
The Commission finds that trade
secret law provides employers with a
viable, well-established means of
protecting investments in trade secrets,
without the need to resort to the use of
non-competes with their attendant
harms to competition. Trade secret law
is a form of intellectual property law
that is specifically focused on providing
employers with the ability to protect
their investments in trade secrets.771
Forty-seven States and DC have
adopted the Uniform Trade Secrets Act
(‘‘UTSA’’).772 The UTSA provides a
civil cause of action for trade secret
misappropriation, which refers to
disclosure or use of a trade secret by a
former employee without express or
implied consent.773 The UTSA also
provides for injunctive and monetary
relief, including compensatory damages,
punitive damages, and attorney’s
fees.774
In addition, in 2016, Congress enacted
the Defend Trade Secrets Act of 2016
(‘‘DTSA’’), which established a civil
cause of action under Federal law for
trade secret misappropriation.775 The
DTSA brought the rights of trade secret
owners ‘‘into alignment with those long
771 Brian T. Yeh, Protection of Trade Secrets:
Overview of Current Law and Legislation, Cong.
Rsch. Serv. 4 (Apr. 22, 2016) (Report R43714),
https://sgp.fas.org/crs/secrecy/R43714.pdf.
772 See Levine & Seaman, supra note 758 at 113.
The three States that have not adopted the UTSA
offer protection to trade secrets under a different
statute or under common law. Yeh, supra note 771
at 6 n.37.
773 Uniform Trade Secrets Act with 1985
Amendments (Feb. 11, 1986) at sec. 1(2).
774 Id. at secs. 2–4.
775 Defend Trade Secrets Act of 2016, Public Law
114–153, 130 Stat. 376, 379 (2016).
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enjoyed by owners of other forms of
intellectual property, including
copyrights, patents, and trademarks.’’ 776
Similar to State laws modeled on the
UTSA, the DTSA authorizes civil
remedies for trade secret
misappropriation, including injunctive
relief, damages (including punitive
damages), and attorney’s fees.777 The
DTSA also authorizes a court, in
‘‘extraordinary circumstances,’’ to issue
civil ex parte orders for the ‘‘seizure of
property necessary to prevent the
propagation or dissemination of the
trade secret that is the subject of the
action.’’ 778 There is thus a clear Federal
statutory protection that specifically
governs protection of trade secrets.
Trade secret theft is also a Federal
crime. The Economic Espionage Act of
1996 (‘‘EEA’’) makes it a Federal crime
to steal a trade secret for either (1) the
benefit of a foreign entity (‘‘economic
espionage’’) or (2) the economic benefit
of anyone other than the owner (‘‘theft
of trade secrets’’).779 The EEA
authorizes substantial criminal fines
and penalties for these crimes.780 The
EEA further authorizes criminal or civil
forfeiture, including of ‘‘any property
constituting or derived from any
proceeds obtained directly or indirectly
as a result of’’ an EEA offense.781 The
EEA also requires offenders to pay
restitution to victims of trade secret
theft.782
Under the UTSA, DTSA, and EEA, the
term ‘‘trade secret’’ is defined
expansively and includes a wide range
of confidential information.783 The
776 U.S. Senate, Report to Accompany S. 1890, the
Defend Trade Secrets Act of 2016, S. Rep. No. 114–
220 at 3 (2016).
777 18 U.S.C. 1836(b)(3).
778 18 U.S.C. 1836(b)(2).
779 18 U.S.C. 1831 (economic espionage); 18
U.S.C. 1832 (theft of trade secrets).
780 18 U.S.C. 1831 through 1832.
781 18 U.S.C. 1834, 2323.
782 18 U.S.C. 1834, 2323.
783 The UTSA generally defines a ‘‘trade secret’’
as information that (1) derives independent
economic value from not being generally known to
other persons who can obtain economic value from
its disclosure or use and (2) is the subject of
reasonable efforts to maintain its secrecy. UTSA,
supra note 773 at sec. 1(4). The DTSA and EEA use
a similar definition. 18 U.S.C. 1839(3). The
Supreme Court has held that ‘‘some novelty’’ is
required for information to be a trade secret,
because ‘‘that which does not possess novelty is
usually known.’’ Kewanee Oil Co. v. Bicron Corp.,
416 U.S. 470, 476 (1974). As the high court of one
State noted in applying a State statute based on the
UTSA, ‘‘business information may . . . fall within
the definition of a trade secret, including such
matters as maintenance of data on customer lists
and needs, source of supplies, confidential costs,
price data and figures.’’ U.S. West Commc’ns, Inc.
v. Off. of Consumer Advoc., 498 NW2d 711, 714
(Iowa 1993). See also Confold Pac., Inc. v. Polaris
Indus., Inc., 433 F.3d 952, 959 (7th Cir. 2006) (‘‘A
trade secret is really just a piece of information
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viability of trade secret law as a means
for redressing trade secret theft is
illustrated by the fact that firms
regularly bring claims under trade secret
law. A recent analysis by the legal
analytics firm Lex Machina finds that
1,156 trade secret lawsuits were filed in
Federal court in 2022.784 In addition, an
analysis by the law firm Morrison
Foerster finds that 1,103 trade secret
cases were filed in State courts in
2019.785 The number of cases filed in
State court has held steady since 2015,
when 1,161 cases were filed.786 The fact
that a considerable number of trade
secret lawsuits are filed in Federal and
State courts—over 2,200 cases per
year—and the fact that this number has
held relatively steady for several years
suggests that many employers
themselves view trade secret law as a
viable means of obtaining redress for
trade secret theft.
The use of trade secret law burdens
competition to a lesser degree than the
use of non-competes. Trade secret law
provides firms with a viable means of
redressing trade secret
misappropriation—and deterring trade
secret misappropriation by workers—
without blocking beneficial competitive
activity, such as workers switching to
jobs in which they can be more
productive or starting their own
businesses.
ii. NDAs
NDAs provide employers with
another well-established, viable means
for protecting valuable investments.787
(such as a customer list, or a method of production,
or a secret formula for a soft drink) that the holder
tries to keep secret by executing confidentiality
agreements with employees and others and by
hiding the information from outsiders by means of
fences, safes, encryption, and other means of
concealment, so that the only way the secret can be
unmasked is by a breach of contract or a tort.’’).
784 Gloria Huang, Lex Machina Releases its 2023
Trade Secret Litigation Report, Lex Machina (Jul.
13, 2023), https://.com/blog/lex-machina-releasesits-2023-trade-secret-litigation-report/.
785 Kenneth A. Kuwayti & John R. Lanham,
Morrison Foerster, Client Alert, Happy Anniversary,
DTSA: The Defend Trade Secrets Act at Five (May
25, 2021), https://www.mofo.com///210525-defendtrade-secrets-act-dtsa.
786 Id. at n.5.
787 The Commission uses the term ‘‘NDA’’ to refer
to contractual provisions that are designed to
protect trade secrets or other business information
that has economic value. Employers may also seek
to use NDAs to protect other kinds of information,
such as information about discrimination,
harassment, sexual assault, corporate wrongdoing,
or information that may disparage the company or
its executives or employees. These types of NDAs
have been widely criticized for, among other things,
their pernicious effects on workers. See, e.g., Rachel
S. Arnow-Richman et al., Supporting Market
Accountability, Workplace Equity, and Fair
Competition by Reining In Non-Disclosure
Agreements, UC-Hastings Research Paper 2–6 (Jan.
2022), https://papers.ssrn.com/sol3/.?abstract_=.
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NDAs are contracts in which a party
agrees not to disclose and/or use
information designated as confidential.
If a worker violates an NDA, the worker
may be liable for breach of contract.788
Employers regularly use NDAs to
protect trade secrets and other
confidential business information.
Researchers estimate that between 33%
and 57% of U.S. workers are subject to
at least one NDA.789 One study finds
that 95.6% of workers with noncompetes are also subject to an NDA;
97.5% of workers with non-competes
are also subject to a non-solicitation
agreement, NDA, or a non-recruitment
agreement; and 74.7% of workers with
non-competes are subject to all three
provisions.790 In most States, NDAs are
more enforceable than non-competes.791
While some commenters argued that
NDAs would not be an adequate
alternative to non-competes because of
the NPRM’s proposed functional
definition of ‘‘non-compete clause,’’ the
final rule will not prevent employers
from adopting garden-variety NDAs;
rather, it prohibits only NDAs that are
so overbroad as to function to prevent
a worker from seeking or accepting
employment or operating a business.792
Appropriately tailored NDAs burden
competition to a lesser degree than noncompetes. Such NDAs may prevent
workers from disclosing or using certain
information, but they generally do not
prevent workers from seeking or
accepting other work, or starting their
own business, after their employment
ends. As the Tenth Circuit has stated,
workers subject to NDAs, unlike
workers subject to non-competes,
‘‘remain free to work for whomever they
wish, wherever they wish, and at
whatever they wish,’’ subject only to the
terms that prohibit them from disclosing
or using certain information.793
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iii. Other Means of Protecting Valuable
Investments
The Commission finds that employers
have additional well-established means
of protecting valuable investments in
addition to trade secret law and NDAs.
788 See Chris Montville, Reforming the Law of
Proprietary Information, 56 Duke L.J. 1159, 1168
(2007).
789 Arnow-Richman, supra note 787 at 2–3.
790 Balasubramanian, Starr, & Yamaguchi, supra
note 74 at 44. The value 97.5% is calculated as
(1¥0.6%/24.2%), where 0.6% represents the
proportion of workers with only a non-compete (see
Table 1 on page 36), and no other post-employment
restriction, and 24.2% represents the proportion of
workers with a non-compete, regardless of what
other post-employment restrictions they have.
791 Montville, supra note 788 at 1179–83.
792 See Part III.D.2.b.
793 MAI Basic Four, Inc. v. Basis, Inc., 880 F.2d
286, 288 (10th Cir. 1989).
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For the protection of trade secrets and
other confidential information, the
Commission finds that these additional
means include patent law and invention
assignment agreements. Patent law
provides inventors with the right, for a
certain period of time, to exclude others
from making, using, offering for sale, or
selling an invention or importing it into
the U.S.794 During the period when
patent protection is effective, patents
grant the patent holder these exclusive
rights, while other firms may use trade
secrets if they are independently
developed, reverse-engineered, or
inadvertently disclosed.795 In some
cases, however, firms may choose to
keep their invention a trade secret rather
than seeking a patent because patent
protection only lasts a certain number of
years, after which the invention
becomes part of the public domain.796
Where a technology, process, design, or
formula is able to meet the rigorous
standards for patentability, patent law
provides companies with a less
restrictive alternative than noncompetes for protecting it.797
Employers can further protect their
property interests in these forms of
intellectual property through
appropriately tailored invention
assignment agreements. These are
agreements that give the employer
certain rights to inventions created by
the employee during their employment
with a firm.798 Like patent law, this tool,
when appropriately tailored, provides
employers with additional protection
for some of their most valuable
intellectual property interests.
With respect to investments in worker
human capital, the Commission finds
that these less restrictive alternatives
include fixed duration contracts and
competing on the merits to retain
workers. If an employer wants to
prevent a worker from leaving right after
receiving valuable training, the
employer can sign the worker to an
employment contract with a fixed
duration. An employer can establish a
term that is long enough for the
employer to recoup its human capital
investment, without restricting who the
worker can work for, or their ability to
start a business, after their employment
ends. In doing so, the employer makes
794 35
U.S.C. 271.
supra note 771 at 3–4.
796 Id. at 4–5. See also United States v. Dubilier
Condenser Corp., 289 U.S. 178, 186 (1933) (rather
than seeking a patent, an inventor ‘‘may keep his
invention secret and reap its fruits indefinitely.’’).
797 Yeh, supra note 771 at 4–5.
798 See, e.g., Milliken & Co. v. Morin, 731 SE2d
288, 294–95 (S.C. 2012); Revere Transducers, Inc.
v. Deere & Co., 595 NW2d 751, 759–60 (Iowa 1999);
Ingersoll-Rand Co. v. Ciavatta, 542 A.2d 879, 886–
87 (N.J. 1988).
795 Yeh,
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a commitment to the worker and vice
versa.
Finally, instead of using noncompetes to lock in workers, the
Commission finds that employers that
wish to retain their workers can also
compete on the merits for the worker’s
labor services—i.e., they can provide a
better job than competing employers by
paying their workers more, offering
them better hours or better working
conditions, or otherwise improving the
conditions or desirability of their
employment. These are all viable tools
for protecting human capital
investments and other investments an
employer may make that do not rely on
suppressing competition.
c. Comments and Responses to
Comments
Many commenters agreed with the
Commission’s preliminary finding that
employers have less restrictive
alternatives to non-competes. These
commenters asserted that trade secret
law, combined with NDAs, creates a
powerful deterrent to post-employment
disclosures of trade secrets and
confidential information, and that these
tools adequately protect valuable
investments in the absence of noncompetes. The Commission agrees with
these commenters. Other commenters
asserted that the alternatives to noncompetes identified in the NPRM are
inadequate for protecting employer
investments. The Commission
summarizes and responds to the
comments it received on less restrictive
alternatives in this Part IV.D.2.c.
i. Comments and Responses to
Comments on Trade Secrets and Other
Confidential Information
Several commenters who generally
supported the proposed rule stated that
trade secret law and NDAs offer
meaningful enforcement advantages to
employers compared with noncompetes. A few commenters stated
that, unlike non-competes, trade secret
law and NDAs are broadly enforceable
in all fifty States. A few commenters
stated that, while monetary penalties for
breaching non-competes are ordinarily
difficult to obtain, employers can obtain
substantial monetary recovery for trade
secret law and NDA violations. The
Commission agrees with these
comments.
Several commenters stated that the
scope of trade secret law is limited in
various respects. Several commenters
stated, for example, that customer lists,
pricing, and bid development
information are typically excluded from
the definition of ‘‘trade secret’’ under
the DTSA and the law of many States.
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In response to these comments, the
Commission notes that customer
information may be classified as trade
secrets under certain circumstances,
such as when the information is not
generally known or not otherwise easy
to obtain and when a firm has taken
measures to protect the confidentiality
of the information.799 Employers may
also use NDAs to protect such
information. NDAs broadly protect all
information defined as confidential,
regardless of whether such information
constitutes a ‘‘trade secret’’ under State
or Federal law.800
Some commenters argued that other
tools under intellectual property law,
such as patent and trademark law, are
inadequate to protect employers’
investments. These commenters
misinterpret the Commission’s findings.
The Commission did not find in the
NPRM, nor does it find in this final rule,
that patent law standing alone or
trademark law standing alone provide
employers benefits equal to the benefits
they may reap from an unfair method of
competition, namely the use of noncompetes. Rather, the Commission finds
that patent law can be used, together
with the other tools the Commission
cites, including NDAs and fixed-term
employment contracts, to protect
legitimate investments in intellectual
property and worker human capital
investment and therefore that these
tools, taken together, are viable
alternatives to non-competes.
A number of commenters stated that
there are enforceability disadvantages to
trade secret law and NDAs compared to
non-competes. Several commenters
stated that trade secret law and NDAs
are inadequate to protect employer
investments prophylactically because
employers can enforce them only after
the trade secrets or other confidential
information have already been
disclosed. These commenters stated that
trade secrets and confidential
information can be highly valuable, and
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799 See
U.S. West Commc’ns, Inc. v. Off. of
Consumer Advoc., 498 NW2d 711, 714 (Iowa 1993)
(‘‘business information may . . . fall within the
definition of a trade secret, including such matters
as maintenance of data on customer lists and needs
. . .’’); Guy Carpenter & Co. v. Provenzale, 334 F.3d
459, 467 (5th Cir. 2003) (‘‘A customer list may be
a trade secret, but not all customer lists are trade
secrets under Texas law. The broader rule of trade
secrets, that they must be secret, applies to
customer lists’’); Home Paramount Pest Control
Cos. v. FMC Corporation/Agricultural Prods. Group,
107 F. Supp. 2d 684, 692 (D. Md. 2000) (‘‘There is
no question that a customer list can constitute a
trade secret.’’); Liebert Corp. v. Mazur, 827 NE2d
909, 922 (2005) (‘‘[W]hether customer lists are trade
secrets depends on the facts of each case.’’).
800 See, e.g., Tendeka, Inc. v. Glover, No. CIV.A.
H–13–1764, 2015 WL 2212601 at *14 (S.D. Tex.
May 11, 2015).
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its value could be destroyed as soon as
a worker discloses such information to
a competing employer. Additionally,
some commenters argued that trade
secret law and NDAs are inadequate to
protect employers’ investments because
enforcement outcomes for trade secrets
and NDAs are less predictable and
certain than with non-competes. Some
comments suggested that this purported
clarity of non-competes benefits
workers, arguing that non-competes
offer bright lines workers can follow to
ensure against unintended violations.
Other commenters assert that noncompetes themselves are not necessarily
effective as a prophylactic remedy,
because it is often unclear whether a
particular non-compete is enforceable,
and non-competes are difficult to
enforce in many jurisdictions. A few
commenters stated that prophylactic
remedies are already available under
trade secret law in almost half of U.S.
States where the doctrine of inevitable
disclosure is recognized, while other
commenters were concerned that not all
States recognize the doctrine. Other
commenters argued the inevitable
disclosure doctrine may be worse for
workers, and one commenter argued
that the final rule would increase the
use of the inevitable disclosure doctrine
and thus reduce worker mobility.
Some commenters stated that
prophylactic remedies are necessary to
adequately protect trade secrets and
confidential information because
workers can exploit their former
employers’ trade secrets and
confidential information without ever
disclosing the information themselves,
thus leaving aggrieved employers with
no recourse under trade secret law or an
NDA. Specifically, these commenters
argued that when workers take new
roles, they will inevitably use their
knowledge of former employers’
confidential information. For example,
where a worker has experience with
attempts and failures to develop new
ideas or products with a former
employer, they will likely use this
knowledge to prevent a new employer
from making similar mistakes, thus free
riding off the former employer’s
development efforts, costs, and time. A
commenter argued that preventing noncompetes from restricting this type of
misappropriation would discourage
investment and harm innovation in the
long run.
The Commission believes that what
some commenters describe as the
‘‘prophylactic’’ benefits of noncompetes—that an employer can block a
worker from taking another job, without
respect to any alleged misconduct—is
also the source of their overbreadth
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because it enables employers to restrict
competition in both labor markets and
product and service markets, as detailed
in Parts IV.B and IV.C. That employers
prefer to wield non-competes as a blunt
instrument on top of or in lieu of the
specific legal tools designed to protect
legitimate investments in intellectual
property and other investments cannot
justify an unfair method of competition.
The Commission also disagrees that
banning non-competes would
discourage investment and would harm
innovation in the long run. As discussed
in Part IV.B.3.b.ii, the Commission finds
that the weight of the evidence indicates
that non-competes reduce innovation by
preventing workers from starting
businesses in which they can pursue
innovative new ideas; inhibiting
efficient matching between workers and
firms (making it less likely that workers
match with firms that can maximize
their talent and productivity); and
decreasing the cross-pollination of
ideas.
Additionally, the Commission notes
that non-compete agreements
themselves cannot be said to provide
ironclad ‘‘prophylactic’’ protections
against disclosure of trade secrets and
other confidential information. As other
commenters point out, in the absence of
this rule, it is often unclear whether and
to what extent a specific non-compete is
enforceable, and they are difficult to
enforce in many jurisdictions.
Moreover, non-competes do not prevent
the worker from disclosing trade secrets
or confidential information after the end
of the non-compete period or outside of
the clause’s geographic restriction. The
Commission also notes that, as a few
commenters stated, prophylactic
remedies are already available under
trade secret law in almost half of U.S.
States where the doctrine of inevitable
disclosure is recognized.801
Several commenters argued that
detecting and proving violations of
NDAs and trade secret law is more
801 In some States, under the ‘‘inevitable
disclosure doctrine,’’ courts may enjoin a worker
from working for a competitor of the worker’s
employer where it is ‘‘inevitable’’ the worker will
disclose trade secrets in the performance of the
worker’s job duties. See, e.g., PepsiCo, Inc. v.
Redmond, 54 F.3d 1262, 1269, 1272 (7th Cir. 1995).
The inevitable disclosure doctrine is controversial.
Several States have declined to adopt it altogether,
citing the doctrine’s harsh effects on worker
mobility. See Bayer Corp. v. Roche Molecular Sys.,
Inc., 72 F. Supp. 2d 1111, 1120 (N.D. Cal. 1999);
LeJeune v. Coin Acceptors, Inc., 849 A.2d 451, 470–
71 (Md. 2004). Other States have required
employers to meet high evidentiary burdens related
to inevitability, irreparable harm, and bad faith
before issuing an injunction pursuant to the
doctrine. See generally Eleanore R. Godfrey,
Inevitable Disclosure of Trade Secrets: Employee
Mobility v. Employer Rights, 3. J. High Tech. L. 161
(2004).
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difficult than for non-competes, and that
enforcement is accordingly more
expensive, because it is more difficult to
detect and obtain evidence of the
disclosure or use of confidential
information than it is to determine that
a former worker has moved to a
competitor. Some commenters asserted
that trade secret litigation is expensive
because the cases are fact-intensive and
involve litigating multiple challenging
issues. Some commenters argued that as
a result, the proposed rule conflicted
with Congressional intent underlying
the DTSA. A few commenters similarly
argued that breaches of non-solicitation
agreements are difficult to detect and
can be enforced only after the
solicitation has occurred. While the
Commission recognizes that trade
secrets litigation and NDA and nonsolicitation enforcement may be more
costly than non-compete enforcement in
some instances, the Commission is not
persuaded that higher costs associated
with alternative tools make those tools
inadequate. The comments do not
establish that pursuing remedies
through trade secrets litigation or NDA
enforcement are prohibitively
expensive. In any event, the
Commission and courts have
consistently held that pecuniary benefit
to the party responsible for the conduct
in question is not cognizable as a
justification.802 While employers may
find that protecting trade secrets and
confidential information or customer
relationships by using non-competes to
restrict worker mobility, regardless of
whether that worker would
misappropriate confidential information
or solicit customers, is easier for them,
the Commission finds that same
overbreadth of non-competes imposes
significant negative externalities on
workers, consumers, businesses, and
competition as a whole.803 This
overbreadth that employers benefit from
wielding is what causes the harms from
non-competes relative to more
narrowly-tailored alternatives.
Some commenters contended that
higher burdens for establishing
violations of trade secret and IP laws
will harm employer incentives to share
trade secrets with workers and to invest
in valuable skills training. The
Commission is not persuaded that
higher evidentiary burdens render trade
secret law and NDAs inadequate for
protecting employers’ valuable
investments. Heightened standards are a
valuable mechanism to filter out
overbroad restrictions on beneficial
competitive activity. The comment
802 See
803 See
supra note 305 and accompanying text.
Parts IV.B and IV.C.
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record is replete with examples of
workers bound by non-competes who
lacked knowledge of trade secrets or
whose employment with a competitor
never threatened their previous
employer’s investments. To the extent
trade secret law and NDAs require
higher evidentiary showings, that makes
these alternatives more tailored tools for
protecting employers’ valuable
investments without unduly restricting
a worker from engaging in competitive
activity.
Some commenters argued that,
without non-competes, employers
would limit access to valuable trade
secrets within the workplace because
trade secret law requires employers to
show reasonable efforts to maintain the
secrecy of an alleged trade secret to
prove a violation, and that reduced rates
of intrafirm trade secrets sharing will
ultimately harm innovation as well as
workers. In response, the Commission
notes that the empirical evidence
indicates otherwise: when noncompetes are more enforceable, the
overall level of innovation decreases.804
Furthermore, these comments seem to
overstate the burden of reasonable
efforts to keep information secret. Under
the DTSA, courts have found that
employers meet this requirement by
sharing information at issue only among
workers bound by NDAs or maintaining
such information in password-protected
digital spaces.805 Accordingly,
assertions that employers will need to
take extraordinary precautions to
maintain secrecy over trade secrets and
confidential information are
inconsistent with standards courts
typically recognize for determining
whether reasonable efforts were taken to
keep such information confidential. The
Commission is not persuaded that
requirements in trade secret law to show
reasonable efforts to maintain secrecy
will deter intrafirm information sharing,
or otherwise make alternative tools
inadequate.
Several commenters argued that the
Commission should not find that
employers have adequate alternatives to
protecting their valuable investments
because there is a lack of empirical
evidence specifically showing that trade
secret law and NDAs are effective for
the purpose of protecting trade secrets
and confidential information. In
response, the Commission notes that
trade secret law is a body of law that is
specifically designed to protect the
804 See
Part IV.B.3.b.ii.
e.g., In re Adegoke, 632 B.R. 154, 167
(Bankr. N.D. Ill. 2021); Houser v. Feldman, 569 F.
Supp. 3d 216, 230 n.7 (E.D. Pa. 2021); AvidAir
Helicopter Supply, Inc. v. Rolls-Royce Corp., 663
F.3d 966, 974 (8th Cir. 2011).
805 See
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interests being asserted; employers
consistently bring cases under this body
of law; and a preference among firms for
a blunter instrument for protecting trade
secrets and confidential information
cannot justify an unfair method of
competition that imposes significant
negative externalities on workers, other
firms, consumers, and the economy.806
An industry trade organization
commenter stated that neither fixedduration employment contracts nor
improved pay, benefits, or working
conditions specifically protect against
the disclosure of confidential
information. In response, the
Commission notes that firms can protect
against the disclosure of confidential
information using trade secret law and
NDAs, and, where applicable, patent
law and invention assignment
agreements. And in response to these
commenters, the Commission notes that
companies in California, North Dakota,
and Oklahoma have been able to protect
their trade secrets and other confidential
information adequately using tools other
than non-competes since the late
nineteenth century. Industries that are
highly dependent on trade secrets and
other confidential information have
flourished in those States even though
non-competes have been unenforceable.
A few commenters disputed the
NPRM’s contention that the rate at
which employers pursue trade secrets
litigation is evidence of the viability of
trade secret law as a means for
redressing trade secret theft or
protecting confidential information, in
part because those employers were not
necessarily relying exclusively on trade
secret law. The Commission does not
assert that these data, alone,
conclusively establish trade secret law
is a perfect vehicle for redressing trade
secret theft. Rather, the data show trade
secret litigation is more than a mere
theoretical possibility—it is an avenue
many companies choose to redress trade
secret theft and indeed it is the body of
law designed and developed for this
very purpose. Accordingly, the
Commission believes that the fact that
many companies bring claims under the
well-established body of State and
Federal law on trade secrets is relevant
evidence that trade secret law provides
a viable means for redressing trade
secret theft.
Some commenters suggested a higher
volume of trade secrets litigation in
California may reflect a higher rate of
trade secret disclosure due to the State’s
policy against enforcing non-competes.
However, these commenters did not
806 See Parts IV.B. and IV.C (describing the
negative externalities from non-competes).
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provide evidence to support this
hypothesis. The Commission also notes
industries in California that depend on
protecting trade secrets have thrived
despite the inability to enforce noncompetes; indeed, the State is the
capital of the global technology
industry. Therefore, regardless of
whether there is a higher rate of trade
secret litigation in California, the less
restrictive alternatives identified in this
Part IV.D have provided sufficient
protection to enable these companies to
grow, thrive, and innovate.
Furthermore, the rate of trade secret
litigation in California may result from
factors unique to California’s economy,
such as California’s high concentration
of technology companies relative to
other States. As such, the Commission
does not believe there is credible
evidence to suggest trade secrets are
disclosed at a higher rate in California
than in other jurisdictions.807
Many commenters agreed with the
Commission’s preliminary conclusion
that the economic success in California,
North Dakota, and Oklahoma of
industries highly dependent on trade
secrets and other confidential
information illustrates that companies
have viable alternatives to noncompetes for protecting valuable
investments. In contrast, a few
commenters argued that the
Commission mischaracterized
California’s non-compete ban because
they claim that California permits noncompetes to protect trade secrets, citing
dicta from the 1965 California Supreme
Court case Muggill v. Reuben H.
Donnelley Corp.808 However, the
Commission is unaware of any cases in
which a California court has actually
upheld a non-compete agreement under
California law based on the dicta in this
opinion, and commenters do not point
to any.809 To the contrary, California
courts have consistently refused to
enforce non-competes even where
employers alleged they were needed to
protect trade secrets.810
Another commenter argued that
California’s experience does not
necessarily demonstrate anything about
the effect of banning non-competes
because California employers impose
non-competes at rates comparable to
807 See
NPRM at 3507.
Cal. 2d 239, 242 (Cal. 1965).
809 See generally David R. Trossen, Edwards and
Covenants Not to Compete in California: Leave Well
Enough Alone, 24 Berkeley Tech. L.J. 539, 546
(2009).
810 See, e.g., D’sa v. Playhut, Inc., 102 Cal. Rptr.
2nd 495, 497–501 (Cal. Ct. App. 2nd 2000); Dowell
v. Biosense Webster, Inc., 102 Cal. Rptr. 3d 1, 11
(Cal. Ct. App. 2nd 2009); Arthur J. Gallagher & Co.
v. Lang, 2014 WL 2195062 (N.D. Cal. May 23, 2014)
at *4 n.3.
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other States. In response, the
Commission notes that while Starr,
Prescott, and Bishara state that workers
are covered by non-competes at
‘‘roughly the same rate’’ in States where
non-competes are unenforceable and
enforceable,811 when the authors control
for employee characteristics to compare
‘‘observationally equivalent
employees,’’ they find that noncompetes are less common (by 4–5
percentage points) in nonenforcing
States compared to States that permit
vigorous enforcement of noncompetes.812 Additionally, California,
North Dakota, and Oklahoma are still
distinct from other States because
employers may not actually enforce
non-competes, even if employers in
those States continue to enter into them.
A commenter argued that the
Commission misattributes California’s
success in the technology industry and
North Dakota’s and Oklahoma’s success
in the energy industry to their noncompete laws, rather than the presence
of top universities and venture capital
firms in the State (in the case of
California) or of abundant natural
resources in the State (in the case of
North Dakota and Oklahoma). The
Commission believes that this
commenter mischaracterizes its
analysis. The Commission does not
attribute California’s success in the
technology industry and North Dakota’s
and Oklahoma’s success in the energy
industry to their non-compete laws. The
Commission merely notes that these
industries are highly dependent on
protecting trade secrets and having
highly trained workers, and that these
industries have thrived in these States
despite the inability of employers to
enforce non-competes.
One commenter argued that there are
no alternatives that adequately protect
employers’ legitimate interests because
other restrictive employment
agreements do not sweep as broadly as
non-competes. In this Part IV.D, the
Commission concludes that less
restrictive alternatives such as trade
secret law, IP law, and NDAs are
adequate to protect trade secrets and
other confidential information even
where they do not sweep as broadly as
non-competes. Indeed, the Commission
believes that non-competes are
overbroad with respect to protecting
trade secrets and other confidential
information, because they enable
employers to restrict a wide swath of
beneficial competitive activity without
respect to any alleged misconduct. That
employers prefer to wield non-competes
811 Starr,
812 Id.
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as a blunt instrument on top of or in lieu
of the specific legal tools designed to
protect legitimate investments in
intellectual property and other
investments cannot justify an unfair
method of competition.
ii. Comments and Responses to
Comments on Human and Physical
Capital Investment
Several commenters addressed the
evidence concerning the effects of noncompetes on human capital investment
and other investment. Several
commenters asserted that, even if noncompetes increased human capital
investment, they still left workers worse
off because they suppressed workers’
mobility and wages overall. Workers
and worker advocates also argued that
workers lose the value of their skills and
human capital investment when noncompetes force them to sit out of the
workforce, and non-competes can
decrease their incentive to engage in
human capital investment since they
cannot capitalize on their skills and
knowledge. These commenters stated
that many workers, particularly highly
skilled workers, have had some form of
education prior to working for their
employer, diminishing any potential
need for non-competes to protect the
employers’ human capital investment.
For example, many physicians pointed
out that they had to go through medical
school, residency, internships, and/or
fellowships—significant investments
that they made, not their employers.
Some commenters questioned the link
between increased human capital
investment and non-compete
enforcement, arguing that employer
human capital investment will still be
provided without non-competes. Other
commenters also stated that prohibiting
non-competes would make it easier for
firms to hire trained workers, because it
would be easier for them to switch jobs.
More generally, one advocacy
organization said that employers
frequently make investments that do not
work out and should not place the risk
of that investment onto their workers. A
commenter who discussed physician
non-competes argued that investmentbased justifications for non-competes
overestimate the value added by
employers while failing to recognize the
value physicians bring to employers.
Some businesses and trade
organizations argued that employers
invest significant time and money into
training workers who lack the specific
skills needed for the job. These
commenters stated that, without noncompetes, employers risk the worker
taking that investment to a competitor.
Some commenters state that this risk is
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greatest in underserved areas and when
there are worker shortages. Several
commenters said that employment
restrictions such as non-competes
incentivize businesses to pay for
credentials, training, and advanced
education that low-wage and other
workers would be unable to afford on
their own, facilitating upward mobility.
For highly educated workers, such as
physicians, some employers said they
need non-competes to protect payments
for continuing education as well as
mentorships and on the job training.
Businesses and their advocates asserted
that in some industries, many new
employees are unprofitable for a
significant period, requiring up-front
investment and training from employers
who want to recoup that investment.
In response, the Commission notes
that, as described in Part IV.D.2.b.iii,
firms have less restrictive alternatives
for protecting human capital
investments, including fixed-duration
contracts and competing on the merits
for the worker’s labor services through
better pay, benefits, or working
conditions. Through these means,
employers can retain workers without
restricting who they can work for, or
their ability to start a business, after
their employment ends. The
Commission also notes that these
commenters often inaccurately describe
the increased labor mobility afforded by
the final rule as a one-way street. While
it will be easier under the final rule for
workers to switch jobs and work for a
competitor, it will also be easier for
firms to hire talented workers, since
those workers are not subject to noncompetes. In general, firms will benefit
from access to a wider pool of labor,
because the rule eliminates the friction
non-competes impose on the free
functioning of competition in labor
markets. Whether this will be a net
benefit to a particular firm, or not, will
depend on the firm’s ability to compete
for workers on the merits to attract and
retain talent.
A group of healthcare policy
researchers stated that the investment
justifications offered by corporate
owners of physician practices are
misleading since the true value of the
investment in the practice is the book of
business and referrals. These
researchers suggested that non-competes
are used to circumvent laws that
prohibit payment for physician referrals.
The Commission notes that this
comment aligns with a statement by
researcher Kurt Lavetti at the
Commission’s 2020 forum on noncompetes. Lavetti stated that patient
referrals are a valuable asset, but buying
or selling those referrals is illegal, so
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non-competes are a secondary method
of protecting that asset.813
Commenters also stated that noncompetes protect investments other than
in human capital, capital expenditures,
and R&D, including recruiting and
hiring, providing client and customer
service, facilities, marketing, and
technology, among others. The
Commission is unaware of any
empirical evidence showing that noncompetes increase these types of
investments, and commenters did not
provide any. In general, however, firms
can protect investments in trade secrets
and confidential information, and
investments in workers, through the less
restrictive alternatives described in Part
IV.D.2.b.
Two trade organizations stated that
prohibiting non-competes could cause
businesses to lose staff, and that losing
staff could cause them to reduce
investments that may be based on
staffing assumptions. These commenters
did not provide empirical evidence to
support these arguments. The
Commission also notes that firms would
not necessarily lose workers because of
the final rule. As described previously,
some firms may lose workers because it
will be easier for workers to leave for
better opportunities, while some firms
may gain workers by attracting workers
from other firms. Additionally, firms
can retain workers by competing on the
merits for their labor services—i.e., by
offering better jobs than their
competitors.
Commenters asserted that Starr,
Prescott, and Bishara 814 found that
notice of non-competes alongside a job
offer is positively correlated with
training compared to later notice. In
response, the Commission notes that the
evidence is a correlation between early
notice and training, not a causal finding,
so the Commission gives it minimal
weight. In addition, regardless of
whether there is an increase in training
where notice of non-competes is
provided along with the job offer
instead of later on, this data is not
salient on the question of whether
employers have less restrictive
alternatives to protecting training
investments.
A few commenters stated noncompetes protect against the
‘‘disclosure’’ of general trade knowledge
and skills, while the less restrictive
alternatives cited in the NPRM do not.
Relatedly, some commenters argued
prohibiting non-competes and broadly
enabling workers to take general trade
knowledge and skills to competitors
will mean that their new employers will
free ride off investments the former
employers made in their human capital,
which will discourage future investment
in human capital. The Commission does
not believe preventing workers from
using their general trade knowledge and
skills, including their gains in trade
knowledge and skills through
experience with a particular employer,
is a legally cognizable or legitimate
justification for non-competes. Under
State common law, preventing a worker
from using their general knowledge and
skills with another employer is not a
legitimate interest that can justify a noncompete.815 Indeed, there is a general
principle in the law of restrictive
employment agreements—and trade
secret law as well—that these tools
cannot be used to prevent workers from
using their general trade knowledge and
skills.816 The Commission does not
view the inability to prevent disclosure
or use of general skills and knowledge
as a shortcoming of trade secret law and
NDAs; instead, it considers the use of
general skills and knowledge as
beneficial competitive activity.
Moreover, the Commission notes that
sectoral job training strategies can be a
tool for employers and workers to access
worker training that is transferrable
across employers.817
One commenter asserted trade secret
law and NDAs are inadequate to protect
employers’ goodwill, while another
commenter asserted these tools are
inadequate to protect investments in
relationships with clients. Regarding
whether trade secret law and NDAs are
adequate to protect employers’ client
relationships, the Commission
interprets this to refer to employers’
concern that a client will follow a
worker to a competitor. The
Commission believes that employers
have alternatives for protecting these
investments, including fixed-duration
contracts (in the case of goodwill),
NDAs (in the case of client lists), and
competing on the merits to retain
workers and/or clients. Firms can seek
to protect client relationships by
offering superior service and value—
through the free and fair functioning of
competition. These more narrowly
815 See
813 Kurt
Lavetti, Economic Welfare Aspects of
Non-Compete Agreements, Remarks at the FTC
Workshop on Non-Competes in the Workplace, at
145–46 (Jan. 9, 2020), at https://www.ftc.gov//files//
_events/1556256/non-compete-workshoptranscript-full.pdf.
814 Starr, Prescott & Bishara, supra note 68 at 53.
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Montville, supra note 788 at 1161.
817 See, e.g., Mayu Takeuchi & Joseph Parilla,
Federal Investments in Sector-Based Training Can
Boost Workers’ Upward Mobility, Brookings Inst.
(Dec. 7, 2023), https://www.brookings.edu/articles/
federal-investments-in-sector-based-training-canboost-workers-upward-mobility/.
816 See
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tailored alternatives reasonably protect
the applicable interest while burdening
competition to a lesser degree because
they do not restrict the worker’s ability
to seek or accept work or start a
business after their employment ends.
Therefore, while trade secret law and
NDAs may not protect goodwill or client
relationships, the Commission finds that
employers have adequate alternative
tools to protect these interests.
Furthermore, the Commission notes the
final rule does not restrict employers
from using trade secret law and NDAs
in tandem—along with other
alternatives—to protect their
investments, and comments maintaining
that employers lack adequate
alternatives to non-competes because
the commenter views just one of these
mechanisms as inadequate are
unpersuasive.
A commenter argued the final rule
may implicate the ability of Federal
contractors to provide letters of
commitment, which are often required
by government agencies and require
contractors to identify key personnel
who will work on an awarded contract,
sometimes for years in the future. In
response, the Commission notes that
contractors have alternatives to noncompetes to retain key personnel,
including by using fixed-term
employment contracts or providing the
key personnel a better job than
competitors.
A commenter stated that fixedduration employment contracts are not
necessarily effective at protecting
human capital investments because
employers may not know at the time of
hiring when they will be providing
training to a worker. This commenter
also stated that improving the pay,
benefits, and working conditions of
workers is not necessarily an effective
means for protecting human capital
investments. In response, the
Commission notes employers may enter
into fixed-duration employment
contracts with their workers at any time,
not just at the outset of the employment
relationship. It further notes competing
to retain a trained worker will not work
in every instance, but it is an important
option available to employers and the
provision of training can itself be a
competitive differentiator for an
employer.
A commenter also asserted California
has the highest cost of living and, if this
is attributable to the absence of noncompetes, the proposed rule could risk
increasing the cost of living nationwide.
The commenter did not provide
evidence to support the existence of an
inverse relationship between noncompete enforceability and cost of
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living, and the Commission is aware of
no such evidence. The Commission thus
does not believe that there is a basis to
conclude the final rule would increase
the cost of living nationwide.
iii. Comments Regarding Alternatives to
Non-Competes for Senior Executives
Commenters offered the same
justifications for non-competes with
senior executives: that they increase
employers’ incentive to make
productive investments. However, many
commenters argued senior executives
are more likely than other workers to
have knowledge of trade secrets and
other competitively sensitive
information or to have customer
relationships and thus non-competes for
senior executives are necessary, and
other tools such as trade secret law and
NDAs are not viable alternatives.
In response, the Commission finds
that these tools—trade secret law,
NDAs, patents, and invention
assignment agreements—provide viable
means of protecting valuable
investments against disclosure by senior
executives, just as they do for all other
workers. Commenters do not identify
any reasons why senior executives are
uniquely situated with respect to these
less restrictive alternatives—i.e., why
trade secret law or NDAs may not
adequately protect firm investments
from disclosure by senior executives
specifically—and the Commission is not
aware of any such reasons.
Some commenters argued noncompetes with executives and highwage workers promote competition
because they encourage innovation in
businesses by providing investors with
more confidence that executives will
not share trade secrets with competitors,
decreasing competition. An industry
organization asserted that non-competes
allow executives to share ideas and
business decisions with other workers
within the business and collaborate to
make strategic decisions. A commenter
stated that an executive leaving to start
a competing product could also delay
the timeline for both the former
employer’s product and the competing
product. As noted previously, the
Commission does not believe there is
reliable empirical data on the
relationship between non-competes and
disclosure of confidential information,
but employers have alternatives to
protect such information. Further, the
empirical evidence shows non-competes
overall inhibit innovation on the output
side; therefore, to the extent any of these
effects are occurring, they are more than
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outweighed by the negative effects of
non-competes on innovation.818
According to some commenters, an
executive moving to a competitor could
unfairly advantage the competitor and
irreparably harm the former employer.
In response, the Commission notes that
there is nothing inherently unfair about
an executive moving to a competitor,
particularly if this results from
competition on the merits (such as the
competitor paying more or otherwise
making a more attractive offer). If
companies seek to retain their
executives, they have other means for
doing so—such as increasing the
executives’ compensation or entering
fixed-duration contracts—that do not
impose significant negative externalities
on other workers and on consumers, as
non-competes do.819
Some commenters also said senior
executives may have more client,
business partner, and customer
relationships than other employees and
may contribute substantially to a firm’s
goodwill. The Commission believes that
employers have alternatives for
protecting goodwill and client/customer
relationships. For example, if a firm
wants to keep a worker from departing
and taking goodwill or clients or
customers with them, it can enter a
fixed-duration contract with the worker,
otherwise seek to retain the worker
through competition on the merits, or
seek to retain the client/customer
through competition on the merits.
An accountant with experience
analyzing executive non-competes for
business valuations said such valuations
are calculated based on the potential
harm if the executive violated the noncompete. In addition, some commenters
argued non-competes for senior
executives and other important workers
increase the value of firms in mergers
and acquisitions because they ensure
such valuable workers stay after the
sale. An investment industry
organization said investors seek to
ensure the right workers who know the
business stay and run the newly
acquired business. In addition, that
organization said some institutional
investors may require contracts
retaining key workers.
In response, the Commission notes
that valuation of senior executive noncompetes in such contexts is part of the
reason the Commission is allowing such
existing senior executive non-competes
to remain in force.820 In future
818 See
Part IV.B.3.b.ii.
Part IV.C.2 (describing the negative
externalities of non-competes for senior executives).
820 See Part IV.C.3.
819 See
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transactions, businesses and investors
have other methods of incentivizing
senior executives and other workers to
remain, including fixed duration
contracts and competing to retain
workers on the merits, and thereby
enhancing the value of firms and
transactions—methods that do not
impose such significant externalities on
other workers and consumers.
Some industry organizations said
non-competes increase employer
investment in management and
leadership training for executives. An
investment industry organization said
non-competes allow senior executives to
access training and experience for their
own benefit and the benefit of investors
in the firm. In response, the
Commission notes that employers have
alternative mechanisms to protect their
investments in worker training,
including fixed-duration contracts and
improved compensation.
Some commenters argued that noncompetes may improve executive
performance, as some executives have
non-competes tied to deferred
compensation and other future benefits,
which encourages long-term value
creation by incentivizing executives to
focus on long-term rather than shortterm gains. A law firm said that
forfeiture-for-competition clauses are an
important component of deferred
compensation agreements, and deferred
compensation incentivizes long-term
value-building and penalizes, via
reduction or forfeiture, harm to the
business, which the commenter said
includes working for a competitor. The
commenter claimed that if forfeiture-forcompetition clauses are banned, firms
would shift some of the deferred
compensation to more short-term
awards, which would in turn increase
risk-taking and decrease overall wealth
accumulation. The commenter cited a
review by the Federal Reserve after the
2008 financial crisis which found that
deferred compensation can mitigate
executive risk-taking activities.821 It also
cited other Federal agencies and court
decisions recognizing the value of
deferred compensation to mitigate risk.
Separately, the firm argued that without
forfeiture-for-competition clauses, an
executive who moves to a competitor
will compete less against their former
employer so as not to devalue their
equity award, thus degrading
competition. Commenters also
821 See Bd. of Govs. of the Fed. Reserve Sys.,
Incentive Compensation Practices: A Report on the
Horizontal Review of Practices at Large Banking
Organizations (Oct. 2011), https://
www.federalreserve.gov/publications/otherreports//incentive-compensation-practices-report201110.pdf.
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contended that State courts have
recognized forfeiture-for-competition
clauses to be reasonable and that some
State statutes governing non-competes
carve them out.
In response, the Commission
recognizes that many existing deferred
compensation contracts may have been
negotiated to include non-competes or
forfeiture-for-competition clauses that
may not be easily separated, and the
final rule allows existing senior
executive non-competes to remain in
force.822 However, the Commission is
not persuaded that non-competes are
necessary for future deferred
compensation agreements. The Federal
Reserve study on the value of deferred
compensation does not mention noncompetes or forfeiture-for-competition
clauses. While the study states that
clawback provisions may discourage
specific types of behavior, it notes that
they do not affect most risk-related
decisions.823 The commenter did not
explain why non-competes are
necessary for deferred compensation to
reduce risk-taking or how postemployment competition could impact
performance while at the firm. The
commenter also did not explain why
firms would forgo the benefits of
deferred compensation even without a
forfeiture-for-competition clause. The
commenter separately argued that an
executive who moves to a competitor
will be conflicted and compete less
against their former employer so as not
to devalue their equity award. The
comment framed this as an
anticompetitive problem akin to
interlocking directorates under the
Clayton Act, as it could increase
collusion (though the commenter
provided no support for this argument).
The commenter did not, however,
explain why an executive would move
to a competitor if doing so would
devalue their own equity. The
Commission also does not believe that
the solution to this type of
anticompetitive behavior, even if it were
to occur, is to further restrict
competition by blocking the executive
from moving to the competitor in the
first place.
Some commenters argued that
forfeiture-for-competition clauses,
which are sometimes attached to
deferred compensation arrangements,
were also justified. Some commenters
contended that workers subject to
forfeiture-for-competition clauses who
choose to work for a competitor are
likely to be compensated by the
Part IV.C.3.
Reserve Report on Incentive
Compensation Practices, supra note 821 at 16–17.
competitor for whom they will be
working. Separately, a law firm and an
investment industry organization stated
that it would be unfair for companies to
continue making deferred compensation
or other payments to former workers
who now work for a competitor if
forfeiture-for-competition clauses were
banned. A law firm also stated that
forfeiture-for-competition clauses allow
senior executives to retire without
losing their deferred compensation,
which in turn clears a path for younger
workers to move up, while protecting
senior executives’ retirement benefits. In
response, the Commission notes that
pre-existing agreements for senior
executives are not banned under the
final rule.824 The Commission also sees
no reason why deferred compensation,
including for retiring workers, cannot be
used without forfeiture-for-competition
clauses.
Some commenters stated that the
study by Kini, Williams, and Yin,
discussed in the NPRM with respect to
senior executive earnings,825 finds that
CEOs with non-competes are more
frequently forced to resign their
position. Commenters note that Kini,
Williams, and Yin also find that CEO
contracts more closely align the
incentives of executives (with respect to
stock prices and risk taking) with
shareholders when the executives have
non-competes or when those noncompetes are more enforceable. In
response, the Commission notes that, as
indicated by commenters, this study
examines the use of non-competes in
conjunction with their enforceability.
The Commission therefore finds that the
results may not reflect a causal
relationship. For example, the use of
non-competes and the propensity of the
board to force an executive to resign
may be jointly determined by the
strength of the relationship or the trust
between management and the board,
rather than the use of non-competes
causing forced turnover. The
Commission also notes that—as shown
in the study—there are other methods
by which boards may encourage
executives to perform, such as by
structuring financial incentives to
encourage or discourage risk taking,
according to the preferences of the
board. Boards can also fire poorly
performing executives even without
non-competes.
One commenter said that a ban on
non-competes may encourage U.S.
companies to relocate their executive
teams outside the U.S. in order to
continue using non-competes. The
822 See
823 Federal
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825 See
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Kini, Williams, & Yin, supra note 83.
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commenter did not provide specific
evidence to support this assertion. The
Commission believes that firms’
decisions on where to locate their
executive teams are likely influenced by
a multitude of factors other than
whether the firm may or may not use
non-competes.
3. The Asserted Benefits From These
Justifications Do Not Justify the Harms
From Non-Competes
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a. The Commission’s Final Findings
Based on the totality of the evidence,
including its review of the empirical
literature, its review of the full comment
record, and its expertise in identifying
practices that harm competition, the
Commission in this final rule finds that
the claimed business justifications for
non-competes do not justify the harms
from non-competes—for either senior
executives or for workers other than
senior executives, whether considered
together or separately—because the
evidence indicates that increasing
enforceability of non-competes has a net
negative impact along a variety of
measures. Whether the benefits from a
practice outweigh the harms is not
necessarily an element of section 5,826
but, in any event, the benefits from the
justifications cited in Part IV.D.1 clearly
do not justify the harms from noncompetes.
Not all the harms from non-competes
are readily susceptible to
monetization.827 However, even the
quantifiable harms from non-competes
are substantial and clearly not justified
by the purported benefits. Noncompetes cause considerable harm to
competition in labor markets and
product and service markets. Noncompetes obstruct competition in labor
markets because they inhibit optimal
matches from being made between
employers and workers across the labor
force through the process of competition
on the merits for labor services. The
available evidence indicates that
increased enforceability of noncompetes substantially suppresses
workers’ earnings, on average, across the
labor force generally and for specific
types of workers.828
In addition to the evidence showing
that non-competes reduce earnings for
workers across the labor force, there is
also evidence that non-competes reduce
earnings specifically for workers who
826 See
Part II.F (stating that the inquiry as to
whether conduct tends to negatively affect
competitive conditions focuses on the nature and
tendency of the conduct and does not require a
detailed economic analysis).
827 See, e.g., Parts IV.B.3.a.iii and IV.B.3.b.iv.
828 See Part IV.B.3.a.ii; Part IV.C.2.c.ii.
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are not subject to non-competes.829
These workers are harmed by noncompetes, because their wages are
depressed, but they do not necessarily
benefit from any purported incentives
for increased human capital investment
that non-competes may provide.
Overall, these harms to labor markets
are significant. The Commission
estimates the final rule will increase
workers’ total earnings by an estimated
$400 billion to $488 billion over ten
years, at the ten-year present discounted
value.830
The available evidence also indicates
non-competes negatively affect
competition in product and service
markets. The weight of the evidence
indicates non-competes have a negative
impact on new business formation and
innovation.831 There is evidence that
non-competes increase consumer prices
and concentration in the health care
sector.832 There is also evidence noncompetes foreclose the ability of
competitors to access talent.833 While
available data do not allow for precise
quantification of some of these effects,
they are nonetheless substantial: the
Commission estimates that the rule will
reduce spending on physician services
over ten years by $74–194 billion in
present discounted value, will result in
thousands to tens of thousands of
additional patents per year, and will
increase in the rate of new firm
formation by 2.7%.834
In the Commission’s view, the
asserted benefits from non-competes do
not justify their harms. Even if the
businesses using non-competes benefit,
pecuniary benefits to the party
undertaking the unfair method of
competition are not a sufficient
justification under section 5.835 As
described in Part IV.D.1, the most
commonly cited justifications for noncompetes are that they increase
employers’ incentive to make
productive investments in, for example,
trade secrets, customer lists, and human
and physical capital investment. There
is some evidence that non-competes
increase human and physical capital
investment, as noted previously.836
However, the empirical literature does
not show the extent to which human
capital investment and other investment
benefits from non-competes accrue to
any party besides the employer, and to
829 See
Part IV.B.3.a.ii.
Part X.F.6.
831 See Part IV.B.3.b.i-ii; Part IV.C.2.c.i.
832 See Part IV.B.3.b.iii.
833 See Part IV.C.2.c.i.
834 See Part X.F.6.
835 See Part II.F.
836 See Part IV.D.1.
830 See
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the extent it addresses this issue it
suggests otherwise. For example, in
theory, if increased human capital
investment from non-competes
benefited workers, they would likely
have higher earnings when noncompetes are more readily available to
firms (i.e., when legal enforceability of
non-competes increases). However, as
explained in Parts IV.B.3.a.ii and
IV.C.2.c.ii, the empirical evidence
indicates that, on net, greater
enforceability of non-competes reduces
workers’ earnings. Likewise, in theory,
if increased human capital investment
increased innovation that redounds to
the benefit of the economy and society
as a whole, one would expect to see
legal enforceability of non-competes
yield such benefits, but as elaborated in
Part IV, the empirical evidence on
innovation effects indicates the
opposite.
Moreover, the Commission is also not
aware of any evidence that these
potential benefits of non-competes lead
to reduced prices. Indeed, the only
empirical study of the effects of noncompetes on consumer prices—in the
health care sector—finds increased
prices as the enforceability of noncompetes increases.837 That study,
which finds that non-compete
enforceability increased physician pay,
also finds that labor cost pass-through is
not driving price decreases.838
Furthermore, there is no evidence
that, in the three States in which noncompetes are generally void, the
inability to enforce non-competes has
materially harmed employers,
consumers, innovation (or economic
conditions more generally), or workers.
As a result, the Commission finds that
the asserted benefits from non-competes
do not justify the harms they cause.
The Commission finds that the harms
from non-competes are clearly not
justified by the purported benefits,
regardless of whether one considers
senior executives or workers other than
senior executives together or separately.
In this Part IV.D.3, the Commission
explains why, for workers overall, the
asserted benefits from non-competes do
not justify the harms they cause. This is
at least as true for senior executives as
for other workers. As described in Part
IV.C.2.c.i, non-competes with senior
executives tend to negatively affect
competitive conditions in product and
service markets at least as much as noncompetes with other workers—and
likely to a greater extent—given the
outsized role of senior executives in
forming new businesses, serving on new
837 See
838 See
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Part IV.B.3.b.iii.
Hausman & Lavetti, supra note 590 at 278.
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businesses’ executive teams, and setting
the strategic direction of businesses
with respect to innovation. At the same
time, firms have the same less restrictive
alternatives available for senior
executives as they do for other workers,
as described in Part IV.D.2.c.iii. For
these reasons, whether one considers
non-competes with senior executives or
non-competes with other workers, the
claimed business justifications for noncompetes do not justify the harms from
non-competes.
b. Responses to Comments
Commenters focused on the question
of whether employers have adequate
alternatives to non-competes and the
analysis of costs and benefits of the
proposed rule in the preliminary
regulatory impact analysis, rather than
the balancing analysis discussed in this
Part IV.D.3 specifically. These
comments are addressed in Part IV.D.2
and in Part X, respectively.
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E. Section 910.2(b): Notice Requirement
for Existing Non-Competes
The Commission proposed to require
employers to rescind (i.e., legally
modify) existing non-competes and
provide notice to inform workers that
they are no longer bound by existing
non-competes.839 Based on comments,
the Commission is not adopting a
rescission requirement in the final rule.
Rather than require employers to legally
modify existing non-competes, the final
rule prohibits employers from enforcing
existing non-competes with workers
other than senior executives after the
compliance date.
The final rule adopts the notice
requirement—for workers who are not
senior executives—with minor revisions
to facilitate compliance and to improve
the likelihood of workers being
meaningfully informed. The revisions
include an option for employers to make
the notice more accessible to workers
who speak a language other than
English. The final rule also simplifies
compliance and ensures that workers
have prompt notice that their noncompetes are no longer in force by
requiring employers to provide notice
by the effective date, rather than 45 days
thereafter.
1. The Proposed Rule
Proposed § 910.2(b)(1) would have
required employers to rescind existing
non-competes with all workers.
Proposed § 910.2(b)(2) would have
required employers that rescinded noncompetes to provide notice to the
affected workers that their non-compete
is no longer in effect and may not be
enforced.
As proposed, § 910.2(b)(2) had three
subparagraphs that imposed various
requirements related to the notice.
Proposed § 910.2(b)(2)(i) stated that an
employer that rescinds a non-compete
pursuant to § 910.2(b)(1) must provide
notice in an individualized
communication to the worker that the
worker’s non-compete is no longer in
effect and may not be enforced. The
Commission stated in the NPRM that an
employer could not satisfy the notice
requirement by, for example, posting a
notice at the employer’s workplace.840
Proposed § 910.2(b)(2)(i) also stated that
the employer must provide the notice in
writing on paper or in a digital format
such as an email or text message within
45 days of rescinding the non-compete.
Proposed § 910.2(b)(2)(ii) stated that
the employer must provide the notice to
both current workers and former
workers when the employer has the
former worker’s contact information
readily available. To ease the burden of
compliance, proposed § 910.2(b)(2)(iii)
provided model language that would
satisfy the notice requirement. Proposed
§ 910.2(b)(2)(iii) and § 910.2(b)(3)
provided a safe harbor for employers
using the model language, while also
permitting an employer to use different
language, provided that the language
communicates to the worker that the
worker’s non-compete is no longer in
effect and may not be enforced.841
In the NPRM, the Commission stated
that the purpose of the proposed notice
requirement was to ensure that workers
are informed that their existing noncompetes are no longer in effect. The
Commission cited evidence indicating
that many workers are not aware of the
applicable law governing non-competes
or their rights under those laws, and
stated that it was therefore concerned
that, absent a notice requirement,
workers may not know that their noncompetes are no longer enforceable as of
the effective date.842
2. The Final Rule
a. The Final Rule Does Not Require
Rescission (Legal Modification) of
Existing Non-Competes
The Commission has eliminated the
proposed rule’s requirement that
employers rescind (i.e., legally modify)
existing non-competes. The Commission
believes the proposed rescission
requirement would have imposed
unnecessary burdens on employers, as
other aspects of the final rule provide
840 Id.
at 3513.
at 3514.
842 Id. at 3513.
841 Id.
839 See
NPRM, proposed § 910.2(b).
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less burdensome means of ensuring that
workers other than senior executives
will not be bound or chilled from
competitive activity by non-competes
after the effective date. Under
§ 910.2(a)(1)(ii), it is an unfair method of
competition for a person to enforce or
attempt to enforce a non-compete
(except where, under § 910.3 the person
has a good-faith basis to believe that the
final rule is inapplicable). Further,
under § 910.2(b)(1), the person who
entered into the non-compete must
provide clear and conspicuous notice to
the worker by the effective date that the
worker’s non-compete clause is no
longer in effect and will not be, and
cannot legally be, enforced against the
worker. These provisions are sufficient
to achieve the purposes of the proposed
rescission requirement without
requiring any affirmative conduct
beyond the notice requirement.
The Commission has also eliminated
the proposed rescission requirement in
response to comments expressing
confusion about the requirement and
concern about its practical implications.
Some comments interpreted the
proposed rescission requirement to
mean that the worker and employer
must be returned to their original
positions (i.e., on the day they entered
into the non-compete) and presumed to
not have entered into it or that it
mandated wholly new contracts to
replace any existing agreements that
contained non-competes. Some
commenters objected to what they
considered the high compliance costs of
rescinding and revising every
employment contract with a noncompete. Some businesses said their
contracts with senior executives and
potentially other workers would be
unwound by a rescission requirement.
Other commenters said that if the
Commission promulgated the proposed
rescission requirement, it would be
disregarding the role non-competes
played in the overall value of the
exchange for an employment contract.
An industry association said rescission
would require assessment of each
contract’s severability under relevant
State law, and the answers would vary
widely.
The Commission does not intend for
the final rule to have such effect and has
omitted the rescission requirement
proposed in the NPRM. The
Commission also adopts § 910.3(b),
which provides an exception for causes
of action that accrued before the
effective date, to be clear that the final
rule does not render any existing noncompetes unenforceable or invalid from
the date of their origin. Instead, it is an
unfair method of competition to enforce
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certain non-competes beginning on the
effective date. Actions taken before the
effective date—for example, enforcing
an existing non-compete or making
representations related to an existing
non-compete—are not unfair methods of
competition under the final rule. As
noted elsewhere, the Commission also
exempts from the rule future
enforcement of existing non-competes
with senior executives.
Commenters also argued that a
rescission requirement would be
impermissibly retroactive, present due
process concerns, and/or constitute an
impermissible taking under the Fifth
Amendment. The Commission responds
to these comments in Part V.B.
Numerous commenters opposed the
proposed rescission requirement based
on perceived challenges presented by
proposed § 910.1(b)(2), which addressed
de facto non-competes, and its
purported ambiguity with respect to
which contractual terms employers
would be required to rescind. The
Commission has removed the rescission
requirement for the reasons described in
this Part IV.E.2.a and has also revised
the proposed rule’s language concerning
de facto non-competes to clarify the
scope of the definition.
b. The Final Rule’s Notice Requirement
While the final rule does not require
rescission (i.e., legal modification) of
existing non-competes, the final rule
does prohibit enforcement of existing
non-competes after the effective date
and requires the person who entered
into the non-compete with the worker to
provide clear and conspicuous notice to
the worker, by the effective date, that
the worker’s non-compete will not be,
and cannot legally be, enforced against
the worker.843 The notice must identify
the person who entered into the noncompete with the worker and must be
on paper delivered by hand to the
worker, or by mail at the worker’s last
known personal street address, or by
email at an email address belonging to
the worker, including the worker’s
current work email address or last
known personal email address, or by
text message at a mobile telephone
number belonging to the worker.844
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843 § 910.2(b)(1).
844 This language mirrors language in other
Federal regulations. See, e.g., 17 CFR 9.11 (notice
of disciplinary action must be made personally by
mail at the person’s last known address or last
known email address); 29 CFR 38.79 (written notice
must be sent to a ‘‘complainant’s last known
address, email address (or another known method
of contacting the complainant in writing)’’); 16 CFR
318.5 (providing for written notification at an
individual’s last known address, or email if the
individual chooses that option).
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Several commenters emphasized the
importance of notice, especially for
former workers who may be actively
refraining from competitive activity (in
compliance with a non-compete), and
who may continue to do so if they are
not informed that their non-compete is
no longer in effect. One commenter
highlighted the importance of notice,
because a non-compete may be coercive
regardless of its enforceability. Many
commenters emphasized the need for
clear and concise language in the
notices, including in languages other
than English. One commenter asked the
Commission to use concrete, layfriendly terms to help reduce workers’
fears of being sued. A commenter that
recommended notice in languages other
than English suggested that such a
requirement apply to medium and large
businesses with a threshold percentage
of workers (such as 10%) who primarily
speak a language other than English.
Commenters also suggested changes
in notice procedures to improve the
chances of workers receiving and
understanding the notice. One
commenter stated that text messages
should not qualify as a primary means
of individual notice because they are too
casual, may be automatically deleted,
and the sender may not be identifiable.
However, in this commenter’s view, text
messages could be a secondary form of
notice. Some commenters suggested that
in addition to individual notice, the
final rule should require an employer to
post a copy of the notice in the
workplace and/or online.
A number of commenters asserted
that the requirement for employers to
provide notice to former workers when
‘‘the employer has the worker’s contact
information readily available’’ was
confusing or burdensome. A commenter
stated that employers do not update
former employees’ contact information,
so such information is likely incomplete
and might be inaccurate. One
commenter asserted that a requirement
to provide notice within 45 days of the
effective date is too difficult for small
businesses. Another commenter
suggested that the final rule should
require contacting only former workers
who left the firm two years or less
before the effective date, unless the noncompete has elapsed.845 Some
commenters expressed concern that
former workers might not be notified
under the ‘‘readily available’’ standard.
A commenter stated that, to avoid
confusion and evasion, employers
should be required to send notice to
845 Under the final rule, notice is only required
for existing non-competes, i.e., those that have not
elapsed.
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38435
former workers at the worker’s last
known home address, email address, or
cell phone number. Commenters also
contended that the meaning of
‘‘individualized communication’’ was
not clear or that compliance with it
would be too difficult or burdensome.
The Commission finalizes the
proposed rule’s notice requirement
largely as proposed, with minor
revisions to facilitate compliance,
reduce burdens on employers, and
improve accessibility for non-English
speakers.846 The final rule also requires
covered businesses to provide notice by
the effective date, rather than 45 days
thereafter, to simplify the final rule and
to secure its benefits for competition in
labor markets and product and service
markets as soon as practicable.
The Commission finalizes a notice
requirement because the available
evidence indicates that many workers
are not aware of the applicable law
governing non-competes or their rights
under those laws, or are unable to
enforce their rights—and are chilled
from engaging in competitive activity as
a result. The evidence shows that even
when employers impose non-competes
that are unenforceable under State law,
many workers believe they are bound by
them (or are otherwise unable to enforce
their rights to be free of noncompetes).847 As a result, the
Commission finds that even after the
final rule is in effect, absent a clear
notice requirement, many workers may
be unaware that, because of the final
rule, their employer cannot enforce a
non-compete and that the Commission
has the authority to take action against
employers who violate the final rule.
Accordingly, absent notice, these
workers may continue to be chilled from
switching jobs or starting their own
business. This would tend to negatively
affect competitive conditions in the
846 The Commission notes that this required
notice is a routine disclosure of valuable, factual
information to workers that does not implicate the
First Amendment. See Milavetz, Gallop & Milavetz,
P.A. v. United States, 559 U.S. 229, 249–53 (2010)
(citing Zauderer v. Off. of Disciplinary Counsel, 471
U.S. 626, 651 (1985)). As described in this Part IV.E,
the Commission adopts this notice requirement to
ensure workers do not wrongly believe they remain
bound by unenforceable non-competes after the rule
goes into effect. The Commission’s conclusion that
such notice is necessary to achieve the full benefits
of the final rule is based on its expertise and on
empirical evidence supporting the Commission’s
finding of an in terrorem effect related to noncompetes.
847 See Prescott & Starr, supra note 413; see also
Part IV.B.2.b.ii (describing the Commission’s
finding that non-competes are exploitative and
coercive where they trap workers in jobs or force
them to bear significant harms or costs, even where
workers believe the non-compete is unenforceable).
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same manner as if non-competes were
in full force and effect.
A notice requirement helps address
this concern by informing individual
workers, to the extent possible, that after
the effective date the employer will not
enforce any non-compete against the
worker. The Commission believes that
prompt and clear notice to workers
other than senior executives that noncompetes are no longer enforceable is
essential to furthering the purposes of
the final rule—to allow workers to seek
or accept another job or to leave to start
and run a business, and to allow other
employers to compete freely for
workers. Indeed, the Commission has
refined the model language to make it
shorter and clearer than the proposed
model language.
While the proposed rule would have
required employers to provide the
notice no later than 45 days after the
compliance date, the final rule requires
notice no later than the effective date
(i.e., no later than 120 days after the
final rule is published in the Federal
Register). The Commission believes that
it is practicable and reasonable for
employers to provide the notice by the
effective date. The Commission has
designed the notice requirement to
make compliance as easy as possible for
employers. The final rule provides safe
harbor model language that satisfies the
notice requirement; 848 gives employers
several options for providing the
notice—on paper, by mail, by email, or
by text; 849 and exempts employers from
the notice requirement where the
employer has no record of a street
address, email address, or mobile
telephone number for the worker.850
In addition, while the model language
in the proposed rule used the phrase
‘‘the non-compete clause in your
contract is no longer in effect,’’ 851 the
model language in the final rule uses the
phrase ‘‘[EMPLOYER NAME] will not
enforce any non-compete clause against
you.’’ 852 Because this language does not
identify the recipient as having a noncompete, the employer does not need to
determine which of its workers have
non-competes; instead, it can simply
send a mass communication such as a
mass email to current and former
workers.
Furthermore, requiring notice by the
effective date simplifies the final rule
and allows its benefits to begin sooner.
In response to commenters that
contended that they need more time to
848 § 910.2(b)(4)–(5).
849 § 910.2(b)(2)(ii).
provide workers notice, the Commission
believes that providing notice should
not be time-consuming, even for small
businesses, particularly given that the
final rule provides model language,
allows use of the worker’s last known
contact information for notice, allows
digital notice, and (unlike in the
proposed rule) categorically exempts an
employer who has no such information
from the notice requirement. Moreover,
as described in Part IV.B.2.b.ii, noncompetes trap workers in jobs or force
them to bear other significant harms or
costs—even where workers believe the
non-compete is unenforceable. Given
the limited burdens associated with
providing notice only to workers whose
last known contact information is on file
and employers’ option to simply copy
and paste the safe harbor model notice,
as well as the known and currently
ongoing acute harms of non-competes
(including their in terrorem effects) and
the importance of workers knowing as
soon as possible that their non-compete
is unenforceable, the Commission
declines to extend the time to provide
notice.853 The Commission finds that
120 days is more than adequate for
employers to complete this task.
In response to comments expressing
concern that the NPRM’s
‘‘individualized communication’’
requirement was unclear or
burdensome, the Commission has
removed that language. Instead, the final
rule ensures each worker will receive
notice while specifying several
permissible methods for providing the
notice, which furthers compliance
certainty while giving employers a range
of options and an efficient means of
complying. By allowing a number of
formats for such communications,
including digital formats, employers are
more likely to be able to contact workers
rapidly, individually, and have
flexibility to do so at low cost.
Accordingly, § 910.2(b)(2) of the final
rule allows for notice by text message,
by email, as well as paper notice by
hand or by mail to the worker’s last
known street address. The final rule
gives employers flexibility to choose
among these methods. In responses to
the concerns expressed by the
commenter about text messages, the
Commission believes that text messages
should be a permissible method for
providing the notice because they are
widely used, delivered quickly, low-cost
for employers, and an effective means of
communication for workers who do not
have email accounts.
850 § 910.2(b)(3).
851 NPRM,
proposed § 910.2(b)(2)(iii).
852 § 910.2(b)(4).
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853 The Commission addresses the effective date
in Part VIII.
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In response to comments contending
that notice to former workers is too
burdensome or difficult, the
Commission believes that providing
notice to former workers is critical
because former workers may be
refraining from competitive activity
because they believe they are subject to
a non-compete. The Commission
disagrees that providing notice to former
workers will be burdensome. The
Commission believes that most
employers have contact information for
former workers who may be subject to
non-competes.854 And under the final
rule, in those rare cases in which an
employer has no record of a street
address, email address, mobile
telephone number, or other method of
contacting the worker or former worker,
§ 910.2(b)(3) exempts the employer from
the final rule’s notice requirement with
respect to the worker. Furthermore, by
specifying the circumstances under
which notice may not be provided, this
exemption also addresses concerns
expressed by some commenters that
ambiguity in the proposed rule’s
‘‘readily available’’ standard for
notifying former workers would lead to
fewer former workers being notified.
In response to comments contending
that notice to former workers is too
burdensome or difficult, the
Commission believes that providing
notice to former workers is critical
because former workers may be
refraining from competitive activity
because they believe they are subject to
a non-compete. In light of the comments
about the proposed ‘‘readily available’’
contact information standard, the
Commission in this final rule does not
adopt that language and instead requires
that the notice must be on paper
delivered by hand to the worker, or by
mail at the worker’s last known personal
street address, or by email at an email
address belonging to the worker,
including the worker’s current work
email address or last known personal
email address, or by text message at a
mobile telephone number belonging to
the worker. The Commission agrees
with commenters that stated that most
employers have such contact
information for both present and former
workers. For those rare cases in which
854 Employers have many record-keeping
requirements under State and Federal laws under
which they may retain the contact information
described in § 910.2(b)(2)(ii). See, e.g., IRS, Circular
E, Employer’s Tax Guide, Pub. 15, 8 (2024) (‘‘Keep
all records of employment taxes for at least 4
years,’’ including addresses of employees and
recipients and forms with addresses.); USCIS,
Handbook for Employers M–274, Sec. 10.0,
Retaining Form I–9 (requiring retention of I–9 form,
which includes employees’ addresses, email
addresses, and telephone numbers).
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an employer has no record of a street
address, email address, mobile
telephone number, or other method of
contacting the worker or former worker,
§ 910.2(b)(3) exempts the employer from
the final rule’s notice requirement.
The Commission agrees with
comments that notices in other
languages spoken by workers would
help achieve the goal of informing
workers that their non-competes are no
longer enforceable and help employers
to comply with the final rule. However,
to avoid imposing a burden of
translation on employers, § 910.2(b)(6)
makes it optional to provide notices in
languages other than English. The
Commission encourages employers to
provide this notice to workers who
speak languages other than English. To
facilitate the provision of notices in
other languages, the final rule provides
a model notice in English and links to
translations of other languages that are
commonly spoken in U.S. homes,
including Spanish, Chinese, Arabic,
Vietnamese, Tagalog, and Korean.855
V. Section 910.3: Exceptions
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A. Section 910.3(a): Exception for
Persons Selling a Business Entity
In the NPRM, the Commission
proposed an exception for certain noncompetes between the seller and the
buyer of a business that applied only to
a substantial owner, member, or partner,
defined as an owner, member, or partner
with at least 25% ownership interest in
the business entity being sold. Based on
comments, the Commission adopts an
exception for the bona fide sale of a
business without requiring that the
seller have at least a 25% ownership
interest.
1. The Proposed Rule
Proposed § 910.3 allowed noncompetes where the restricted party is
‘‘a person who is selling a business
entity or otherwise disposing of all of
the person’s ownership interest in the
business entity, or . . . selling all or
substantially all of a business entity’s
operating assets,’’ and is also ‘‘a
substantial owner of, or substantial
member or substantial partner in, the
business entity at the time the person
enters into the non-compete.’’ 856 The
Commission proposed to define
‘‘substantial owner, substantial member,
and substantial partner’’ as ‘‘an owner,
member, or partner holding at least a 25
855 See Sandy Dietrich & Erik Hernandez, Census
Bureau, Nearly 68 Million People Spoke a Language
Other Than English at Home in 2019 (Dec. 6, 2022)
at Table 1, https://www.census.gov/library/stories/
2022/12/languages-we-speak-in-united-states.html.
856 NPRM, proposed § 910.3.
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percent ownership interest in a business
entity.’’ 857 The text of proposed § 910.3
stated that non-competes allowed under
the proposed exception would remain
subject to Federal antitrust law and all
other applicable law.
The Commission stated in the NPRM
that its proposal to exempt from the rule
non-competes between the seller and
the buyer of a business did not reflect
a finding that such non-competes are
beneficial to competition.858 Rather, the
Commission explained that such noncompetes may implicate unique
interests and have unique effects, and
the evidentiary record did not permit
the Commission to thoroughly assess
the full implications of restricting their
enforceability.859 The Commission
noted that because all States permit
non-competes between the seller and
the buyer of a business to some degree,
and because the laws that apply to these
types of non-competes have seen fewer
changes recently than the laws
applicable to non-competes that arise
solely out of employment, there have
not been natural experiments allowing
researchers to assess this type of noncompete’s effect on competition.860
2. Comments Received
A few commenters suggested
eliminating the proposed exception.
These commenters contended that noncompetes between the seller and the
buyer of a business may still be
exploitative and coercive, particularly
in the case of small business owners in
transactions with larger, betterresourced corporations. However, most
commenters who addressed the issue
supported an exception that would
allow certain non-competes between the
seller and the buyer of a business. These
commenters agreed with the NPRM that
State common law generally applies
less-intensive scrutiny to non-competes
ancillary to the sale of a business and
that every State statute banning noncompetes has an exception which
allows some or all non-competes
between the seller and the buyer of a
business. Most of the commenters who
supported some form of exception for
non-competes between the seller and
the buyer of a business contended that
they are necessary to protect the value
of the sale by ensuring the effective
transfer of the business’s goodwill.
According to these commenters, a buyer
will be less willing to pay for a business
if they cannot obtain assurance that they
will be protected from future
proposed § 910.1(e).
at 3515.
859 Id. at 3514–15.
860 Id.
38437
competition by the seller, and so a
failure to exempt related non-competes
may chill acquisitions. Commenters
stated that sellers of a business have
more bargaining power than workers do
and generally receive a portion of the
sales price, making exploitation and
coercion less likely. They also noted
that non-competes between the seller
and the buyer of a business remain
subject to State limitations on scope,
duration, and reasonableness.
Some commenters supported the
proposed 25% ownership threshold.
However, most commenters who
otherwise supported the exception
stated that the proposed 25% ownership
threshold is too high. They argued that
the 25% threshold does not account for
the reality of most transactions, in
which owners with less than 25%
interest in a business may have
significant goodwill and receive
significant proceeds from a sale. Some
commenters focused on the tax costs of
the threshold, pointing to IRS
provisions that currently allow
taxpayers to deduct from their taxable
income the portion of the sales price
made in exchange for non-competes.
Others argued that the 25% threshold
would disincentivize equity-based
consideration. To avoid these harms,
these commenters suggested a variety of
other thresholds, including the 5%
ownership threshold used in SEC
regulations.861 Some commenters
contended that the Commission failed to
provide evidence justifying the
proposed 25% ownership threshold.
Others questioned the effectiveness of
ownership as a proxy for goodwill or the
likelihood of exploitation and coercion.
As examples, these commenters pointed
to passive investors who may have
significant ownership stakes in a
business but none of its goodwill, and
owners whose interests may be
purchased for less than fair market
value or who are excluded from sales
negotiations.
A few commenters argued that the
proposed 25% threshold would preempt
the laws of California and other States
which ban non-competes except in the
sale of a business, none of which require
that the seller have a substantial
ownership stake. They pointed to cases
in which California courts applied the
exception and allowed enforcement of
non-competes against shareholders
holding as little as a 3% ownership
interest. In light of these statutes, some
of these commenters urged the
Commission to adopt an exception for
857 Id.,
858 Id.
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861 See, e.g., 17 CFR 240.13d–1 (requiring
reporting by beneficial owners holding more than
5% interest in an equity security).
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agreements that involve the sale of a
business or equity in a company
without a threshold ownership
requirement.
Some commenters urged the
Commission to adopt a case-by-case
assessment of business sales based on
State law, such as a ‘‘totality of the
circumstances’’ or ‘‘reasonableness’’
test. Others proposed replacing the
ownership-based exception with an
exception for founders, key workers
with IP access, and/or those with
goodwill. At least one commenter asked
the Commission to use a bright-line rule
rather than a functional or definitional
test that would require adjudication and
interpretation by courts.
Some commenters presented
empirical evidence to justify a lower
ownership threshold. A few
commenters pointed to data suggesting
that more than 96% of CEOs of the
3,000 largest publicly traded companies
own less than 25% of their company.
One commenter pointed to data
suggesting that the average duration of
a startup’s life from fundraising to
acquisition is 6.1 years, arguing that it
is unlikely for venture-capital backed
businesses to operate and grow for that
period of time without accepting
funding that dilutes founders’ and key
employees’ equity stake in the business.
Other commenters supporting a lower
threshold provided anecdotal evidence
that businesses cede large shares to
financial backers, resulting in many
owner-operators holding significantly
less than a 25% share in their business.
Finally, some commenters focused on
eliminating potential loopholes to the
proposed exception. Some commenters
expressed concern that employers may
set up sham transactions with wholly
owned subsidiaries in order to impose
non-competes that would otherwise be
prohibited under the rule, urging the
Commission to clarify that the exception
applies only to bona fide transfers to an
independent third party. Some
commenters contended that firms may
use ‘‘springing’’ non-competes (in
which a worker must agree at the time
of hiring to a non-compete in the event
of some future sale) and repurchase
rights, mandatory stock redemption
programs, or similar stock-transfer
schemes (pursuant to which a worker
may be required to sell their shares if a
certain event occurs) to impose noncompetes on their workers which would
otherwise be prohibited. They urged the
Commission to address those instances
specifically, including by defining the
exception by the percentage of total
equity value received in liquid proceeds
at the time of the relevant transaction.
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3. The Final Rule
The Commission adopts a sale of
business exception for substantially the
same reasons articulated in the NPRM.
However, in response to comments
concerning the ownership percentage
threshold, the Commission modifies
§ 910.3(a) so that it no longer includes
the proposed requirement that the
restricted party be ‘‘a substantial owner
of, or substantial member or substantial
partner in, the business entity’’ to fall
under the exception. The Commission
otherwise adopts this provision largely
as proposed. To address commenters’
concerns that employers will use sham
transactions, stock-transfer schemes or
other mechanisms designed to evade the
rule, § 910.3(a) requires that, to fall
under the exemption, a non-compete
must be entered into pursuant to a bona
fide sale.
The Commission reiterates that
§ 910.3(a) does not reflect a finding that
non-competes between the seller and
the buyer of a business are beneficial to
competition or that they are not
restrictive and exclusionary or
exploitative and coercive. Indeed, the
Commission acknowledges that some
non-competes between the seller and
buyer of a business may be exploitative
and coercive due to an imbalance in
bargaining power and/or may tend to
harm competitive conditions. However,
commenters did not present empirical
research on the prevalence of noncompetes between the seller and the
buyer of a business or on the aggregate
economic effects of applying additional
legal restrictions to non-competes
between the seller and buyer of a
business. The Commission’s decision to
adopt § 910.3(a) reflects the view of the
Commission and most commenters that,
compared to non-competes arising
solely out of an employment
relationship, non-competes between the
sellers and buyers of businesses may
implicate unique interests and have
unique effects that this rulemaking
record does not address.862
The proposed requirement that an
excepted non-compete bind only a
‘‘substantial’’ owner, member or partner
of the business entity being sold was
designed to allow those non-competes
between the seller and the buyer of a
business which are critical to effectively
transfer goodwill while prohibiting
those which are more likely to be
exploitative and coercive due to an
imbalance of bargaining power between
the seller and the buyer. However,
commenters persuasively argued that
the proposed 25% ownership threshold
862 See
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was too high because it failed to reflect
the relatively low ownership interest
held by many owners, members, and
partners with significant goodwill in
their business. The Commission
declines to maintain the ‘‘substantial’’
interest requirement with a lower
percentage threshold for the same
reason.
The Commission also declines to
adopt a threshold of $1 million,
$250,000, or some other dollar limit on
the proceeds received by the seller. On
the current record, these thresholds
were not sufficiently correlated to
sellers’ goodwill or bargaining power for
a broadly generalizable approach. The
Commission declines to adopt a
‘‘totality of the circumstances’’ or
‘‘reasonableness’’ test in the text of
§ 910.3(a) because they would provide
little meaningful guidance to buyers and
sellers and would be difficult to
administer. For the same reasons, the
Commission declines to replace the
ownership-based exception with an
exception for founders, key workers,
workers with access to intellectual
property, and/or workers with goodwill.
Furthermore, non-competes allowed
under the exception will continue to be
governed by State law, which generally
requires a showing that a non-compete
is necessary to protect the value of the
business being sold, as well as Federal
antitrust law.863
Finally, the Commission agrees with
commenters’ concerns about the risks
that firms may abuse the exception
through sham transactions with wholly
owned subsidiaries, ‘‘springing’’ noncompetes, repurchase rights, mandatory
stock redemption programs, or similar
evasion schemes. The Commission adds
the term ‘‘bona fide’’ and makes changes
clarifying that any excepted noncompete must be made ‘‘pursuant to a
bona fide sale’’ to ensure that such
schemes are prohibited under the rule.
A bona fide sale is one made in good
faith as opposed to, for example, a
transaction whose sole purpose is to
evade the final rule.864 In general, the
Commission considers a bona fide sale
to be one that is made between two
863 See, e.g., U.S. v. Addyston Pipe & Steel Co.,
85 F. 271, 281 (6th Cir. 1898) (‘‘For the reasons
given, then, covenants in partial restraint of trade
are generally upheld as valid when they are
agreements [inter alia] by the seller of property or
business not to compete with the buyer in such a
way as to derogate from the value of the property
or business sold . . . . Before such agreements are
upheld, however, the court must find that the
restraints attempted thereby are reasonably
necessary . . . to the enjoyment by the buyer of the
property, good will, or interest in the partnership
bought. . . .’’).
864 Black’s Law Dictionary defines bona fide as
‘‘[m]ade in good faith; without fraud or deceit,’’ and
‘‘[s]incere; genuine.’’ (11th ed. 2019).
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independent parties at arm’s length, and
in which the seller has a reasonable
opportunity to negotiate the terms of the
sale. So-called ‘‘springing’’ noncompetes and non-competes arising out
of repurchase rights or mandatory stock
redemption programs are not entered
into pursuant to a bona fide sale
because, in each case, the worker has no
good will that they are exchanging for
the non-compete or knowledge of or
ability to negotiate the terms or
conditions of the sale at the time of
contracting. Similarly, sham
transactions between wholly owned
subsidiaries are not bona fide sales
because they are not made between two
independent parties.
The Commission declines to
specifically delineate each kind of sales
transaction which is not a bona fide sale
under the exception to avoid the
appearance that any arrangement not
listed is allowed under the exception.
Courts have effectively identified and
prohibited such schemes pursuant to
State statutes prohibiting noncompetes.865 In addition, non-competes
allowed under the sale-of-business
exception remain subject to Federal and
State antitrust laws, including section 5
of the FTC Act.
B. Section 910.3(b): Exception for
Existing Causes of Action
Proposed § 910.2(a) would have
prohibited employers from maintaining
an existing non-compete with a worker.
The proposed rule also would have
required employers to rescind existing
non-competes.866 Commenters argued
that any invalidation or rescission
required of existing non-competes
would be impermissibly retroactive,
present due process concerns, and/or
constitute an impermissible taking
under the Fifth Amendment.
As described in Part IV.C.5, the
Commission adopts a modified
§ 910.2(a) under which existing noncompetes for workers who are not senior
executives are no longer enforceable.
The Commission adds an exception in
§ 910.3(b) in response to comments
raising concerns related to retroactivity.
Section 910.3(b) specifies that the final
rule does not apply if a cause of action
related to a non-compete provision
accrued prior to the effective date. This
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865 See,
e.g., Bosley Med. Grp. v. Abramson, 161
Cal. App. 3d 284, 291 (Cal. Ct. App. 1984) (refusing
to enforce non-compete imposed on physician
under agreement requiring physician to purchase
9% of stock at hiring and resell to corporation upon
termination because agreement ‘‘was devised to
permit plaintiffs to accomplish that which the law
otherwise prohibited: an agreement to prevent
defendant from leaving plaintiff medical group and
opening a competitive practice’’).
866 See proposed § 910.2(b)(1).
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includes, for example, where an
employer alleges that a worker accepted
employment in breach of a non-compete
if the alleged breach occurred prior to
the effective date. This provision
responds to concerns that the final rule
would apply retroactively by
extinguishing or impairing vested rights
acquired under existing law prior to the
effective date.867 In this Part V.B, the
Commission addresses commenters’
arguments regarding retroactivity, due
process, and impermissible taking under
the Fifth Amendment.
1. Retroactivity
A number of commenters asserted
that applying the final rule to prohibit
the enforcement of existing noncompetes would render the final rule
impermissibly retroactive. The
Commission disagrees. A rule ‘‘does not
operate ‘retrospectively’ merely because
it is applied in a case arising from
conduct antedating the [rule’s]
enactment, or upsets expectations based
in prior law.’’ 868 Rather, courts have
explained that an ‘‘administrative . . .
rule is retroactive [only] if it takes away
or impairs vested rights acquired under
existing law, or creates a new obligation,
imposes a new duty, or attaches a new
disability in respect to transactions or
considerations already passed.’’ 869 ‘‘A
rule that ‘alter[s]’ the past legal
consequences of ‘past action’ is
retroactive,’’ while a rule that ‘‘‘alter[s]
only the ‘future effect’ of past actions, in
contrast, is not.’’ 870 Agency action ‘‘that
only upsets expectations based on prior
law is not retroactive.’’ 871
The final rule is not impermissibly
retroactive because it does not impose
any legal consequences on conduct
predating the effective date. The
Commission is not creating any new
obligations, imposing any new duties, or
867 As discussed in Part V.B.1, courts have
explained that an ‘‘administrative . . . rule is
retroactive [only] if it takes away or impairs vested
rights acquired under existing law, or creates a new
obligation, imposes a new duty, or attaches a new
disability in respect to transactions or
considerations already passed.’’ Regents of the
Univ. of Cal. v. Burwell, 155 F. Supp. 3d 31, 44
(D.D.C. 2016) (alteration in original) (quoting Nat’l
Min. Ass’n v. DOL, 292 F.3d 849, 859 (D.C. Cir.
2002)). But a regulation is not retroactive simply
because it ‘‘impair[s] the future value of past
bargains’’ if it does not also ‘‘render[ ] past actions
illegal or otherwise sanctionable.’’ Nat’l Cable &
Telecomms. Ass’n v. FCC, 567 F.3d 659, 670 (D.C.
Cir. 2009).
868 Landgraf v. USI Film Prods., 511 U.S. 244, 269
(1994).
869 Burwell, 155 F. Supp. 3d at 44 (alteration in
original) (quoting Nat’l Min. Ass’n, 292 F.3d at 859).
870 Id. (alterations in original) (quoting Ne. Hosp.
Corp. v. Sebelius, 657 F.3d 1, 14 (D.C. Cir. 2011)).
871 Nat’l Cable, 567 F.3d at 670 (internal
quotation omitted) (quoting Mobile Relay Assocs. v.
FCC, 457 F.3d 1, 11 (D.C. Cir. 2006)).
PO 00000
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38439
attaching any new disabilities for past
conduct.872 And to minimize concerns
about retroactivity, the Commission
adopts § 910.3(b), which states that the
final rule does not apply where a cause
of action related to a non-compete
accrues before the effective date. The
notice requirement in § 910.2(b)
likewise does not render the final rule
impermissibly retroactive because that
requirement merely requires notice that
non-competes that exist after the
effective date will not be enforced in the
future with respect to workers other
than senior executives. No penalties
attach to persons who entered noncompetes before the effective date.
This final rule is analogous to the FCC
rulemaking upheld in National Cable &
Telecommunications Ass’n v. FCC.
There, the agency promulgated a rule
that ‘‘forbade cable operators not only
from entering into new exclusivity
contracts, but also from enforcing old
ones.’’ 873 The court upheld the rule
against a retroactivity challenge because
the FCC had ‘‘impaired the future value
of past bargains but ha[d] not rendered
past actions illegal or otherwise
sanctionable.’’ 874 This final rule does
the same with existing non-competes.
The final rule does not render it illegal
or otherwise sanctionable for parties to
have entered into non-competes before
the effective date; it merely provides
that persons cannot enforce or attempt
to enforce such agreements with
workers other than senior executives or
represent to such workers that they are
bound by an enforceable non-compete
after the effective date. It is thus not
impermissibly retroactive.
In National Cable, the court also
considered whether the agency had
‘‘balance[d] the harmful ‘secondary
retroactivity’ of upsetting prior
expectations or existing investments
against the benefits of applying [its]
rules to those preexisting interests.’’ 875
While commenters did not frame their
objection as one of ‘‘secondary
retroactivity,’’ some did object that the
final rule would upset the benefits of
pre-existing bargains. As in National
Cable, however, the Commission has
‘‘expressly consider[ed] the relative
benefits and burdens of applying its rule
872 For instance, the D.C. Circuit found that
agency action impermissibly attached a ‘‘new
disability’’ when a Department of Interior rule made
mine operators ineligible for a surface mining
permit based on ‘‘pre-rule violations.’’ Nat’l Min.
Ass’n v. U.S. DOI, 177 F.3d 1, 8 (D.C. Cir. 1999).
Here, the final rule imposes no penalties or other
disabilities on persons who entered into noncompetes before the effective date.
873 Nat’l Cable, 567 F.3d at 661.
874 Id. at 670.
875 Id. at 670.
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to existing contracts.’’ 876 This
consideration led the Commission to
adopt the various exceptions described
in the final rule, including the decision
not to apply the final rule to noncompetes entered into with senior
executives before the effective date. As
explained in Part IV.B, however, the
Commission has determined that, for
workers other than senior executives,
there are substantial benefits to applying
the rule to prohibit the future
enforcement of non-competes entered
into before the effective date. These
benefits include the anticipated increase
in worker earnings, new business
formation, and innovation.877
Additionally, the Commission finds
such agreements are generally coercive
and exploitative, so prohibiting their
future enforcement is also a benefit.878
In the Commission’s view, these
significant benefits justify any burdens
of applying the final rule to the future
enforcement of pre-existing agreements
with workers other than senior
executives. Having balanced the
burdens and benefits of so applying the
final rule, the Commission has satisfied
its obligation to consider the secondary
retroactivity effects of the final rule.
Moreover, the Commission notes that
non-competes were already subject to
case-by-case adjudication under section
5.879 Employers were thus already
responsible, even before the final rule,
for ensuring their non-competes are not
unfair methods of competition.
2. Takings
The Commission also disagrees with
commenters who contended that
applying the final rule to non-competes
entered into before the effective date
would violate the Fifth Amendment by
effecting a taking without due
compensation. Some comments
interpreted the proposed rescission
requirement to mean that the worker
and employer must be returned to their
original positions (i.e., on the day they
entered into the non-compete) and
presumed to not have entered the
agreement, or that the rule would
mandate wholly new contracts to
replace any existing agreements that
contained non-competes. The
Commission does not intend the final
rule to have such effect and has omitted
the rescission requirement proposed in
the NPRM. The Commission also adopts
§ 910.3(b), which provides an exception
for causes of action that accrued before
the effective date, to clarify that the final
876 Id.
at 671.
Part IV.B.
878 See Part IV.B.2.b.
879 Part I.B.1.
877 See
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rule is purely prospective. The final rule
does not render any existing noncompetes unenforceable or invalid from
the date of their origin. Instead, under
the final rule, it is an unfair method of
competition to enforce certain noncompetes beginning on the effective
date. Action taken before the effective
date to enforce an existing non-compete
or representations made before the
effective date related to an existing noncompete are not an unfair method of
competition under the final rule. The
final rule does not effectuate a taking.
The Takings Clause provides that
‘‘private property’’ shall not ‘‘be taken
for public use, without just
compensation.’’ 880 When, as here, ‘‘the
government, rather than appropriating
private property for itself or a third
party, imposes regulations that restrict
an owner’s ability to use his own
property,’’ courts consider whether the
regulation ‘‘goes too far’’ and constitutes
a ‘‘regulatory taking.’’ 881 Consistent
with the Supreme Court’s decision in
Penn Central Transportation Co. v. City
of New York (‘‘Penn Central’’), this is
necessarily an ‘‘ad hoc, factual
inquir[y]’’ and focuses on three factors:
‘‘the economic impact of the regulation
on the claimant’’; ‘‘the extent to which
the regulation has interfered with
distinct investment-backed
expectations’’; and ‘‘the character of the
governmental action.’’ 882 ‘‘[T]he Penn
Central inquiry turns in large part, albeit
not exclusively, upon the magnitude of
a regulation’s economic impact and the
degree to which it interferes with
legitimate property interests.’’ 883 As a
general matter, ‘‘the fact that legislation
disregards or destroys existing
contractual rights does not always
transform the regulation into an illegal
taking.’’ 884
Under the Penn Central test, the final
rule does not effect a taking as a matter
of law. First, the economic impact of the
regulation on employers with existing
non-competes with workers who are not
senior executives is insufficient to
constitute a taking.885 The Commission
has found that such agreements are
rarely the product of bargaining, and
that little to nothing is offered in
880 U.S.
Const. amend. V.
881 Cedar Point Nursery v. Hassid, 594 U.S. 139,
148 (2021).
882 Penn Cent. Transp. Co. v. City of N.Y., 438
U.S. 104 (1978).
883 Lingle v. Chevron U.S.A. Inc., 544 U.S. 528,
540 (2005).
884 Connolly v. Pension Ben. Guar. Corp., 475 U.S.
211, 224 (1986); see also Nat’l Min. Ass’n v. Babbitt,
172 F.3d 906, 917 (D.C. Cir. 1999) (applying
Connolly to a Takings challenge to an
administrative rule).
885 Murr v. Wis., 582 U.S. 383, 405 (2017); see also
Connolly, 475 U.S. at 225.
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exchange for them. And research has
confirmed that for many such
agreements, employers do not value the
ability to enforce the agreements.886 The
final rule also includes provisions that
allow employers and workers to
‘‘moderate and mitigate the economic
impact’’ of the final rule.887 The
Commission has made clear that
employers may continue to use
reasonable NDAs and trade secrets law
to protect their interests, including
customer goodwill.888 In fact, one study
finds that 97.5% of workers with noncompetes are also subject to a nonsolicitation agreement, NDA, or a nonrecruitment agreement, and 74.7% of
workers with non-competes are subject
to all three provisions.889 And in cases
where non-competes with workers other
than senior executives were tied to
benefits like cash or equity, the
Commission has provided time for those
agreements to be renegotiated if
necessary.890 For senior executives, the
Commission allows existing agreements
to continue to be enforced.
The character of the governmental
action here also counsels against
viewing the final rule as a taking. ‘‘A
‘taking’ may more readily be found
when the interference with property can
be characterized as a physical invasion
by government . . . than when
interference arises from some public
program adjusting the benefits and
burdens of economic life to promote the
common good.’’ 891 There is no physical
invasion here, and the final rule is
promulgated under the Commission’s
authority to identify and prohibit unfair
methods of competition.892 Among
other economic benefits described in
Part IV.B, the Commission finds
economy-wide benefits, including
increases in new business formation and
innovation. The Commission also finds
that the final rule will increase earnings
for workers by preventing enforcement
of agreements that suppress their
earnings. Moreover, non-competes have
long been subject to government
regulation, including not only section 5
of the FTC Act, but also State common
886 See Hiraiwa, Lipsitz, & Starr (2023) (showing
that firms do not value the ability to enforce noncompetes for workers earning up to $100,000 per
year and potentially more).
887 Connolly, 475 U.S. at 225–26.
888 See Part IV.D.2.
889 Balasubramanian, Starr, & Yamaguchi, supra
note 74 at 35.
890 See § 910.6.
891 Penn Cent. Transp. Co. v. City of N.Y., 438
U.S. 104, 124 (1978) (internal citation omitted).
892 See 15 U.S.C. 45(a); see also Parts IV.B and C
(the Commission’s findings outlining the public
benefits of the final rule and the public harm from
the use of non-competes).
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law, State enactments, and other Federal
antitrust laws.
Finally, the final rule does not upset
investment-backed expectations to the
extent necessary to constitute a taking.
Even in States that prohibit some or all
non-competes, employers make many
investments in workers that they would
continue to make regardless of their
ability to use non-competes, such as
training, or that would be protected by
other mechanisms, such as reasonable
NDAs, trade secret law, and/or fixed
term contracts. In other words, noncompetes are not a prerequisite to
employers’ productivity and output, in
large part because (as described in Part
IV.D) employers have reasonable
alternatives to protecting the
investments they make. The
Commission has also lessened the
economic burden of the final rule by
creating an exception for situations
where a cause of action accrued before
the effective date.893 Furthermore,
States and the Federal government have
regulated and considered further
regulating non-competes for years, and
the Commission issued the NPRM more
than 18 months before the effective
date—and began exploring whether to
regulate non-compete agreements more
than five years ago.894 There has thus
been ample notice that non-competes
may become unenforceable by rule,895
and prior to this rule non-competes
were already subject to case-by-case
adjudication under section 5. For all
these reasons, the Commission does not
believe the final rule constitutes a
taking.
3. Due Process
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Similarly, the Commission disagrees
with commenters who argued that
applying the final rule to existing noncompetes would present due process
concerns. Assuming that these due
process concerns are independent of
other constitutional concerns like the
alleged retroactive application of the
final rule,896 which are addressed in
Parts V.B.1 and V.B.2, the Commission
disagrees that there is any due process
infirmity. Due process requires the
government, at a minimum, to provide
notice and an opportunity to be heard
before depriving any person of
893 See
§ 910.3(b).
Part I.B.
895 Connolly v. Pension Ben. Guar. Corp., 475 U.S.
211, 226 (1986).
896 Commenters invoking a due process concern
outside the retroactivity context provided little
contextual detail on the precise substance of the
concern, nor did they explain what further process
would be due before the Commission could
promulgate the rule.
894 See
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property.897 By issuing the NPRM and
engaging in notice-and-comment
rulemaking, the Commission has
provided sufficient due process. And on
top of the notice-and-comment process,
there will be further process in an
administrative adjudication or in court
before any person is found to have
violated the rule.
C. Section 910.3(c): Good Faith
Exception
The Commission adds an exception in
§ 910.3(c) in an abundance of caution to
ensure the final rule does not infringe
on activity that is protected by the First
Amendment 898 and to improve clarity
in § 910.2(a). The exception states: ‘‘It is
not an unfair method of competition to
enforce or attempt to enforce a noncompete clause or to make
representations about a non-compete
clause where a person has a good-faith
basis to believe that this part 910 is
inapplicable.’’ A similar ‘‘good-faith
basis’’ clause was in proposed
§ 910.2(a).
As described in Parts IV.B.4 and
IV.C.5, the final rule includes a
prohibition on enforcing or attempting
to enforce non-competes in both
§ 910.2(a)(1) and (2). Under the NoerrPennington doctrine, filing a lawsuit—
even if the suit may tend to restrict
competition and is ultimately
unsuccessful—is typically protected
under the First Amendment right to
petition and immune from antitrust
scrutiny.899 However, courts have
recognized that where a lawsuit is a
‘‘sham,’’ i.e., objectively baseless and
subjectively designed solely to prevent
competition, it is not protected.900 For
a non-compete covered by the final rule,
enforcing or attempting to enforce the
non-compete would likely be
considered a ‘‘sham’’ lawsuit.
Accordingly, such a lawsuit would not
enjoy protection under the First
Amendment. Section 910.3(b) ensures,
however, that if a circumstance arises
under which an employer’s enforcement
of or attempt to enforce a non-compete
897 See, e.g., N. Am. Butterfly Ass’n v. Wolf, 977
F.3d 1244, 1265 (D.C. Cir. 2020) (citing Mathews v.
Eldridge, 424 U.S. 319, 333–34 (1976)).
898 The Commission adopts § 910.3(b)(3) out of an
abundance of caution and does not believe that any
of the requirements in the final rule run afoul of the
First Amendment because the Commission finds
that the use of certain existing non-competes is an
unlawful unfair method of competition.
899 See E.R.R. Presidents’ Conference v. Noerr
Motor Freight, Inc., 365 U.S. 127 (1961); United
Mine Workers of Am. v. Pennington, 381 U.S. 657
(1965).
900 Pro. Real Est. Invs., Inc. v. Columbia Pictures
Indus., Inc., 508 U.S. 49, 60 (1993).
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38441
is protected by the First Amendment,
the final rule does not run afoul of it.
As explained in Parts IV.B.4 and
IV.C.5, the Commission adopts a
prohibition on ‘‘representing’’ that a
worker is subject to a non-compete in
§§ 910.2(a)(1)(iii) and 910.2(a)(2)(iii). In
§ 910.3(c), the Commission incorporates
a ‘‘good-faith’’ exception that applies to
the prohibition on ‘‘representing’’ the
worker is subject to a non-compete.
Taken together, these provisions of the
final rule prohibit an employer from
representing to a worker that the worker
is subject to a non-compete unless the
employer has a good-faith basis to
believe the worker is subject to an
enforceable non-compete.
The Supreme Court has held ‘‘there
can be no constitutional objection to the
suppression of commercial messages
that do not accurately inform the public
about lawful activity.’’ 901 Accordingly,
‘‘[t]he government may ban forms of
communication more likely to deceive
the public than to inform it, . . . or
commercial speech related to illegal
activity.’’ 902 The final rule does not
cover protected speech because it
prohibits only misrepresentations about
whether a non-compete covered by the
rule is enforceable. The good-faith
exception in § 910.3(b) ensures,
however, that the final rule does not run
afoul of the First Amendment if a
circumstance arises under which an
employer’s representation that a worker
is subject to a non-compete is protected
by that Amendment.
In the NPRM, the Commission stated
that an employer would have no good
faith basis to believe that a worker is
subject to an enforceable non-compete
‘‘where the validity of the rule . . . has
been adjudicated and upheld.’’ Some
commenters stated that legal challenges
to the final rule will create uncertainty
and unpredictability related to
compliance. The Commission believes
the foregoing statement in the NPRM
would contribute to this confusion and
does not adopt it in this final rule. The
Commission clarifies that the absence of
a judicial ruling on the validity of the
final rule does not create a good-faith
basis for non-compliance. If the rule is
in effect, employers must comply.
D. Requests To Expand Final Rule
Coverage or To Provide an Exception
From Coverage Under the Final Rule
In the NPRM, the Commission
preliminarily concluded that applying
the rule uniformly to all employers and
workers would advance the proposed
901 Cent. Hudson Gas & Elec. v. Pub. Serv.
Comm’n of N.Y., 447 U.S. 557, 563 (1980).
902 Id. at 563–64.
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rule’s objectives to a greater degree than
differentiating among workers on the
basis of industry or occupation,
earnings, another factor, or some
combination of factors, and that it
would better ensure workers are aware
of their rights under the rule.903 The
Commission sought comment on this
topic, including what specific
parameters or thresholds, if any, should
apply in a rule differentiating among
workers.904
The vast majority of commenters
supported the Commission’s proposal to
ban non-competes categorically for all
workers.905 Commenters from a broad
spectrum of job types and industries
stated that non-competes harm
competition in a way that hurts workers
and employers.
Commenters also supported the rule
with perspectives specific to particular
industries. In response to the
Commission’s request for comment on
the issue, some commenters argued that
the Commission should further expand
the rule to cover non-competes between
franchisors and franchisees.
Other commenters argued the
Commission should differentiate among
workers and employers along different
parameters. They stated that workers
with higher earnings, higher skills,
specific job titles, or access to specific
types of information should be
excluded. Some stated that particular
industries should be excluded
wholesale, including all workers in an
industry regardless of their job duties,
while some stated that only certain
workers in particular industries should
be excluded.
In adopting the final rule, the
Commission considered each request for
exclusion from or expansion of coverage
under the final rule and concludes that
the use of covered non-competes is an
unfair method of competition. The
Commission also concludes that
applying the final rule as adopted in
part 910 to the full extent of the
Commission’s jurisdiction with respect
to covered workers advances the final
rule’s objectives to a greater degree than
differentiating among workers. In
response to, inter alia, comments
regarding the potential costs and
difficulties that may result from
903 NPRM at 3518. The NPRM’s proposed
definition of ‘‘worker’’ excluded franchisees in the
context of franchisee-franchisor relationships. Id. at
3520. The NPRM also proposed an exception for
certain non-competes between the seller and the
buyer of a business.
904 NPRM at 3519.
905 The Commission received over 26,000 public
comments from a wide range of stakeholders.
Among these comments, over 25,000 expressed
support for the Commission’s proposal to
categorically ban non-competes.
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invalidating existing non-competes for
certain senior executives, however, the
final rule differentiates between senior
executives and other workers by
allowing existing non-competes for
senior executives to remain in force.
The final rule adopts a uniform rule
categorically banning new noncompetes for all workers. The
Commission substantiates its finding
that the use of non-competes with
workers is an unfair method of
competition in Parts IV.B and IV.C.
In this Part V.D, the Commission
addresses comments related to
differentiation or exclusion of certain
workers, employers, or industries.
Comments related to expanding or
limiting the definition of worker or
employer are addressed in Parts III.C
and III.G. Comments related to the
Commission’s jurisdiction and
exclusions from the Commission’s
jurisdiction in the FTC Act are
addressed in Part II.E. Comments related
to the prevalence of non-competes
within and across industries are
addressed in Part I.B.2.
Overall, the Commission is committed
to stopping unlawful conduct related to
the use of certain non-competes to the
full extent of its authority and
jurisdiction. The Commission finds
every use of a non-compete covered by
the final rule to be an unfair method of
competition under section 5 of the FTC
Act for the reasons in Parts IV.B and
IV.C. The use of an unfair method of
competition cannot be justified on the
basis that it provides a firm with
pecuniary benefits.906 To the extent
commenters argue for an exception
based on this justification, the
Commission declines to create any
exception on that basis. Moreover, a
uniform rule carries significant benefits,
which many commenters who otherwise
opposed the NPRM acknowledged.907
Among those benefits is the certainty for
both workers and employers from a
uniform rule, which also lessens the
likelihood of litigation over uncertain
applications. Exceptions for certain
industries or types of workers would
likely increase uncertainty and litigation
costs, as parties would dispute whether
a specific business falls within an
industry-wide exception. Most
importantly, exceptions would fail to
906 See, e.g., Atl. Refin. Co. v. FTC, 381 U.S. 357,
371 (1965) (‘‘Upon considering the destructive
effect on commerce that would result from the
widespread use of these contracts by major oil
companies and suppliers, we conclude that the
Commission was clearly justified in refusing the
participants an opportunity to offset these evils by
a showing of economic benefit to themselves.’’); see
also Part II.F.
907 See Part IX.C.
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remedy the tendency of non-competes
to negatively affect competitive
conditions in the excepted industries or
for excepted types of workers and
would likely have in terrorem effects.
1. Differentiation by Worker
Compensation or Skills
Many commenters sought an
exception for highly paid or highly
skilled workers, often alongside requests
for an exception for senior executives,
while many others asked the
Commission to keep these workers
within the scope of the final rule.
Commenters seeking an exception
argued that highly paid and highly
skilled workers in particular did not
experience exploitation and coercion
and were more likely to have access to
confidential information or client or
customer relationships, along with the
other justifications for non-competes
discussed in Part IV.D. Commenters’
specific arguments on the evidence
concerning highly paid or highly skilled
workers are considered in the relevant
subsections of Part IV.B. Many
commenters proposed using a
compensation threshold to differentiate
highly paid workers and senior
executives, discussed in IV.C.4.b. Other
commenters suggested an exception
based on the FLSA exemptions or the
worker’s level of access to confidential
information, discussed in Parts IV.C.4.
and V.D.2.
The Commission finds that noncompetes have a tendency to negatively
affect competitive conditions in labor
markets and product and service
markets, including non-competes
binding highly paid and highly skilled
workers. The evidence shows that,
among the other effects described in
Part IV.B, non-competes for highly paid
and highly skilled workers suppress
wages for these workers,908 restrict
competitors’ access to highly skilled
workers,909 and restrict
entrepreneurship.910 Notably, as
described in Parts IV.B.2 and IV.C.1, the
Commission concludes that noncompetes for highly paid or highly
skilled workers who are not senior
executives are generally exploitative
and coercive. The Commission finds
that highly paid and highly skilled
workers who are not senior executives
only rarely negotiate meaningful
consideration in exchange for a noncompete. As the Commission finds, the
overwhelming response from
commenters, particularly workers, was
that non-competes are exploitative and
908 See
Part IV.B.3.a.ii.
Part IV.C.2.c.i.
910 See Part IV.B.3.b.i.
909 See
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coercive for many workers in highly
paid professions other than senior
executives.911 While there may be
highly paid or highly skilled workers
who do not meet the definition of
‘‘senior executive’’ and who are not
exploited or coerced, including workers
above the definition’s total
compensation threshold, the
Commission explains in Part IV.C.4 why
a compensation threshold is necessary—
but not sufficient—for purposes of
defining senior executives whose
existing non-competes may remain in
force under the final rule. Further, the
Commission finds that employers have
sufficient alternatives to non-competes
for highly paid and highly skilled
workers.912 The Commission also
explains why it is not exempting all
non-competes that were exchanged for
consideration in Part IV.C.3.
Accordingly, the final rule does not
include any workers other than highly
paid senior executives in the exception
from the ban on enforcing existing noncompetes. To ensure that only workers
for whom there is insufficient evidence
of exploitation and coercion are
included in the exception, the final rule
narrowly defines senior executive in
§ 910.1.913
2. Differentiation by Worker Access to
Information
Some commenters suggested
excluding workers with access to trade
secrets, confidential business
information, or other intellectual
capital. Commenters contended these
workers are uniquely situated because
of their access to valuable employer
information. Many commenters
responded to these arguments and
disagreed with them. Some commenters
stated that employers overstate the
proportion of workers who have access
to such information. Commenters also
stated that employers exaggerate the
amount or quality of information that
should be appropriately considered a
trade secret, confidential business
information, or other intellectual
capital, and therefore exaggerate the
purported cost to the firm of not being
able to use non-competes. Commenters
also stated that employers have
alternatives to non-competes that
generate less harm to competition, to
workers, to the economy, and to rival
firms, including NDAs and fixed-term
employment contracts.
The Commission declines to adopt an
exclusion based on workers’ access to
911 See
Part IV.B.2.b.
Part IV.D.2.
913 For a more detailed discussion of proposed
§ 910.1(i), see Part IV.C.4.a.
912 See
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trade secrets, confidential business
information, or other intellectual capital
because it finds such an exclusion
would be unnecessary, unjustified,
unworkable, and prone to evasion. The
Commission finds the use of noncompetes to be an unfair method of
competition and addresses claimed
justifications related to trade secrets,
confidential business information, or
other intellectual capital in Part IV.D.
The Commission finds that protecting
trade secrets, confidential information,
and other intellectual capital is an
insufficient justification for noncompetes because employers have less
restrictive alternatives for protecting
such information. Moreover, if the
Commission were to exempt workers
with access to confidential information,
employers could argue that most or all
workers fall under the exception,
requiring workers to engage in complex
and fact-specific litigation over the
protected status of the underlying
information. As explained in Part IX.C,
such case-by-case adjudication of the
enforceability of non-competes has an in
terrorem effect that would significantly
undermine the Commission’s objective
to address non-competes’ tendency to
negatively affect competitive conditions
in a final rule.
3. Differentiation by Industry Other
Than Healthcare
Some businesses and organizations
argued that specific industries should be
exempt from the final rule. The
Commission carefully considered these
comments and declines to adopt any
industry-based exceptions. The
Commission notes that while some
commenters characterized purported
justifications for an exclusion from the
final rule as unique to a particular
industry, the purported justifications
were in fact the same as the those
addressed in Part IV.D, namely, the
need to protect investments in labor,
trade secrets, confidential business
information, or other intellectual
capital. The Commission addresses
those arguments in full in Part IV.D, but
in this Part V.C.3 further discusses
examples of comments seeking
industry-based exceptions.
a. Client- and Sales-Based Industries
Some commenters in client- or salesbased industries, including real estate
and insurance, argued they are unique
and should be excluded from any rule.
A real estate commenter argued that job
switching by real estate employees is
similar to the sale of a business where
the goodwill and book of business
generated by the departing employee
must remain with the business. A
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timeshare industry commenter claimed
the industry had unique features
justifying the use of non-competes with
highly paid workers, such as the cost of
marketing and cultivation of
relationships to bring in and maintain
customers as well as the need to protect
proprietary targets and strategies for
resort development, due in part to the
limited number of available resort
contracts. A commenter representing
insurance marketing organizations
(IMOs), which serve as facilitators
between insurance carriers, agents, and
consumers similarly argued for an
exclusion, citing client goodwill,
purported trade secrets in sales
methods, sales leads, unique
compensation structures, and company
analyses, and consumer harm from
potential agent misconduct if the agent
moves to a new IMO and changes the
consumer’s policy. Some businesses
stated that non-competes rarely impact
a worker’s ability to find other work in
their industry, sometimes because the
new employer ‘‘buys out’’ the noncompete.
The majority of commenters from the
real estate and insurance industry
workers and small, independent
insurance agencies, supported a
comprehensive ban. These comments
painted a picture consistent with the
Commission’s findings in Part IV.B
regarding indicia of unfairness,
including facial unfairness, and the
tendency of non-competes to negatively
affect competitive conditions in the
labor and product and service markets.
A worker from the real estate industry
stated that non-competes are standard in
the industry for all workers, regardless
of their position in a company.
Commenters stated that they were asked
to sign after starting their job, with one
worker stating that they faced the option
of either signing the non-compete or
leaving and losing future commissions
for work they had done. Workers noted
that they were terminated without cause
and still required to comply with a noncompete, and that they had no
bargaining power for promotion or wage
increases. The following examples are
illustrative of the comments the
Commission received:
• As an aspiring entrepreneur in the real
estate space, I am in a relatively small market
where one company dominates. I recently
ended my employment with them. They use
non-competes to restrict competition and
trap employees. The abolition of noncompetes is paramount as small towns/cities
grow. . . .914
• I signed a non-compete after working at
a Real Estate Brokerage for several months. I
914 Individual commenter, FTC–2023–0007–
10710.
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was told I had to sign it or I would not be
paid on the transactions I had pending. The
non-compete was so overreaching—there was
no geographical scope, the penalty was more
than prohibitive. I was told that no one really
enforces them or attempts to. I signed it,
collected my outstanding pay and left the
company within 90 days. Fast forward 4
years, I have been defending myself in
litigation over this non-compete for over 3
years. Unable to afford qualified
representation.915
• I am a business owner and have had 40
independent contractors under my business
at my peak. They were all under noncompete, and if I could go back, I would
eliminate the non-compete. It doesn’t help
the employee or contractor, and it doesn’t
help the business either. It spurs an
unhealthy work environment. Clogs up the
judicial system with frivolous cases where
they try and scare people from earning a
living. . . . I 100% support this ban, and it
should go into effect immediately.916
Commenters stated that non-competes
are standard in the insurance industry
and that the industry is facing
significant consolidation, fueled in part
by private equity firms. These
commenters argued that workers in the
insurance industry are prohibited from
seeking jobs with higher pay and better
benefits in their specialty. Commenters
stated that they were not able to
negotiate better conditions at their
current job and that employers can
change the employment terms at will, so
workers face reduced commissions and
pay while still being held to a noncompete. Commenters stated that
insurance agents are highly trained and
specialized, and non-competes force
them to leave their specialty and start
over in a new specialty for less pay.
Commenters also argued that noncompetes thwart consumer choice
because insurance agents create
relationships with their customers, and
customers lose the ability to choose the
same agent if the agent is bound by a
non-compete. Commenters also noted
that standard employment agreements
in the insurance industry require
workers to pay their own costs to defend
against noncompete litigation even if
the worker is successful in the challenge
such that even if a worker does not
violate the terms of a noncompete, or
the noncompete is not enforceable,
workers who change jobs or start a new
agency are often faced with significant
legal bills. Commenters noted that
although independent licensing agents
are meant to be able to contract with
multiple insurance companies, they are
heavily restricted by non-competes,
creating regional monopolies. The
915 Individual
916 Individual
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following examples are illustrative of
the comments the Commission received:
• As a captive ‘‘Independent Contractor’’
for a large insurance company, this rule
would be a lifeline should I decide to pursue
an independent agent opportunity. The
insurance company I represent, has gradually
cut commissions over the past few years . . .
that makes it extremely uncompetitive
compared to peers. There is absolutely no
reason why I should be held prisoner and not
be able to pursue far more favorable, and
beneficial opportunities, for both myself and
my family.917
• Ideally I would like to start my own
insurance agency but am currently prevented
from doing so due to a non-compete clause.
We are already somewhat limited in
employment opportunities here in rural West
Texas . . . . I’m finding it difficult to find a
path to provide for my family during the two
year period [of the non-compete], and
therefore am considering scrapping the new
business idea and remaining at my current
job. . . . In a sense, I feel trapped at my
current job, and ultimately I feel hobbled
from achieving my full potential as a future
small business owner.918
The Commission declines to adopt an
exclusion for client- or sales-based
industries such as real estate and
insurance. The use of non-competes is
an unfair method of competition and the
purported justifications raised by
commenters do not change the
Commission’s finding. The Commission
also notes that, to the extent
commenters seeking an exception are
referencing different restrictive
covenants, including some garden
variety non-solicitation agreements,
which do not prohibit or function to
prevent a worker from switching jobs or
starting a new business as described in
Part III.D, the final rule does not apply
to them. Thus, the Commission focuses
on commenters’ purported need for an
exclusion based on non-competes alone.
In response to commenters arguing
that information and techniques related
to sales, including strategy on
developing business, is confidential or
proprietary and that workers’ ability to
move to another job or start a business
would thus harm them, the Commission
notes that any specific information or
truly proprietary techniques can be
protected by much less restrictive
alternatives, such as trade secret law
and NDAs. For example, proprietary
targets and strategies for timeshares or
unique compensation structures or
company analyses cited by IMOs can be
otherwise protected. Moreover,
companies can compete on the merits to
retain their customers by offering better
917 Individual commenter, FTC–2023–0007–
10919.
918 Individual commenter, FTC–2023–0007–
19441.
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products and services. Requiring
workers to leave the industry or the
workforce is an overbroad restriction
that tends to negatively affect—and
actually harms—competition with
attendant harm to workers and rivals, as
outlined in Part IV.B.
With respect to commenter arguments
that non-competes are needed to protect
specialization related to particular
products and skills related to sales, as
the Commission finds in Part IV.D,
preventing workers from using their
general trade knowledge and skills,
including their gains in the same
through experience with a particular
employer, is not a legally cognizable
justification for non-competes. That a
real estate, insurance, or any other sales
agent inherently learns skills and gains
knowledge in the performance of their
job, becoming a more effective
salesperson over time, is not itself a
cognizable justification for preventing
the worker from re-entering the labor
market as a worker or business owner.
Employers’ efforts to use non-competes
to prevent workers from using general
trade knowledge and skills is an unfair
method of competition under section 5
because it is an attempt to avoid
competition on the merits.919 To the
extent employers seek to protect
legitimate investments in training, the
Commission finds employers have less
restrictive alternatives, including fixed
duration contracts and better pay or
other terms and conditions of
employment to retain the worker.
Finally, the Commission notes that
because all covered employers can no
longer maintain or enforce noncompetes with workers who are not
senior executives, employers may also
have a larger pool of trained and
experienced workers to hire from.
The Commission disagrees with
commenters arguing that a worker
leaving a sales position is akin to the
sale of a business. Unlike the seller of
a business, a worker is in an unequal
bargaining position and does not receive
compensation when leaving the firm.
The fact that a worker generates
goodwill for an employer is not a
cognizable justification for noncompetes. First, it not clear that the
employer would lose goodwill
associated with their business if a
particular worker leaves. Moreover,
commenters do not specify the extent to
which their legitimate investment in the
worker—separate from employing the
919 See Nat’l Soc’y of Prof. Engrs. v. United States,
435 U.S. 679 (1978) (confirming that limiting
competition, even if based on the specific
advantages of doing so because of the particular
nature of an industry, is not a cognizable
justification).
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worker to use their general skills and
knowledge to successfully perform the
job—generates such goodwill. To the
extent employers do seek to protect
investments in goodwill, the employer
has less restrictive alternatives to attract
and retain workers and customers or
clients.
b. Industries With Apprenticeships or
Other Required Training
Some commenters representing
industries with apprenticeships or that
require training as a part of
employment, such as real estate
appraisers, plumbers, and veterinarians,
argued their industry should be
excluded from the final rule. These
commenters contended that a significant
investment is needed to make workers
productive in their industries and that
they need to use non-competes to
protect that investment. Each
commenter cited an apprenticeship or
training period during which they are
not able to bill or must bill a lower
amount for a worker’s labor.
Worker commenters from these
industries stated that non-competes
leave them unable to launch or progress
in their career because non-competes tie
them to their first employer. Some
appraiser commenters noted that, while
their share of the appraisal fee rises to
some extent after completing their
apprenticeship, they cannot negotiate
higher shares of the fee or other better
working conditions because of noncompetes. A union commenter
representing plumbers noted that
plumbers with non-competes are not
able to accept better offers of
employment, with better pay and
benefits, including union positions.
Other worker commenters mentioned
geographic overbreadth and excessively
long non-competes of two years. Many
veterinarian commenters supported the
proposed rule, stating that noncompetes artificially held down their
compensation and did not allow them to
start new practices in areas where the
need for more veterinary services is
great, with some commenters stating
that this contributed to consolidation.
The Commission declines to exclude
industries, such as real estate appraisal,
plumbing, and veterinary medicine, in
which an industry must purportedly
invest in significant training or
apprenticeship of workers before the
employer considers them to be
productive. The Commission finds that
these employers have less restrictive
alternatives—namely fixed duration
contracts—to protect their investment in
worker training. A return on investment
in the training does not require that the
worker be unable to work for a period
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after leaving employment. Moreover,
employers stand to benefit from the
final rule through having access to a
broader labor supply—including
incoming experienced workers—with
fewer frictions in matching with the best
worker for the job.
c. Financial Services
Some commenters representing
financial services companies opposed
the rule, arguing non-competes are
necessary for the industry and their
industry is unique because noncompetes have been used for decades,
while numerous firms have entered the
market, workers are mobile, and there is
no evidence of blocked or curbed entry,
lack of access to talent, lower
innovation, or other negative impacts in
that market. These commenters mention
that mobility and access to talent is
possible because new employers often
‘‘buy out’’ a worker’s non-compete to
hire a worker who may be otherwise
bound by a non-compete. Several
commenters also contend that noncompetes are especially vital to firms
that focus on securities or commodities
trading because disclosure of
commercially sensitive information to
competitors can be extremely damaging
to their former employers’ profitability.
Commenters identified three studies
which they contend suggest that noncompetes improve worker productivity.
First, commenters identified two studies
on the Broker Protocol, an agreement
among financial advisory firms which
ostensibly limited the use of NDAs, nonsolicitation agreements, and noncompetes simultaneously. One study by
Gurun, Stoffman, and Yonker finds that
firms that joined the Protocol
experienced higher rates of employee
misconduct and earned increased
fees.920 The other study, by Clifford and
Gerken, finds that firms which joined
the Protocol invested more heavily in
licensure and experienced fewer
customer complaints.921 Commenters
noted that these two studies have
conflicting findings on advisor
misconduct. The authors themselves
discuss these findings, with each
criticizing the approach of the other.
One commenter stated that, from a
technical standpoint, the Clifford and
Gerken study has a superior approach
due to its substantially larger sample
size and its analysis of the assumptions
920 Umit G. Gurun, Noah Stoffman, & Scott E.
Yonker, Unlocking Clients: The Importance of
Relationships in the Financial Advisory Industry,
141 J. of Fin. Econ. 1218–43 (2021).
921 Christopher P. Clifford & William C. Gerken,
Property Rights to Client Relationships and
Financial Advisor Incentives, 76 J. of Fin. 2409–45
(2021).
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underlying the methodologies used in
both studies. A third study—a study of
the mutual fund industry by Cici,
Hendriock, and Kempf—finds that
mutual fund managers increase their
firms’ revenue when non-competes are
more enforceable by investing in higher
performing funds, attracting new
clients, and increasing revenue from
fees.922 This study uses three changes in
non-compete enforceability, measured
in a binary fashion.
A commenter representing a large
group of public equity investors
supported the rule, stating that a
comprehensive ban would create an
inclusive labor market, which is integral
to long-term corporate value and a
dynamic, innovative, and equitable
economy. Financial services worker
commenters also supported the rule,
citing to their failure to be paid for their
skills over time, the threat of litigation
in seeking new employment, and the
overbroad nature of non-competes in the
industry. The following example is
illustrative of the comments the
Commission received:
• I am a female finance professional with
strong qualifications and experience. I am
subject to an extremely long and
comprehensive non compete contract which
I was induced to sign at a young age. I have
been offered many positions at other firms
who would be more willing to provide me
with leadership opportunities and a path to
further advancement, but I am unable to
consider them and I am essentially trapped
at my firm. . . .923
The Commission declines to exclude
financial services companies over which
it has jurisdiction from the final rule.
The Commission finds in Part IV.C that
non-competes are restrictive,
exclusionary, and also exploitative and
coercive for higher wage and highly
skilled workers, including workers in
finance. The Commission also finds in
Part IV.B and IV.C that non-competes
tend to negatively affect competitive
conditions in labor market through
reduced labor mobility and in the
product and services market through
reduced innovation and new business
formation. Evidence that new employers
sometimes buy out non-competes also
suggests that such clauses harm
competition by raising the cost to
compete and creating deadweight
economic loss for the new employer.924
The empirical evidence provided by
commenters arguing for differentiation
922 Gjergji Cici, Mario Hendriock, & Alexander
Kempf, The Impact of Labor Mobility Restrictions
on Managerial Actions: Evidence from the Mutual
Fund Industry, 122 J. of Banking & Fin. 105994
(2021).
923 Individual commenter, FTC–2023–0007–0953.
924 See Part IV.C.2.c.i.
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for the finance industry does not
support their claims. The Commission
finds that it is difficult to weigh the
evidence in the two studies of the
Broker Protocol because they reach
conflicting results, though the
Commission agrees that the technical
approach in the Clifford and Gerken
study is superior due to its larger
sample size. More importantly, both
studies primarily concerned nonsolicitation agreements, and do not
isolate any effects of non-competes. So
even if the studies did not reach
conflicting results, the Commission
believes they still would yield little
reliable information about the effects of
non-competes specifically. With respect
to the study of the mutual fund
industry, the Commission notes that
under section 5, firms may not justify
unfair methods of competition based on
pecuniary benefit to themselves.925 The
study does not establish that there were
societal benefits from the attraction of
new clients or the increased fee
revenue—just that the firms benefited.
Therefore, this study does not establish
a business justification that the
Commission considers cognizable under
section 5.
d. On-Air Talent
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Some commenters opposing the rule
stated that investment in on-air talent
would be considerably reduced without
non-competes. Commenters argued that
on-air talent becomes well-known
because of employers’ investment and
reputation and that employers must be
able to use non-competes to protect this
investment. The Commission also
received a number of comments from
and on behalf of on-air talent. Those
commenters stated that non-competes
are ubiquitous for on-air talent, that they
are often localized geographically, that
they suppress compensation, and that
they force workers seeking a better
match to move out of their localities.
The following example is illustrative of
the comments the Commission received:
• I am a professional broadcast journalist
subject to a non-compete agreement with
every employment contract I have ever
signed, which is the industry standard. I
understand the need for contractual
agreements with on-air talent and some offair talent, but non-compete agreements have
historically offered nothing to employees
besides restricting where they work, and how
much money they are able to earn . . .
[while] knowing that employees would have
to completely relocate if they wanted to seek
or accept another opportunity.926
925 Id.
926 Individual commenter, FTC–2023–0007–
12779.
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The Commission declines to exclude
on-air talent from the final rule. The
Commission finds the use of noncompete agreements is an unfair method
of competition as outlined in Part IV.B,
and commenters do not provide
evidence that a purported reduction in
investment in on-air talent would be so
great as to overcome that finding.
Specifically, the success of on-air talent
is a combination of the employer’s
investment and the talent of the worker,
both of which benefit the employer. As
noted in Part IV.D, other less restrictive
alternatives, including fixed duration
contracts and competing on the merits
to retain the talent, allow employers to
make a return on their own investments.
Moreover, as stated in Part II.F, firms
may not justify unfair methods of
competition based on pecuniary benefit
to themselves. Employers in this context
do not establish that there are societal
benefits from their investment in on-air
talent, but only that the firms benefited.
e. Construction
A commenter representing companies
who provide skilled workers in
construction stated that the Commission
should exclude the industry from the
rule because non-competes are
necessary to the industry’s success. The
commenter states that non-competes are
necessary for investment in innovation
and productivity in the industry. The
comment cites to three studies. Two of
the studies find a general reduction in
productivity in construction and
conclude, inter alia, further study is
warranted to better understand the
trend—Goolsbee and Syverson 927 and
Huang, Chapman, and Burty (‘‘NIST
study’’ 928). The third study is a
McKinsey & Company report published
in 2020 predicting innovation in the
construction industry in the coming
years.929
The evidence cited by this commenter
is exclusively about broad trends in
productivity in the industry, and what
may impact those trends. None of the
studies explicitly examines noncompetes, and they do not support
inferences on the effects of noncompetes in this particular industry.
Indeed, the Commission finds that the
927 Austan Goolsbee & Chad Syverson, The
Strange and Awful Path of Productivity in the U.S.
Construction Sector (NBER Working Paper 30845,
Jan. 2023).
928 Allison L. Huang, Robert E. Chapman, & David
Burty, Metrics and Tools for Measuring
Construction Productivity: Technical and Empirical
Considerations, Nat’l Inst. of Standards and Tech.,
Bldg. and Fire Rsch. Lab., NIST Special
Publication 110 (September 2009).
929 McKinsey & Co., The Next Normal in
Construction: How Disruption is Reshaping the
World’s Largest Ecosystem (June 2020).
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final rule addresses issues raised by the
commenter. For example, the
commenter notes that productivity in
the industry has been broadly declining
for years. Notably, this downward trend
exists with non-competes in use in the
industry. The Commission notes that,
under its analysis of the effect of the
final rule, productivity will benefit
because the final rule frees up labor and
allows for greater innovation. The NIST
study raises ‘‘skilled labor availability’’
as the very first factor that affects
productivity. The Commission finds in
Part IV that non-competes suppress
labor mobility and the Commission
believes the final rule will result in
firms having access to workers who are
a better, more productive fit. The
McKinsey & Company report notes that
changes in the industry will require
adaptation by firms. The Commission
believes the final rule will facilitate this
adaptation by sharing non-confidential
know-how across firms through
increased mobility of workers. The rule
may also help mitigate, and certainly
will not exacerbate, concerns over
increased concentration in the industry
raised in the McKinsey & Company
report, as the Commission finds that
non-competes inhibit new business
formation in Part IV.B.3.b.i. Moreover,
the Commission believes non-competes
may increase concentration, as
discussed in Part IV.B.3.b.iii.
Additionally, the Commission finds
that less restrictive alternatives,
including appropriately tailored NDAs
and non-solicitation agreements, are
sufficient to address disclosure of
confidential information and concerns
related to client business. With respect
to concerns that the construction
industry as a whole is suffering from
under-investment in capital and that the
final rule may further disincentivize
capital investment, as the Commission
finds in Part IV.B.3.b.i, non-competes
inhibit new business formation. The
increase in new business formation from
the final rule will bring new capital to
bear in the industry. The Commission
addresses the empirical literature and
comments related to capital investment
in detail Part IV.D.1. The Commission
notes here that it is not clear any
purported capital investment associated
with non-competes is entirely beneficial
because it may be the result of firms
over-investing in capital because they
do not face competition on the merits.
Even if there is some net decrease in
capital investment due to the final rule,
commenters provide no reason to
believe it would be a material amount.
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4. Exclusion for Covered Market
Participants That Have Competitors
Outside the FTC’s Jurisdiction
The Commission explained in the
NPRM that some entities that would
otherwise be employers may not be
subject to the final rule to the extent
they are exempted from coverage under
the FTC Act.930 As described in Part
II.E.1, the Act exempts, inter alia,
‘‘banks,’’ ‘‘persons, partnerships, or
corporations insofar as they are subject
to the Packers and Stockyards Act of
1921’’ 931 as well as an entity that is not
‘‘organized to carry on business for its
own profit or that of its members.’’ 932
A few business and trade organization
commenters argued the Commission
should rescind the proposal or should
not promulgate the rule because limits
on the Commission’s jurisdiction mean
that the rule will distort competitive
conditions where coverage by the final
rule may not be universal. These
commenters identified industries where
employers excluded from the
Commission’s jurisdiction compete with
covered persons, including livestock
and meatpacking industries, and areas
where government or private employers
subject to the State action doctrine
compete with covered employers. They
contended that excluded employers will
be able to use non-competes while their
covered competitors are legally
prohibited from doing so, advantaging
excluded employers.
The Commission declines to rescind
the proposal or otherwise refrain from
promulgating a rule simply because the
rule would not cover firms outside the
Commission’s jurisdiction. As an initial
matter, jurisdictional limits are not
unique to the Commission. All agencies
have limits on their jurisdiction—many
of which do not neatly map to all
competitors in a particular market.
Moreover, as explained in Parts IV and
X, the final rule will have substantial
benefits notwithstanding the FTC Act’s
jurisdictional limits, including increases
in worker earnings, new firm formation,
competition, innovation, and a decrease
in health care prices (and potentially
other prices). Furthermore, the
Commission finds the risk of material
disparate impact in markets where some
but not all employers are covered by the
final rule is minimal and, in any event,
the final rule’s overall benefits justify
any such potential impact. As
commenters acknowledged, excluded
employers already compete with
covered employers in the same markets.
930 NPRM
at 3510.
(citing 15 U.S.C. 45(a)(2)).
932 Id. (citing 15 U.S.C. 44).
931 Id.
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That is, coverage under the FTC Act—
whether an employer is subject to the
FTC Act and enforcement by the FTC—
differs across a range of topics and long
predates this final rule, which does not
materially alter the status quo in that
respect. Moreover, even in the absence
of the rule, firms within the jurisdiction
of the FTC Act are already subject to
potential FTC enforcement against
unfair methods of competition,
including against non-competes, while
firms outside the FTC’s jurisdiction are
not. The final rule does not alter that
basic landscape.
At least one financial services
industry commenter stated that national
banks are outside of the Commission’s
jurisdiction and argued the final rule
should exclude bank holding
companies, subsidiaries, and other
affiliates of Federally regulated banks to
avoid disparate treatment of workers
employed by different affiliates within
the same organization, and because
those entities are already heavily
regulated. The Commission declines to
exclude bank holding companies,
subsidiaries, and other affiliates of
Federally regulated banks that fall
within the Commission’s jurisdiction.
While these institutions may be highly
regulated, and depending on the
corporate structure non-competes may
be allowed for some workers but not
others, the Commission finds that
neither factor justifies excluding them
from the final rule. If Federally
regulated banks are concerned about
disparate treatment of workers
employed by their own different
affiliates, they have the option to stop
using non-competes across all their
affiliates.
A corporation wholly owned by an
Indian tribe asserted that the
Commission should exclude Indian
tribes and their wholly owned business
entities from the definition of
‘‘employer.’’ The commenter asserted
that the FTC Act does not explicitly
grant jurisdiction over Indian tribes and
their corporate arms. The commenter
further argued that critical tribal
revenue will be lost if tribal businesses’
ability to retain skilled workers is
impacted. The Commission declines to
categorically exclude tribes or tribal
businesses from coverage under the
final rule. The FTC Act is a law of
general applicability that applies to
Indians, Indian Tribes, and tribal
businesses.933 The Commission
933 See Fed. Power Comm’n v. Tuscarora Indian
Nation, 362 U.S. 99, 116–17 (1960) (examining case
law supporting the conclusion that ‘‘a general
statute in terms applying to all persons includes
Indians and their property interests’’); FTC v. AMG
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38447
recognizes, however, that in some
instances these entities may be
organized in such a way that they are
outside the Commission’s
jurisdiction.934 Whether a given Tribe or
tribal business is a corporation within
the FTC Act will be a fact-dependent
inquiry. The Commission is aware of no
evidence suggesting the final rule would
disproportionately impact tribes or
tribal businesses.935
5. Coverage of Healthcare Industry
Many commenters representing
healthcare organizations and industry
trade associations stated the
Commission should exclude some or all
of the healthcare industry from the rule
because they believe it is uniquely
situated in various ways. The
Commission declines to adopt an
exception specifically for the healthcare
industry. The Commission is not
persuaded that the healthcare industry
is uniquely situated in a way that
justifies an exemption from the final
rule. The Commission finds use of noncompetes to be an unfair method of
competition that tends to negatively
affect labor and product and services
markets, including in this vital industry;
the Commission also specifically finds
that non-competes increase healthcare
costs. Moreover, the Commission is
unconvinced that prohibiting the use of
non-competes in the healthcare industry
will have the claimed negative effects.
a. Comments Received
Many business and trade industry
commenters from the healthcare
industry seeking an exception,
Servs., Inc., No. 2:12–CV–00536–GMN, 2013 WL
7870795, at *16–*21 (D. Nev. July 16, 2013), report
and recommendation adopted, No. 2:12–CV–
00536–GMN, 2014 WL 910302 (D. Nev. Mar. 7,
2014) (discussing the FTC Act’s applicability to
Indian Tribes and tribal businesses).
934 See, e.g., AMG Servs., 2013 WL 7870795, at
*22 (finding genuine dispute of material fact barring
summary judgment on question of whether tribal
chartered corporations were corporations under the
FTC Act).
935 The commenter also asked the Commission to
engage Indian tribes about the proposed rule, citing
Executive Order 13175. However, the Commission
notes that Executive Order 13175, which requires
consultation with Indian Tribes before
promulgating certain rules, does not apply to
independent regulatory agencies such as the
Commission. E.O. No. 13175, 65 FR 67249 (Nov. 6,
2000) (stating that the term ‘‘agency,’’ which
governs the applicability of the executive order,
excludes agencies ‘‘considered to be independent
regulatory agencies, as defined in 44 U.S.C.
3502(5)’’); 44 U.S.C. 3502(5) (listing the
Commission as an ‘‘independent regulatory
agency’’). The Commission did, however, provide
extensive opportunities for public input from any
and all stakeholders, including a 120-day comment
period (extended from 90 days) and a public forum
held on February 16, 2023, that provided an
opportunity to directly share experiences with noncompetes.
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including, for example, hospitals,
physician practices, and surgery centers,
focused on whether the Commission has
jurisdiction to regulate nonprofit
entities registered under section 501(c)
of the Internal Revenue Code. The
Commission addresses its jurisdiction in
Part II.E and considers comments
related to requests for an industry-based
exclusion for all or part of the
healthcare industry in this section. As
stated in Part II.E, entities claiming tax
exempt status are not categorically
beyond the Commission’s jurisdiction,
but the Commission recognizes that not
all entities in the healthcare industry
fall under its jurisdiction.
Based on the assumption that entities
claiming tax-exempt status as nonprofits
and publicly owned healthcare
organizations would be exempt, many
industry commenters contended that
for-profit healthcare organizations must
be also exempted from the rule as a
matter of equal treatment. Commenters
cited data from the American Hospital
Association (AHA) indicating that as
many as 58% of all U.S. hospital
systems claim tax-exempt status as
nonprofits, 24% are for-profit hospitals,
and 19% are State and local government
hospitals. One commenter cited AHA
data indicating that 78.8% of for-profit
hospitals are located in the same
Hospital Referral Region (HRR) as at
least one entity that claims tax-exempt
status as a nonprofit. Many commenters
argued that for-profit entities and
entities that claim nonprofit status
compete for patients, physician and
non-physician staff, and market share.
These commenters contended that a rule
covering only for-profit healthcare
entities will distort the market in favor
of entities claiming tax-exempt status as
nonprofits, which would continue using
non-competes. One commenter
identifying as an entity claiming
nonprofit tax-exempt status argued that
such entities need to rely on noncompetes to compete with for-profit
competitors because, unlike for-profit
health systems, they invest significantly
in specialized training and mentorship,
and offer a guaranteed minimum salary
to recent graduates.
Some commenters contended that
favoring entities claiming tax-exempt
status as nonprofits would have
negative effects. Some commenters
argued that disparate coverage under the
rule may exacerbate consolidation in the
healthcare industry by advantaging
entities that claim tax-exempt status as
nonprofits. They stated that increased
consolidation would reduce the
available supply of skilled labor for forprofit hospitals, increasing labor costs
and contributing to higher prices paid
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by patients. Commenters noted a trend
in physicians increasingly leaving
private practice to work at large hospital
groups claiming tax-exempt status as
nonprofits, which, they contended, may
continue to lock those physicians up
using non-competes. Industry
commenters also argued that insurance
premiums will rise more than they
would absent the rule because of the
greater market power and resulting
leverage of entities that claim taxexempt status as nonprofits in provider
network negotiations. One
manufacturing industry association
commenter argued that the burden of
rising premiums will be passed on to
manufacturers who provide health
insurance to their employees.
Commenters also argued that a rule
covering for-profit healthcare providers
would cause independent, physicianowned practices, and small community
practices to suffer a competitive
disadvantage compared to larger entities
that claim tax-exempt status as
nonprofits and public hospital groups,
reducing the number of these practices
and interrupting continuity of care for
their patients. Commenters stated that
such practices will suffer these
consequences acutely in States or
localities that are particularly saturated
with entities that claim tax-exempt
status as nonprofits or exempt State or
local hospitals, and cited New York and
Mississippi as examples. A commenter
claimed that public hospitals regulated
by the Commission will incur losses
because of their reduced ability to hire
and retain physicians that perform
profitable procedures. One commenter
cited a 1996 Commission study to
contend that, all else equal, hospitals
that claim tax-exempt status as
nonprofits set higher prices when they
have more market power. A business
commenter contended that, given what
they considered a large-scale exemption
of certain physician employers from the
Commission’s jurisdiction, the States
are more appropriate regulators of noncompetes between physicians and
employers. Other commenters claimed
that the Commission must further study
the consequences of differential
treatment.
Conversely, many commenters
vociferously opposed exempting entities
that claim tax-exempt status as
nonprofits from coverage under the final
rule. Several commenters contended
that, in practice, many entities that
claim tax-exempt status as nonprofits
are in fact ‘‘organized to carry on
business for [their] own profit or that of
[their] members’’ such that they are
‘‘corporations’’ under the FTC Act.
These commenters cited reports by
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investigative journalists to contend that
some hospitals claiming tax-exempt
status as nonprofits have excess revenue
and operate like for-profit entities. A
few commenters stated that
consolidation in the healthcare industry
is largely driven by entities that claim
tax-exempt status as nonprofits as
opposed to their for-profit competitors,
which are sometimes forced to
consolidate to compete with the larger
hospital groups that claim tax-exempt
status as nonprofits. Commenters also
contended that many hospitals claiming
tax-exempt status as nonprofits use selfserving interpretations of the IRS’s
‘‘community benefit’’ standard to fulfill
requirements for tax exemption,
suggesting that the best way to address
unfairness and consolidation in the
healthcare industry is to strictly enforce
the IRS’s standards and to remove the
tax-exempt status of organizations that
do not comply. An academic commenter
argued that the distinction between forprofit hospitals and nonprofit hospitals
has become less clear over time, and
that the Commission should
presumptively treat hospitals claiming
nonprofit tax-exempt status as operating
for profit unless they can establish that
they fall outside of the Commission’s
jurisdiction.
The Commission also received many
comments about coverage of the health
care sector generally under the rule.
Some commenters urged the
Commission to ensure that health care
workers, including doctors and
physicians, were covered by the final
rule. Several commenters stated that
eliminating non-competes would allow
doctors wishing to change jobs to stay
in the same geographic area, fostering
patient choice and improving continuity
of care. Other commenters urged the
Commission to create an exception for
health care workers. Some argued that
the evidence does not support the
Commission’s conclusion that noncompetes depress earnings in health
care. Other reasons commenters cited in
support of an exception included
concerns about continuity and quality of
care for patients, the increased costs for
employers of health care workers,
physicians’ negotiating power with their
employers, and the effect on incentives
for employers to train their health care
workers.936
Thousands of healthcare workers
submitted comments supporting a ban
on non-competes. Worker commenters
936 Some commenters also contended that the
health care industry should be exempt from the rule
because many health care providers fall outside of
the Commission’s jurisdiction. The Commission
summarizes and responds to those commenters in
Part II.E.2.
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did not always identify whether they
were working at for-profit organizations,
entities that claim tax-exempt status as
nonprofits, or State or local healthcare
organizations, but each category was
represented in the comments. These
commenters detailed the negative effects
of non-competes on their families, their
mental health, their financial health,
and their career advancement, as
elaborated in Part IV.B.2.b.ii.
Specifically, healthcare workers
commented that because non-competes
prohibited them from switching jobs or
starting their own businesses, they had
to stay at jobs with unsafe and hostile
working conditions, to take jobs with
long commutes, to relocate their
families, to give up training
opportunities, and to abandon patients
who wanted to continue seeing them.
Illustrative comments are highlighted in
Parts I and IV.
Additionally, commenters stated the
hardship patients have suffered because
of non-competes when, for example,
their physician was required to move
out of their area to work for a different
employer. The Commission highlights
some of these comments in Part
IV.B.2.b.ii and includes two further
illustrative comments here:
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• As a patient, non compete clauses are
affecting mine and my [family’s] ability to
receive medical care. Our pediatrician left a
practice and we aren’t able to be informed
where they are going. When we find out, it
is an hour away [because] of the non
compete. And when we look for other
[doctors] closer they aren’t accepting new
patients. So for an entire year we are driving
2 [hours] round trip to see our pediatrician
until they can move back to a local medical
group. The non compete clause is not just
affecting the life of the [doctor], but is also
impacting many of us who rely on their
services.937
• As a family physician this has caused
much grief and obstructs my desire to work
and provide care for underserved
populations. I am a NHSC scholarship
recipient and due to non compete clauses
was unable to continue working in the town
I served due to its rurality. This created a
maternity desert in the region I served. Now
in a more metropolitan area, there has been
an exodus of physicians in the area due to
non compete clauses that has caused
worsening access to primary care, specialty
services, including behavioral health and
substance use disorder treatment.938
A number of physician group
commenters stated that nonprofit
healthcare organizations regularly
impose non-competes on physicians,
and that the impact of the rule would be
limited if nonprofits are not required to
937 Individual commenter, FTC–2023–0007–
10085.
938 Individual commenter, FTC–2023–0007–0924.
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comply. Some physician group
commenters urged the Commission to
work with other agencies to fill in gaps
in applying the rule based on the
Commission’s jurisdiction, citing the
importance of banning non-competes as
widely as possible because of the harms
they impose on physicians and patients
irrespective of employer status.
Specifically, commenters suggested that
the Commission use its antitrust and
referral authority to aggressively
monitor nonprofit organizations for
antitrust violations, to collaborate with
other Federal agencies, including the
IRS, and to provide incentives and
guidance to States, which can enact
measures to ensure that a prohibition on
non-competes is implemented
comprehensively. One commenter also
noted that a ban would bring scrutiny to
non-competes and would likely
intensify pressure to eliminate them. A
few commenters also contended that
entities claiming tax-exempt status as
nonprofits are subject to the
Commission’s jurisdiction as ‘‘persons’’
under the FTC Act.
b. The Final Rule
After carefully considering
commenters’ arguments, the
Commission declines to exempt forprofit healthcare employers or to
exempt the healthcare industry
altogether.
First, as described in Part IV, the
Commission finds that certain uses of
non-competes are an unfair method of
competition. The use of unfair methods
of competition cannot be justified on the
basis that it provides a firm with
pecuniary benefits to help them
compete with other firms that use
similar tactics.939 In this case, for-profit
and other covered entities have urged
the Commission to allow them to
continue to employ an unfair method of
competition (i.e., use non-competes)
because some competitors are not
prohibited from doing so as they are
beyond the Commission’s jurisdiction.
The Commission is committed to
stopping unlawful conduct to the full
extent of its jurisdiction. For example,
the Commission would not refrain from
seeking to enjoin unlawful price fixing
by a for-profit within its jurisdiction
because entities outside its jurisdiction
939 See Atl. Refin. Co. v. FTC, 381 U.S. 357, 371
(1965) (‘‘Upon considering the destructive effect on
commerce that would result from the widespread
use of these contracts by major oil companies and
suppliers, we conclude that the Commission was
clearly justified in refusing the participants an
opportunity to offset these evils by a showing of
economic benefit to themselves.’’).
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under the FTC Act would not be subject
to the same FTC action.
Second, the Commission disagrees
with commenters’ contention that all
hospitals and healthcare entities
claiming tax-exempt status as nonprofits
necessarily fall outside the
Commission’s jurisdiction and, thus, the
final rule’s purview. As explained in
Part II.E.2, a corporation’s ‘‘tax-exempt
status is certainly one factor to be
considered,’’ but that status is not
coterminous with the FTC’s jurisdiction
and therefore ‘‘does not obviate the
relevance of further inquiry into a
[corporation’s] operations and
goals.’’ 940 Accordingly, as noted by
commenters, entities that claim taxexempt nonprofit status may in fact fall
under the Commission’s jurisdiction.
Similarly, whether the final rule would
apply to quasi-public entities or certain
private entities that partner with States
or localities, such as hospitals affiliated
with or run in collaboration with States
or localities, depends on whether the
particular entity or action is an act of
the State itself under the State action
doctrine, which is a well-established,
fact-specific inquiry.941 Thus, some
portion of the 58% of hospitals that
claim tax-exempt status as nonprofits
and the 19% of hospitals that are
identified as State or local government
hospitals in the data cited by AHA
likely fall under the Commission’s
jurisdiction and the final rule’s purview.
Further, many States have banned noncompetes for a variety of healthcare
professionals in both for-profit and
nonprofits entities by statute.942 Even if
940 In the Matter of the Am. Med. Assoc., 94 F.T.C.
701, 1979 WL 199033 (FTC Oct. 12, 1979).
941 In the Matter of Ky. Household Goods Carriers
Ass’n, Inc., 139 F.T.C. 404, 405 (2005) (‘‘The
Supreme Court has made clear that the state action
doctrine only applies when (1) the challenged
restraint is clearly articulated and affirmatively
expressed as state policy, and (2) the policy is
actively supervised by the State itself.’’) (citation
and alterations omitted); see also id. at 410–13
(applying test); Elec. Inspectors, Inc. v. Vill. of East
Hills, 320 F.3d 110, 117–19 (2d Cir. 2003).
942 Colo. Rev. Stat. sec. 8–2–113(5)(a) (Colorado
statute banning non-competes for physicians); D.C.
Code sec. 32–581.01 (D.C. statute banning noncompetes for medical specialists earning less than
$250,000, compared to $150,000 for other workers);
Fla. Stat. sec. 542.336 (Florida statute banning noncompetes for physician specialists in certain
circumstances); Ind. Code Ann. secs. 25–22.5–5.5–
2 and 2.5(b) (Indiana statute banning non-competes
for primary care physicians and restricting noncompetes for other physicians); Iowa Code sec.
135Q.2(3)(a) (banning non-competes for health care
employment agency workers who provide nursing
services); Ky. Rev. Stat. sec. 216.724(1)(a) (Kentucky
statute banning non-competes for temporary direct
care staff of health care services agencies); N.M.
Stat. Ann. secs. 24–1I–1 and 2 (New Mexico statute
banning non-competes for several types of health
care practitioners); S.D. Codified Laws secs. 53–9–
11.1–11.2 (South Dakota statute banning non-
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the final rule’s coverage extends only to
hospitals that do not identify as taxexempt non-profits based on AHA data,
as explained in Part IV.A.1, the
Commission finds every use of covered
non-competes to be an unfair method of
competition and concludes that the
evidence supports the Commission’s
decision to promulgate this final rule,
which covers the healthcare industry to
the full extent of the Commission’s
authority.
Relatedly, in response to commenters’
concern that large numbers of
healthcare workers will not benefit from
the final rule because they work for
entities that the final rule does not
cover, the Commission notes many
workers at hospitals, including those
that claims tax-exempt status as a
nonprofit or government-owned
hospital, contract with or otherwise
work for a for-profit entity, such as a
staffing agency or physician group.
Although some of these individuals may
work at an excluded hospital, the final
rule applies to their employer—the
staffing agency or for-profit physician
group—because it is covered by the final
rule.
The Commission disagrees with
commenters stating the ability to use
non-competes will provide a material
competitive advantage to entities
claiming tax-exempt status as nonprofit
or publicly owned entities that are
beyond the Commission’s jurisdiction.
To the contrary, those entities outside
FTC jurisdiction that continue to deploy
non-competes may be at a self-inflicted
disadvantage in their ability to recruit
workers, even if they derive some shortterm benefit from trapping current
workers in their employment.
Furthermore, commenters’ concern that
for-profit healthcare entities will be at a
competitive disadvantage is based on
the false premise that entities outside
the jurisdiction of the FTC will not be
otherwise regulated or scrutinized with
respect to the use of non-competes.
States currently regulate non-competes
by statute, regulation, and common law.
According to the AHA data cited by
commenters, over 12% (398/3,113) of
nonprofit hospitals and 13% of
government hospitals (187/1,409) are in
States that ban non-competes for all
employers. In any event, even if true,
arguments that for-profit and other
covered entities could suffer
competitive harm by not being able to
employ an unfair method of competition
would not change the Commission’s
competes for several types of healthcare
practitioners); Tex. Bus. & Com. Code secs. 15.50–
.52 (Texas statute restricting the use of noncompetes for physicians).
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finding that use of certain non-competes
is an unfair method of competition, as
further discussed in Part IV.
While the Commission shares
commenters’ concerns about
consolidation in healthcare, it disagrees
with commenters’ contention that the
purported competitive disadvantage to
for-profit entities stemming from the
final rule would exacerbate this
problem. As some commenters stated,
the Commission notes that hospitals
claiming tax-exempt status as nonprofits
are under increasing public scrutiny.
Public and private studies and reports
reveal that some such hospitals are
operating to maximize profits, paying
multi-million-dollar salaries to
executives, deploying aggressive
collection tactics with low-income
patients, and spending less on
community benefits than they receive in
tax exemptions.943 Economic studies by
FTC staff demonstrate that these
hospitals can and do exercise market
power and raise prices similar to forprofit hospitals.944 Thus, as courts have
recognized, the tax-exempt status as
nonprofits of merging hospitals does not
mitigate the potential for harm to
competitive conditions.945
Commenters provide no empirical
evidence, and the Commission is
unaware of any such evidence, to
support the theory that prohibiting noncompetes would increase consolidation
or raise prices. To the contrary, as
elaborated in Parts IV.B.3.a and IV.B.3.b,
the empirical literature suggests, and the
Commission finds, that the final rule
will increase competition and efficiency
in healthcare markets, as workers at forprofit healthcare entities will be able to
spin off new practices or work for
different employers where their
productivity is greater. This is true even
if the Commission does not reach some
portion of healthcare entities. While the
Commission’s prior research may
indicate, as one commenter suggested,
that nonprofit hospitals set higher prices
when they have more market power, the
Commission finds that the final rule is
not likely to increase healthcare prices
943 See, e.g., Press Release, Office of U.S. Sen.
Chuck Grassley, Bipartisan Senators Probe Potential
Abuse Of Tax-Exempt Status By Nonprofit
Hospitals (Aug. 9, 2023), https://
www.grassley.senate.gov/news/news-releases/
bipartisan-senators-probe-potential-abuse-of-taxexempt-status-by-nonprofit-hospitals; Request for
Information Regarding Medical Payment Products,
88 FR 44281 (July 12, 2023); U.S. Gov’t
Accountability Off., Testimony Before the
Subcommittee on Oversight, Committee on Ways
and Means, House of Representatives, Tax
Administration: IRS Oversight of Hospital’s TaxExempt Status, GAO–23–106777 (Apr. 26, 2023),
https://www.gao.gov/assets/gao-23-106777.pdf;
Pottstown Sch. Dist. v. Montgomery Cnty. Bd. of
Assessment Appeals, 289 A.3d 1142 (Pa. Commw.
Ct. 2023) (holding that for-profit hospitals
purchased by nonprofit claiming tax exempt status
under Federal law do not qualify under State law
for nonprofit tax exemption); Phoenixville Hosp.,
LLC v. Cnty. of Chester Bd. of Assessment Appeals,
293 A.3d 1248 (Pa. Commw. Ct. 2023); Brandywine
Hosp., LLC v. Cnty. of Chester Bd. of Assessment
Appeals, 291 A.3d 467 (Pa. Commw. Ct. 2023);
Jennersville Hosp., LLC v. Cnty of Chester Bd. of
Assessment Appeals, 293 A.3d 1248 (Pa. Commw.
Ct. 2023); The Daily, How Nonprofit Hospitals Put
Profits Over Patients (Jan. 5, 2023), https://
www.nytimes.com/2023/01/25/podcasts/the-daily/
nonprofit-hospitals-investigation.html; Gov’t
Accountability Off., Tax Administration:
Opportunities Exist to Improve Oversight of
Hospitals’ Tax-Exempt Status, GAO–20–679 (Sept.
17, 2020), https://www.gao.gov/products/gao-20679; Danielle Ofri, Why Are Nonprofit Hospitals So
Highly Profitable?, N.Y. Times, Feb. 20, 2020,
https://www.nytimes.com/2020/02/20/opinion/
nonprofit-hospitals.html; Maya Miller & Beena
Raghavendran, Thousands of Poor Patients Face
Lawsuits From Nonprofit Hospitals That Trap Them
in Debt, ProPublica (Sept. 13, 2019), https://
www.propublica.org/article/thousands-of-poorpatients-face-lawsuits-from-nonprofit-hospitalsthat-trap-them-in-debt.
944 See, e.g., Michael G. Vita & Seth Sacher, The
Competitive Effects of Not-For-Profit Hospital
Mergers: A Case Study, 49 J. Indus. Econ. 63 (2001),
https://onlinelibrary.wiley.com/doi/10.1111/14676451.00138/epdf (finding substantial price
increases resulting from a merger of nonprofit,
community-based hospitals, and determining that
mergers involving nonprofit hospitals are a
legitimate focus of antitrust concern); Steven Tenn,
The Price Effects of Hospital Mergers: A Case Study
of the Sutter-Summit Transaction, 18 Int’l J. Econ.
Bus. 65, 79 (2011), https://www.tandfonline.com/
doi/full/10.1080/13571516.2011.542956 (finding
evidence of post-merger price increases ranging
from 28%–44%, and concluding that ‘‘[o]ur results
demonstrate that nonprofit hospitals may still raise
price quite substantially after they merge. This
suggests that mergers involving nonprofit hospitals
should perhaps attract as much antitrust scrutiny as
other hospital mergers.’’).
945 See, e.g., FTC v. OSF Healthcare Sys., 852 F.
Supp. 2d 1069, 1081 (N.D. Ill. 2012) (‘‘[T]he
evidence in this case reflects that nonprofit
hospitals do seek to maximize the reimbursement
rates they receive.’’); FTC v. ProMedica, No. 3:11 CV
47, 2011 WL 1219281 at *22 (N.D. Ohio Mar. 29,
2011) (finding that a nonprofit hospital entity
‘‘exercises its bargaining leverage to obtain the most
favorable reimbursement rates possible from
commercial health plans.’’); United States v.
Rockford Mem’l Corp., 898 F.2d 1278, 1284–87 (7th
Cir. 1990) (rejecting the contention that nonprofit
hospitals would not seek to maximize profits by
exercising their market power); FTC v. Univ.
Health, Inc., 938 F.2d 1206, 1213–14 (11th Cir.
1991) (‘‘[T]he district court’s assumption that
University Health, as a nonprofit entity, would not
act anticompetitively was improper.’’); Hospital
Corp. of America v. FTC, 807 F.2d 1381, 1390–91
(7th Cir. 1986) (rejecting the contention that
nonprofit hospitals would not engage in
anticompetitive behavior). See also FTC & Dep’t of
Jusitce, Improving Health Care: A Dose of
Competition 29–33 (2004), https://www.ftc.gov/
sites/default/files/documents/reports/improvinghealth-care-dose-competition-report-federal-tradecommission-and-department-justice/
040723healthcarerpt.pdf (discussing the
significance of nonprofit status in hospital merger
cases, and concluding that the best available
empirical evidence indicates that nonprofit
hospitals exploit market power when given the
opportunity and that ‘‘the profit/nonprofit status of
the merging hospitals should not be considered a
factor in predicting whether a hospital merger is
likely to be anticompetitive’’).
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through this same mechanism because it
is unlikely to lead to significant
increases in healthcare nonprofits’
market share, if at all.
Moreover, the Commission has other
tools to address consolidation in
healthcare markets and is committed to
using them. The Clayton Act grants the
Commission authority to enforce
compliance with, inter alia, section 7 of
the Clayton Act. The Clayton Act does
not include any carveout for entities
that are nonprofit or otherwise do not
operate for profit—and the FTC’s
jurisdictional limit based on the
definition of ‘‘corporation’’ in the FTC
Act does not apply in this context.946
Accordingly, the Commission has
authority under the Clayton Act to
review and challenge mergers and
acquisitions involving healthcare
entities or hospitals regardless of
nonprofit status.947 Thus, even if the
jurisdictional limitations of the final
rule were to somehow incentivize some
hospitals and other healthcare entities
claiming non-profit status to
consolidate, the Commission will
continue to scrutinize those mergers and
work with State partners to vigorously
defend competition.948 For the same
reason, the Commission disagrees with
commenters who contended that the
effects of consolidation and staffing
shortages will be worse in areas highly
saturated with nonprofits claiming taxexempt status.
Finally, the Commission disagrees
with commenters that stated the
Commission must further study the final
rule’s effect on healthcare workers and
entities. The Commission has specific,
long-time expertise in the healthcare
market as anticompetitive mergers and
conduct in healthcare markets have long
been a focus of FTC law enforcement,
research, and advocacy.949 This work
946 15 U.S.C. 18; 15 U.S.C. 45; Univ. Health, Inc.,
938 F.2d at 1214–16.
947 Id.
948 See, e.g., In the Matter of RWJ Barnabas Health
and Saint Peters Healthcare Sys., Docket No. 9409
(Jun. 2, 2022) (complaint); FTC v. Advoc. Health
Care, No. 15 C 11473, 2017 WL 1022015, at *1 (N.D.
Ill. Mar. 16, 2017); FTC v. Penn State Hershey Med.
Ctr., 838 F.3d 327, 332 (3d Cir. 2016).
949 See, e.g., FTC, Competition in the Health Care
Marketplace, https://www.ftc.gov/tips-advice/
competition-guidance/industry-guidance/healthcare; FTC, Overview of FTC Actions in Health Care
Services and Products (2022), https://www.ftc.gov/
system/files/ftc_gov/pdf/2022.04.08
%20Overview%20Healthcare%20
%28final%29.pdf; Joseph Farrell et al., Economics
at the FTC: Retrospective Merger Analysis with a
Focus on Hospitals, 35 Rev. Indus. Org. 369 (2009),
https://link.springer.com/content/pdf/
10.1007%2Fs11151-009-9231-2.pdf; FTC,
Examining Health Care Competition (Mar. 20–21,
2014), https://www.ftc.gov/news-events/eventscalendar/2014/03/examining-health-carecompetition; FTC & Dep’t of Justice, Examining
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includes economic analyses of the
effects of mergers involving nonprofit
hospitals and studies of the impacts of
hospital mergers.950 Accordingly, given
this expertise and the extensive record
in the rulemaking, the Commission
finds it has sufficient understanding of
healthcare markets and that the
evidence supports the final rule’s
application to the healthcare industry.
6. Coverage of Franchisors Vis-a`-Vis
Franchisees
a. The Proposed Rule
The Commission proposed to exclude
franchisees from the definition of
‘‘worker’’ and requested comment on
whether and to what extent the rule
should cover non-competes between
franchisors and franchisees
(‘‘franchisor/franchisee noncompetes’’).951 The Commission
explained that it proposed to exclude
franchisees from the definition of
‘‘worker’’ because, in some cases, the
relationship between a franchisor and
franchisee may be more analogous to the
relationship between two businesses
than the relationship between an
employer and a worker.952 The
Commission also noted that the
evidentiary record relates primarily to
non-competes that arise out of
employment. However, the Commission
stated that, in some cases, franchisor/
franchisee non-competes may present
concerns under section 5 similar to the
concerns presented by non-competes
between employers and workers and
sought comment on coverage of
franchisor/franchisee non-competes.953
b. Comments Received
Many commenters requested that the
final rule cover franchisor/franchisee
Health Care Competition (Feb. 24–25, 2015),
https://www.ftc.gov/news-events/events-calendar/
2015/02/examining-health-care-competition;
Improving Health Care: A Dose of Competition,
supra note 945.
950 See, e.g., FTC, FTC Policy Perspectives on
Certificates of Public Advantage (Aug. 15, 2022),
www.ftc.gov/copa; FTC, Physician Group and
Healthcare Facility Merger Study (ongoing, initiated
Jan. 2020), https://www.ftc.gov/enforcement/
competition-matters/2021/04/physician-grouphealthcare-facility-merger-study; Christopher
Garmon, The Accuracy of Hospital Merger
Screening Methods, 48 RAND J. of Econ. 1068
(2017), https://www.ftc.gov/system/files/
documents/reports/accuracy-hospital-mergerscreening-methods/rwp_326.pdf; Joseph Farrell, et
al., Economics at the FTC: Hospital Mergers,
Authorized Generic Drugs, and Consumer Credit
Markets, 39 Rev. Indus. Org. 271 (2011), https://
link.springer.com/content/pdf/10.1007%2Fs11151011-9320-x.pdf; Devesh Raval, Ted Rosenbaum, &
Steve Tenn, A Semiparametric Discrete Choice
Model: An Application to Hospital Mergers, 55
Econ. Inquiry 1919 (2017).
951 NPRM at 3511, 3520.
952 Id. at 3511.
953 Id. at 3520.
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non-competes. Numerous commenters
contended the franchisee-franchisor
relationship is closer to a relationship
between a worker and an employer than
a relationship between businesses.
These commenters argued that
franchisees are often individual
business owners who, like workers, lack
bargaining power to negotiate over noncompetes. One commenter stated that
the Commission acknowledged in the
Franchise Rule that franchisees
generally lack bargaining power.954
Several commenters, including industry
commenters representing franchisees,
argued that franchisees tend to suffer
even greater power imbalances than
workers because many risk significant
personal assets to start their franchises.
According to these commenters, this
risk places acute strain on franchisees’
bargaining leverage when negotiating to
renew franchise agreements because, if
they choose to reject a new agreement,
they not only lose the opportunity to
continue working in the same field due
to their non-compete, but also the value
of their investment.
Commenters seeking coverage of
franchisor/franchisee non-competes also
stated that these non-competes do not
protect legitimate interests because
franchisors generally do not entrust
franchisees with trade secrets or details
about their broader commercial strategy.
These commenters stated that, even if
franchisees do receive such information,
franchisors have less restrictive
alternatives for protecting it, including
NDAs and trade secret law. Some
commenters also stated that noncompetes have anticompetitive effects
because franchisors may degrade the
quality of inputs or raise input prices
without fearing that their existing
franchisees will leave for a competitor.
Many franchisee commenters also
stated their desire to compete after
exiting their franchise relationships.
Franchisees also stated that their noncompetes harm their negotiating
position in bargaining over franchise
renewal terms. These franchisees stated
that franchisors can impose higher
royalty rates or other less favorable
terms over time as the franchisees feel
powerless to refuse or make effective
counteroffers, due to their noncompetes. Many franchisees asserted
that their non-competes are overbroad
because they restrain individual owners’
spouses and other close relatives from
competing in the same industry. Some
franchisees stated that their noncompetes include penalties for choosing
954 Trade Regulation Rule on Franchising and
Business Opportunity Ventures, 43 FR 59614,
59625 (Dec. 21, 1978).
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not to renew their contracts even if they
do not compete.
Other commenters, primarily
franchisors and trade organizations,
stated that franchisor/franchisee noncompetes should be excluded from the
final rule. Many of these commenters
argued that franchisor/franchisee noncompetes are more similar to restrictive
covenants between businesses than noncompetes between employers and
workers. Some of these commenters
argued that franchisor/franchisee noncompetes are more justified than noncompetes in the employment context
because, unlike employment
relationships, entering into a franchise
agreement is completely voluntary.
Some commenters argued that, unlike
non-competes in the employment
context, franchisor/franchisee noncompetes are only entered into by
individuals with access to substantial
capital and who therefore always have
the option of starting their own
businesses.
Many of these commenters argued
that prohibiting non-competes for
franchisees would threaten to severely
disrupt or destroy the franchise business
model, and that this would harm
franchisors and franchisees alike, as
franchising offers a unique opportunity
for working people to become
entrepreneurs with established brands.
Commenters asserted non-competes are
critical to the franchise business model
because they offer both franchisors and
franchisees confidence that existing
franchisees will likely stay with a brand
and refrain from using a franchise’s
trade secrets to unfairly compete against
the franchisor. Commenters also
asserted that franchisees are often
exposed to proprietary information
through training manuals and
operational support and that noncompetes help protect this information.
In addition, commenters contended
franchisor/franchisee non-competes
protect investments made by other
franchisees and maintain a franchise’s
goodwill.
Commenters supporting the exclusion
of franchisor/franchisee non-competes
from the final rule also asserted that the
Commission lacked an evidentiary basis
for covering such non-competes. These
commenters also claimed no State has
prohibited non-competes for
franchisees, and the Commission would
therefore lack data from natural
experiments to justify extending a final
rule to the franchise context.
c. The Final Rule
The Commission continues to believe
that, as many commenters attested,
franchisor/franchisee non-competes
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may in some cases present concerns
under section 5 similar to the concerns
presented by non-competes between
employers and workers. The comments
from franchisors, franchisees, and others
provide the Commission with further
information about non-competes in the
context of the franchisor/franchisee
relationship, but the evidentiary record
before the Commission continues to
relate primarily to non-competes that
arise out of employment. Accordingly,
the final rule does not cover franchisor/
franchisee non-competes. Non-competes
used in the context of franchisor/
franchisee relationships remain subject
to State common law and Federal and
State antitrust laws, including section 5
of the FTC Act.
VI. Section 910.4: Relation to State
Laws and Preservation of State
Authority and Private Rights of Action
In proposed § 910.4, the Commission
addressed State laws and preemption.
Based on comments, the Commission
adopts a modified provision clarifying
and explaining that States may continue
to enforce laws that restrict noncompetes and do not conflict with the
final rule, even if the scope of the State
restrictions is narrower than the final
rule.955
A. The Proposed Rule
The NPRM contained an express
preemption provision, proposed § 910.4,
that explained the proposed rule
preempted State laws inconsistent with
the rule and did not preempt State laws
that offer greater protection than the
rule. The NPRM explained that when a
State law offers greater protection than
the rule, employers would be able to
comply with both the NPRM and the
State law. Thus, the proposed rule
would have established a regulatory
floor, but not a ceiling. The NPRM
provided two hypothetical examples,
one of a State law that would be
inconsistent with, and therefore
preempted by, proposed § 910.2(a) and
one that would not because it satisfied
the savings clause by offering greater
protection and was not inconsistent
with proposed part 910.956
B. Authority for Preemption
Numerous commenters supported the
preemption of inconsistent State laws.
Some commenters asserted the
Commission lacks the legal authority to
preempt State laws, including State
common law, on non-competes because
Congress allegedly did not confer the
955 State statutes, regulations, orders, or
interpretations, including State common law, are
referred to as ‘‘State laws’’ for ease of reference.
956 NPRM at 3515.
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necessary authority to the Commission
or because of federalism principles.
They argued there must be clear
Congressional intent to preempt State
laws relating to non-competes.957
Numerous commenters asserted the
Commission lacks clear authority from
Congress to preempt State laws on noncompetes, arguing the FTC’s statutory
authority neither expressly nor
impliedly authorizes preemption of
non-competes. Commenters made
similar points based on cases about the
preemptive force of the Commission’s
UDAP regulations. For example, one
commenter asserted the FTC may not
have the authority to preempt less
restrictive State laws, citing American
Optometric Association v. FTC, in
which the court noted the need for
congressional authorization for the
Commission to preempt an entire field
of State laws that arise from the State’s
police powers.958
The Commission finds it has the
authority to promulgate regulations that
preempt inconsistent State laws under
section 6(g), together with section 5, of
the FTC Act. Even without an express
preemption provision, Federal statutes
and regulations preempt conflicting
State laws. Under the Supreme Court’s
conflict preemption doctrine, a Federal
statute or regulation impliedly preempts
State laws when it is impossible for the
regulated parties to comply with both
the Federal and the State law, or when
a State law is an obstacle to achieving
the full purposes and objectives of the
Federal law.959 ‘‘Federal regulations
have no less pre-emptive effect than
Federal statutes.’’ 960 Indeed, even
commenters who questioned the FTC’s
authority to preempt State laws agreed
that if a Federal agency promulgates a
rule pursuant to its Congressionally
conferred authority, the rule preempts
conflicting State laws.
As discussed in Parts II.A, II.B, and
II.C, the Commission has the authority
to promulgate this final rule.
Accordingly, the final rule preempts
conflicting State laws. To provide a
clear explanation of the Commission’s
intent and the scope of preemption
effected by the final rule, the final rule
includes an express preemption
957 Comments on the Commission’s authority to
promulgate this final rule, separate from the issue
of preemption of State law, are summarized in Part
II.
958 Am. Optometric Ass’n v. FTC, 626 F.2d 896,
910 (1980).
959 See, e.g., Federal Preemption: A Legal Primer,
Cong. Rsch. Serv., 23 (May 18, 2023) (Report
R45825), https://crsreports.congress.gov/product/
pdf/R/R45825/3.
960 Fid. Fed. Sav. & Loan Ass’n v. de la Cuesta,
458 U.S. 141, 153 (1982).
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provision at § 910.4.961 As discussed in
Part VI.D, the Commission has modified
proposed § 910.4 to make clear that even
when the scope of non-compete
prohibitions under a State law is less
than that of the final rule, State
authorities and persons may enforce the
State law by, for example, bringing
actions against non-competes that are
illegal under the State law.
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C. The Benefits of Preemption
Numerous commenters stated that
variations in State laws chill worker
mobility and expressed support for a
uniform Federal standard. Some
commenters explained that a
preemption clause could bring clarity to
the law’s effect.
The U.S. Department of Justice
commented that, due to the patchwork
of State laws, a worker may be free to
switch jobs in one jurisdiction but
subject to a non-compete in another,
creating uncertainty as to the noncompete’s enforceability for both firms
and workers.962 In another commenter’s
view, the variation in State non-compete
laws creates competitive disadvantages
for companies in States that ban such
clauses, necessitating a Federal ban.
Another commenter pointed out that
most States have not passed statutes that
ban or restrict non-competes, and that
existing statutes cover different
961 Many FTC regulations, including regulations
promulgated under section 6(g) of the FTC Act,
include provisions addressing State laws and
preemption. See, e.g., Funeral Rule, 16 CFR 453.9
(exempting from preemption State laws that ‘‘afford
an overall level of protection that is as great as, or
greater than, the protection afforded by’’ the FTC’s
Rule) (emphasis added); Concerning Cooling Off
Period for Sales Made at Homes or at Certain Other
Locations, 16 CFR 429.2(b) (exempting laws and
ordinances that provide ‘‘a right to cancel a doorto-door sale that is substantially the same or greater
than that provided in this part’’) (emphasis added);
Business Opportunity Rule, 16 CFR 437.9(b) (‘‘The
FTC does not intend to preempt the business
opportunity sales practices laws of any [S]tate or
local government, except to the extent of any
conflict with this part. A law is not in conflict with
this Rule if it affords prospective purchasers equal
or greater protection[.]’’) (emphasis added); Mail,
internet, or Telephone Order Merchandise Rule, 16
CFR 435.3(b) (‘‘This part does supersede those
provisions of any State law, municipal ordinance,
or other local regulation which are inconsistent
with this part to the extent that those provisions do
not provide a buyer with rights which are equal to
or greater than those rights granted a buyer by this
part.’’) (emphasis added); Franchise Rule, 16 CFR
436.10(b) (‘‘The FTC does not intend to preempt the
franchise practices laws of any [S]tate or local
government, except to the extent of any
inconsistency with part 436. A law is not
inconsistent with part 436 if it affords prospective
franchisees equal or greater protection[.]’’)
(emphasis added); Labeling and Advertising of
Home Insulation, 16 CFR 460.24(b) (preemption of
‘‘State and local laws and regulations that are
inconsistent with, or frustrate the purposes of this
regulation’’). See also Part II.B.
962 Comment of Dep’t of Justice Antitrust Div.,
FTC–2023–0007–20872 at 7.
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categories of workers and different wage
levels, making it difficult for workers to
know whether employers can enforce a
particular non-compete. The commenter
stated that variations in the legal
authority of State attorneys general to
take action on the public’s behalf also
limit the effectiveness of State
restrictions on non-competes. A number
of commenters explained that the
difficulties arising from variations in
State non-compete laws are exacerbated
by the increase in remote and hybrid
work, and workers who travel to work
across State lines. Accordingly, many
commenters favored a uniform Federal
standard that would promote certainty
for employers and workers. Even some
commenters who generally opposed
banning non-competes favored
preemption to eliminate the patchwork
of State laws that makes it difficult for
workers to know the applicable law and
encourages forum shopping by
employers who want to bring suits in
sympathetic jurisdictions.
Other commenters opposed
preemption, asserting that State
legislatures and courts are best situated
to address non-competes and that the
States have historically regulated this
area. They contended States should be
allowed to continue adjusting the scope
of restrictions on non-competes
including applicability to different types
of workers, time span, and geographic
scope.
The Commission finds that
preemption of State laws, including
State common law, that conflict with
the final rule best mitigates the negative
effects of the patchwork of State laws,
including chilling worker mobility and
undercutting competitive conditions in
labor and product and services
markets.963 Preempting this patchwork
with a Federal floor is particularly
important given the increase in work
across State lines, and remote and
hybrid work, since the COVID–19
pandemic.
Moreover, as discussed in Part IX.C,
preemption furthers a primary goal of
the final rule: to provide a uniform, high
level of protection for competition that
is easy for both employers and workers
to understand and makes it less likely
that employers will subject workers to
illegal non-competes or forum shop.
Indeed, some commenters who
otherwise opposed the proposed ban on
non-competes regarded the patchwork
itself burdensome to employers as well
as workers and noted the rule would
reduce burden by eliminating
uncertainty and confusion caused by
963 See
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State law variations.964 As described in
Part IX.C, the Commission has
determined that declining to issue this
final rule and continuing to rely solely
on State laws and case-by-case
adjudication would be less effective
than issuing a clear national standard.
The Commission concludes, however,
that supplementing the final rule with
additional State authority and resources,
so long as the State laws are not
inconsistent with the final rule, will
assist in protecting both workers and
competition.
D. The Extent of Preemption
Some commenters strongly supported
the NPRM but expressed concern that
the preemption provision as proposed
could undermine States’ efforts to curb
non-competes and would thereby
undercut the final rule’s effectiveness.
These commenters stated that under one
interpretation, proposed § 910.4 could
preempt State laws that prohibit noncompetes for workers earning less than
a specified income because the law as
a whole may not be deemed to provide
greater protection than the final rule. In
their view, such an interpretation would
not further the final rule’s goals, because
States with income-based restrictions on
non-competes rather than complete bans
may offer covered workers protections
against non-competes that the FTC’s
proposed rule would not provide, such
as State enforcement, private rights of
action, and certain financial
penalties.965
These commenters also asserted that
in many cases, State agencies and
residents could be better positioned to
respond to unlawful non-compete use
specific to a particular State, but they
would be unable to do so and
dependent on the Commission if their
laws were fully preempted. To enable
concurrent enforcement of State laws
that restrict the use of non-competes,
thereby increasing the enforcement
resources devoted to the issue, they
recommended a ‘‘savings clause’’ that
would exempt from preemption State
laws that provide workers with
protections substantially similar to or
greater than those afforded by the
964 See, e.g., Comment of Mech. Contractors Ass’n
of Am., FTC–2023–0007–18218 (although opposed
to the proposed rule, MCCA’s position supports a
single Federal rule and some level of preemption).
965 See Comment of the Attys. Gen. of 17 States
and DC, FTC–2023–0007–21043, at 14–15
(‘‘jurisdictions like Colorado, Illinois, Washington,
and the District of Columbia have passed laws that
ban non-competes for workers making under a
specified income threshold and also include
remedies provisions that authorize [S]tate agencies
and residents to enforce the law’’); id. at 9–11
(discussing State enforcement, private action, and
damages in several State non-compete laws).
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rule.966 They also recommended that
the rule not preempt State antitrust and
consumer protection laws that may
protect workers against non-competes
and other restrictive employment
arrangements as those laws can provide
another enforcement avenue for State
agencies and residents.
Another commenter recommended
including a narrow reverse preemption
provision so that relevant State laws in
States that enact the Uniform Restrictive
Employment Agreement Act 967 would
not be preempted.968 The comment
asserted that by doing so, a final rule
would preserve a role for the States and
encourage their cooperation with the
Commission, and also provide greater
protections for employees than the
proposed rule provided in several ways,
such as allowing for greater enforcement
and including classes of employers that
the final rule would not cover.969 The
uniform law would ban non-competes
for workers earning at or below the
State’s annual mean wage and would
allow non-competes for those earning
more, but apply limits and require
disclosures for any non-compete.
Based on comments, the Commission
has modified the final rule’s preemption
provision to clarify and explain that
State laws that restrict non-competes
and do not conflict with the final rule
are not preempted. Section 910.4 also
expressly references State common law,
antitrust law, and consumer protection
law, so that the intended scope of
preemption is clear. State common law
is expressly referenced because many
States do not have a general noncompete statute, and the common law
varies considerably.
Section 910.4(b) reflects the
Commission’s intent that States may
continue to enforce in parallel laws that
restrict non-competes and do not
conflict with the final rule, even if the
scope of the State restrictions is
narrower than that of the final rule. That
is, State laws cannot authorize noncompetes that are prohibited under this
final rule, but States may, for example,
continue to pursue enforcement actions
under their laws prohibiting noncompetes even if the State laws prohibit
a narrower subset of non-competes than
this rule prohibits.
966 Another comment recommended a similar
formulation, which would exempt from preemption
State laws that offer workers protection that is equal
to or greater than the protection provided by the
final rule. This commenter asserted that this
formulation would allow existing State law to
stand.
967 See Uniform Restrictive Employment
Agreement Act, supra note 332 at sec. 5, sec. 8.
968 See Comment of ULC, FTC–2023–0007–20940.
969 See also Part II.E (discussing comments on the
Commission’s jurisdiction under the FTC Act).
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Accordingly, § 910.4(a) states that the
final rule will not be construed to annul,
or exempt any person from complying
with, any State statute, regulation,
order, or interpretation applicable to a
non-compete, including, but not limited
to, State antitrust and consumer
protection laws and State common law.
Rather, the final rule supersedes such
laws to the extent, and only to the
extent, that such laws would otherwise
permit or authorize a person to engage
in conduct that is an unfair method of
competition under § 910.2(a) or conflict
with the notice requirement in
§ 910.2(b).970 These revisions provide
that when States have restricted noncompetes and their laws do not conflict
with the final rule, employers must
adhere to both provisions, and workers
are protected by both provisions
(including State restrictions and
penalties that exceed those in Federal
law).
For example, § 910.4 makes clear that
the final rule does not preempt State
law enforcement where a State bans
non-competes only for workers earning
below a certain amount and thus has a
ban that is narrower than the final rule.
Thus, if a State’s law bars non-competes
only for workers who earn less than
$150,000 per year, the final rule and the
law are different in scope of protection
but not directly inconsistent. The State
may continue to enforce its ban for
workers earning less than $150,000, but
all non-competes covered by the final
rule, regardless of a worker’s earnings,
remain an unfair method of competition
under the final rule and are therefore
unlawful.
In response to concerns raised by
commenters and to further bolster the
consistent use of State laws, the
Commission expressly recognizes State
authority and the existence of private
rights of action arising under State laws
that restrict non-competes or bar unfair
methods of competition. This is set forth
in § 910.4, now titled ‘‘Relation to State
laws and preservation of State authority
and private rights of action,’’ and is
detailed in § 910.4(b). That section
provides that unless a State law
conflicts with the final rule and is
superseded as described in § 910.4(a),
part 910 does not limit or affect the
authority of State attorneys general and
other State agencies or the rights of a
person to bring a claim or regulatory
action arising under State laws,
including State antitrust and consumer
protection laws and State common law.
Section 910.4(b) also explains that
970 The effect of part 910 is limited to noncompetes. It would not broadly preempt other uses
of State antitrust and consumer protection law.
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persons retain the right to bring a claim
or regulatory action under State laws
unless the laws conflict with the final
rule and have been superseded as
described in § 910.4(a).
These modifications are consistent
with many commenters’
recommendations and recognize Statebased enforcement as a potent force that
supplements Federal enforcement. In
addition, the modifications, particularly
those that explain § 910.4 does not
exempt any person from complying
with State laws, are intended to curb the
use of preemption as a defense against
State restrictions of non-competes.971
Under the final rule, States may
continue to play a critical role in
restricting the use of non-competes. In
contrast to the FTC Act, which cannot
be enforced by private persons or State
authorities,972 the non-compete laws of
numerous States provide for such
enforcement.973 Non-competes that are
outside the FTC’s jurisdiction or
otherwise outside the scope of the final
rule may be covered by State noncompete laws.974 State penalties can be
substantial and may be particularly
important as a deterrent.
The modifications also reflect the
Commission’s long history of working in
concert with States and encouraging
concurrent enforcement of State laws to
pursue common goals. While the
Commission recognizes this will leave
some variation in the enforcement
exposure covered persons face among
States, that variation will be greatly
reduced by the final rule, which sets a
971 See, e.g., Sprietsma v. Mercury Marine, 537
U.S. 51, 62–70 (2002) (finding Federal Boat Safety
Act did not relieve defendant from liability for State
common law tort claim because it did not expressly
nor impliedly preempt State common law).
972 See, e.g., FTC, A Brief Overview of the Federal
Trade Commission’s Investigative, Law
Enforcement, and Rulemaking Authority App. A
(May 2021), https://www.ftc.gov/about-ftc/mission/
enforcement-authority; Holloway v. Bristol-Myers
Corp., 485 F.2d 986, 997 (D.C. Cir. 1973).
973 Comment of the Attys. Gen. of 17 States and
DC, FTC–2023–0007–21043 at 7 (‘‘jurisdictions like
Colorado, Illinois, Washington, and the District of
Columbia have passed laws that ban non-competes
for workers making under a specified income
threshold and also include remedies provisions that
authorize state agencies and residents to enforce the
law’’). See also 2023 Cal. Legis. Serv. Ch. 157 (S.B.
699) West (adding Cal. Bus. & Prof. Code sec.
16600.5, Sept. 1, 2023) (providing for a private right
of action in regard to California’s non-compete
statute).
974 See Part II.E (discussing the Commission’s
jurisdiction under the FTC Act). See, e.g., Cal. Bus.
& Prof. Code secs. 16600–16602 (broad coverage);
Minn. Stat. Ann. sec. 181.988, subdiv. 1 (b)
(‘‘‘Employer’ means any individual, partnership,
association, corporation, business, trust, or any
person or group of persons acting directly or
indirectly in the interest of an employer in relation
to an employee.’’).
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floor that applies nationally.975 As it has
done in the past, the Commission will
‘‘share the field’’ with States and partner
with them in the battle against abusive
non-competes.976 As set out in Part
IX.C, the Commission considered and
rejected the alternative of relying on
existing State laws alone. Consistent
with that determination, the
Commission declines to adopt the
suggestion from a comment that relevant
State laws in States that enact the
Uniform Restrictive Employment
Agreement Act not be preempted.
VII. Section 910.5: Severability
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The Commission stated in the NPRM
that it may adopt a severability
clause 977 and it received a comment
stating the Commission should adopt
such a clause to protect the rights and
securities of workers if one part of the
rule or one category of workers were
invalidated. The Commission adds
§ 910.5, together with this section, to
clarify the Commission’s intent.978
Section 910.5 states that if any
provision of the final rule is held to be
invalid or unenforceable either facially,
or as applied to any person or
circumstance, or stayed pending further
agency action, such invalidity shall not
affect the application of the provision to
other persons or circumstances or the
validity or application of other
provisions. Section 910.5 also states that
if any provision or application of the
final rule is held to be invalid or
unenforceable, the provision or
application shall be severable from the
final rule and shall not affect the
remainder thereof. This provision
confirms the Commission’s intent that
the remainder of the final rule remain in
effect in the event that a reviewing court
stays or invalidates any provision, any
part of any provision, or any application
of the rule—including, for example, an
aspect of the terms and conditions
defined as non-competes, one or more of
the particular restrictions on noncompetes, or the standards for or
application to one or more categories of
workers.
975 The Commission has taken this position in
previous regulations. See, e.g., Part 429—CoolingOff Period for Door-to-Door Sales, 37 FR 22934 (Oct.
26, 1972).
976 For a previous example, see Trade Regulation
Rule; Funeral Industry Practices, 47 FR 42260,
42287 (Sept 24, 1982) (noting the purpose of the
rule’s provision addressing relation of the rule to
State law is ‘‘to encourage [F]ederal-[S]tate
cooperation by permitting appropriate [S]tate
agencies to enforce their own [S]tate laws that are
equal to or more stringent than the trade regulation
rule’’).
977 NPRM at 3518–19 & n.429.
978 In the NPRM, proposed § 910.5 addressed the
compliance date.
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The Commission finds that each of
the provisions, parts of the provisions,
and applications of the final rule
operate independently and that the
evidence and findings supporting each
provision, part of each provision, and
application of each provision stand
independent of one another. In this final
rule, the Commission determines that
certain conduct is an unfair method of
competition in Part IV.B and Part IV.C
and differentiates between senior
executives and workers who are not
senior executives with respect to
existing non-competes. The final rule
distinguishes between the two in both
the final rule’s operation and in the
bases for adopting the final rule. The
difference in restrictions among
different workers, and the distinct bases
for adopting the restrictions, is
described in detail in Parts IV.B and
IV.C. The Commission also estimates
the effect of excluding senior executives
entirely from the rule in Part X.F.11 and
finds that the benefits of covering only
those workers who are not senior
executives justify the costs.
The Commission promulgates each
provision, part of each provision, and
application of each provision as a valid
exercise of its legal authority. Were any
provision, part of any provision, or any
application of any provision of the final
rule stayed or held inapplicable to a
particular category of workers, to
particular conduct, or to particular
circumstances, the Commission intends
the remaining elements or applications
of the final rule to prohibit a noncompete between covered persons and
covered workers as an unfair method of
competition.
In Parts IV.B and IV.C, the
Commission finds that the use of noncompetes is an unlawful unfair method
of competition under section 5 of the
FTC Act because it is restrictive and
exclusionary conduct that tends to
negatively affect competitive conditions
in several independent ways. In support
of its finding that the use of noncompetes is an unlawful unfair method
of competition for workers who are not
senior executives, the Commission
additionally finds that the use of noncompetes is exploitative and coercive in
Part IV.B.2.b.
The Commission relies principally on
empirical evidence regarding the effects
of changes in non-compete
enforceability, both when finding in
Part IV.B.3.a and Part IV.C.2.c.ii that the
use of non-competes tends to negatively
affect competitive conditions in labor
markets, and when finding in Part
IV.B.3.b and Part IV.C.2.c.i that the use
of non-competes tends to negatively
affect competitive conditions in product
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38455
and service markets. The Commission
further analyzes and quantifies these
effects in Part X.F.6, including
sensitivity analyses that compare the
estimated effects of smaller changes in
enforceability and larger changes in
enforceability.
Based on this empirical evidence and
analysis, the Commission believes that
more limited application of the rule—
which might result were a court to
render the final rule inapplicable in
some way—may be equivalent to
smaller changes in the enforceability of
non-competes in the empirical
literature. As described in Part IV.B.3.a
and IV.B.3.b, smaller changes in
enforceability change the magnitude,
but not the directional nature, of the
labor market and product and service
market effects.979 Accordingly,
consistent with the findings related to
the use of certain non-competes being
an unfair method of competition in Part
IV, the empirical evidence on the use of
non-competes, the regulatory impact
analysis in Part X, and its expertise, the
Commission finds that any smaller
reduction in enforceability resulting
from circumstances in which a court
stays or invalidates some application of
the final rule would not impair the
function of the remaining parts of the
final rule nor would it undermine the
justification or necessity for the final
rule as applied to other persons,
conduct, or circumstances. The
Commission intends for any remaining
application of the final rule to be in
force because it is committed to
stopping any and all unlawful conduct
related to the use of certain noncompetes and the Commission finds
every use of a non-compete covered by
the final rule to be an unlawful unfair
method of competition under section 5
of the FTC Act.980
In Part X, the Commission conducts a
regulatory impact analysis for the final
rule as applied to all workers, as applied
to all workers other than senior
executives, and as applied to senior
executives. The Commission finds that
the asserted benefits of the use of noncompetes do not justify the harms from
the use of non-competes for any
category of workers. The Commission’s
findings and differential analysis
demonstrate that the asserted benefits
from the use of non-competes do not
justify the harms from the use of noncompetes for higher- or lower-wage
earners, including, for example, lowerwage workers defined as workers whose
total annual compensation is less than
$151,164.
979 See
980 See
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For instance, if, for any reason, a
reviewing court were to stay or
invalidate the final rule as applied to
senior executives, the Commission
would intend for the remainder of the
final rule to apply to all workers other
than senior executives. Likewise, if a
reviewing court were to stay or
invalidate the final rule to apply to
workers other than senior executives,
the Commission would intend for the
remainder of the final rule to apply to
senior executives. Additionally, if a
reviewing court were to stay or
invalidate the final rule as applied to
some other subset of workers, the
Commission would intend for the
remainder of the final rule to apply to
all but those workers. So, for example,
if a reviewing court were to stay or
invalidate the final rule as applied to
workers other than lower-wage
workers—defined as workers whose
total annual compensation is less than
$151,164—the Commission would
intend for the remainder of the final rule
to apply to those workers, and further
notes the evidentiary record
demonstrates that application of the rule
to those remaining workers would be
beneficial and achieve lawful objectives.
In the same way, if a reviewing court
were to stay or invalidate the provision
of the final rule regarding enforcing an
existing non-compete or the notice
requirement, the Commission would
intend for the remainder of the final rule
to apply. As described in Part IX.C,
although the Commission concludes
that a national standard is most
effective, a number of States currently
apply different standards to different
workers and States also apply a myriad
of legal standards to non-competes
generally. Accordingly, were a
reviewing court to stay or invalidate a
particular application of the final rule,
a covered person could simply comply
with the provisions, parts of provisions,
or applications of the final rule that
remain in effect.
The Commission’s adoption of the
final rule does not hinge on the same
restrictions applying to all noncompetes, on the final rule applying to
all workers, or on joint adoption or
operation of each provision.
Accordingly, the Commission considers
each of the provisions adopted in the
final rule to be severable, both within
each provision and from other
provisions in part 910. In the event of
a stay or invalidation of any provision,
any part of any provision, or of any
provision as it applies to certain
conduct or workers, the Commission’s
intent is to otherwise preserve and
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enforce the final rule to the fullest
possible extent.
VIII. Section 910.6: Effective Date
The Commission adopts a uniform
effective date of 120 days after
publication of the final rule in the
Federal Register. The final rule will go
into effect, and compliance with the
final rule will be required, on that date.
Based on comments urging the
Commission to reduce the compliance
period from the 180-day period
proposed in the NPRM so that the
benefits of the final rule may be
obtained as soon as possible, the
Commission’s findings that the use of
non-competes is exploitative and
coercive for the vast majority of
workers, and modifications in the final
rule that reduce covered entities’
compliance burden, the Commission
modifies the date that compliance with
the final rule is required from 180 days
to 120 days after publication in the
Federal Register.
A. The Proposed Rule
In the NPRM the Commission
proposed a compliance date of 180 days
after publication of the final rule in the
Federal Register. The Commission
stated that, during the compliance
period, employers would need to: (1)
assess whether to implement
replacements for existing non-competes
(such as NDAs), draft those covenants,
and then negotiate and enter into those
covenants with the relevant workers; (2)
remove any non-competes from
employment contracts that they provide
to new workers; and (3) rescind, no later
than the date that compliance is
required, any non-competes that it
entered into prior to the compliance
date.981 The Commission preliminarily
found that 180 days would be enough
time for employers to accomplish all of
these tasks.982 The NPRM would have
also required employers to provide the
notice specified in proposed
§ 910.2(b)(2) within 45 days of
rescinding the non-compete.983
The Commission also stated that it
proposed to establish an effective date
of 60 days after the final rule is
published in the Federal Register even
though compliance would not be
required for 180 days.
981 Id. at 3483, 3515–16. In the NPRM and herein,
the Commission refers to the period between the
publication of the final rule and the date on which
compliance with the final rule is required as the
‘‘compliance period.’’ See id. at 3515.
982 Id. at 3516.
983 Id. (addressing compliance with proposed
§ 910.2(b)(2)).
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B. Comments Received
Many worker commenters urged the
Commission to act as quickly as
possible to bring the final rule into
force, citing the current acute, ongoing
harms to their earnings, mobility,
quality of life, and other significant
impacts and noting the final rule’s
potential for immediate relief if their
non-compete was no longer in force.
Representatives of many local
governments from different States
contended that the negative effects of
non-competes and the anticipated
benefits of the proposed rule justified
allowing the Commission’s rule to go
into effect as soon as possible. Other
commenters supported the compliance
date as proposed or favored other
measures to obtain the anticipated
benefits of the final rule as soon as
practicable. Another commenter
contended that the 180-day compliance
period was sufficient to allow
businesses to ensure compliance and
suggested that the Commission move
the effective date back to the day or the
day after the final rule is published.984
Several commenters suggested the
Commission adopt a longer compliance
period of one year, 18 months, or two
years. These commenters generally
stated that businesses need more time to
adjust their compensation packages,
contracting practices, and employee
policies to comply with the rule and to
protect their intellectual property. At
least one commenter also argued the
Commission should adopt a two-year
compliance period to allow courts
sufficient time to hear and resolve
challenges to the final rule. One
commenter asserted that the compliance
period would be especially burdensome
for smaller business. Another industry
commenter argued application of the
rule should be phased in over time.
C. The Final Rule
The Commission adopts a 120-day
compliance period. As outlined in Parts
IV.B and IV.C, based on both
voluminous comments from the public
as well as a significant body of
empirical evidence, the Commission
finds that the use of non-competes is
coercive and exploitative for the vast
majority of workers across different
earnings levels and occupations and
that for all workers it tends to negatively
affect competitive conditions in labor
markets and also tends to negatively
affect competitive conditions in product
and service markets—and that such
actual harms are in fact currently
ongoing. The Commission adopts a 120984 The comment did not consider the limitations
on the effective date imposed by the CRA.
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day compliance period to stop these
unfair methods of competition as soon
as practicable. The Commission finds
that a 120-day period appropriately
balances the interests at hand.
The Commission has taken several
steps in the final rule to make
compliance as simple as possible for
employers. These steps make it
practicable and reasonable to require
compliance within 120 days. The final
rule allows regulated entities to enforce
existing non-competes with senior
executives, who commenters contended
are most likely to have complex
compensation arrangements that
include non-competes. Accordingly,
there is no need for a lengthy
compliance period, as the most complex
existing arrangements are left in place.
The Commission also eliminated the
rescission requirement for all workers.
Under the final rule, employers will not
need to rescind (i.e., legally modify)
existing non-competes for any workers;
rather, employers will simply be
prohibited from enforcing them after the
effective date of the final rule and will
be required to provide the notice in
§ 910.2(b)(1).985 While employers are
required to provide notice to workers
with existing non-competes who are not
senior executives, under § 910.2(b), the
final rule provides model safe harbor
language that satisfies the notice
requirement.986 The final rule gives
employers several options for providing
the notice—on paper, by mail, by email,
or by text.987 And employers are exempt
from the notice requirement where the
employer has no record of a street
address, email address, or mobile
telephone number for the worker.988
Furthermore, as explained in Part IV.E,
the Commission has simplified the
notice requirement to facilitate
employers’ ability to comply by simply
sending a mass communication such as
a mass email to current and former
workers.
Starting on the effective date of the
final rule, employers will be prohibited
from entering into new non-competes
barred by this final rule and from
enforcing non-competes that the
employer entered into prior to that date
with workers other than senior
executives. Prior to the effective date
employers will need to identify each of
their workers with existing non-compete
agreements and can assess which, if
any, are senior executives and
determine if they wish to maintain those
985 See Part IV.E (describing why the Commission
is not finalizing a rescission requirement).
986 § 910.2(b)(4) and (5).
987 § 910.2(b)(2)(ii).
988 § 910.2(b)(3).
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non-competes. Employers will also need
to assess and revise, if necessary, any
employment policies or handbooks that
purport to bind workers even after the
effective date.
To the extent they have confidential
business information, trade secrets, or
other investments to protect with
respect to a particular worker,
employers will be able to assess their
options to lawfully protect that
information. However, new protections
will be unnecessary in many cases,
because, for example, 95.6% of workers
subject to non-competes are already
subject to an NDA.989 In the rare case
where compensation might be tied to a
non-compete that is not with a senior
executive, the employer and worker can
determine whether to amend their
original employment agreement. The
Commission concludes that the 120-day
compliance period gives employers
more than sufficient time to complete
these tasks. For example, firms routinely
complete entire onboarding processes
for new employees in much shorter
timeframes than 120 days.
The Commission also finds that the
120-day compliance period gives small
businesses enough time to comply with
the final rule. Although small
businesses may have limited staff and
funds compared to larger firms, they
also have fewer workers, and the
exclusion for existing non-competes for
senior executives will relieve the
compliance burden altogether for those
small firms that use non-competes only
with those workers. Moreover, the steps
the Commission has taken to reduce the
compliance burden of § 910.2(b) will
further simplify and streamline
compliance for small businesses.
The Commission has also determined
it is not necessary to extend the
compliance period to give courts time to
adjudicate pending non-compete
litigation because, as described in Part
V.C.3, the Commission has adopted
§ 910.3(b), which provides that the final
rule does not apply where a cause of
action related to a non-compete arose
prior to the effective date. The
Commission also finds that a longer
compliance period is not needed to hear
and resolve challenges to the final rule,
especially given the ability of a
challenger to seek a preliminary
injunction.
In sum, the Commission finds that
due to modifications reducing covered
entities’ burden to comply with the final
rule, a compliance period of 120 days is
sufficient time to comply with the final
rule. Given these changes the longer
compliance period proposed in the
NPRM is no longer warranted and
would allow the use of certain noncompetes that are an unfair method of
competition—and their related harms
and costs—to continue for longer than
necessary. The substantial benefits to
competition and to workers of the final
rule taking effect as soon as possible
outweigh any concerns about potential
difficulties in meeting an earlier
compliance date.
The Commission also adopts a 120day effective date. The Commission
concludes that it would ease the burden
of implementation and reduce possible
confusion by having a uniform date for
when the final rule goes into effect and
when compliance under the final rule is
required. A 120-day effective date
complies with the requirements of the
Congressional Review Act that a ‘‘major
rule’’ may not take effect fewer than 60
days after the rule is published in the
Federal Register.
IX. Alternative Policy Options
Considered
The Commission proposed to ban
non-competes categorically, with a
limited exception for non-competes
entered into by a person who is selling
a business entity. In the NPRM, the
Commission discussed and sought
comment on potential alternatives to the
proposed categorical ban, including
discrete alternatives that would
implement a rebuttable presumption of
unlawfulness or apply different
standards to different categories of
workers.990 The Commission also
sought comment on whether a rule
should apply a different standard to
senior executives, and whether, in lieu
of the proposed rule, the Commission
should adopt a disclosure rule or
reporting rule.991 The Commission
sought comment on all aspects of
potential alternatives, including
whether the Commission should adopt
one of the identified alternatives or
some other alternative instead of the
proposed rule.992 The Commission also
sought comment on the extent to which
a uniform Federal standard for noncompetes would promote certainty for
employers and workers.993
The Commission received many
comments on these questions, as well as
on the question of whether the
Commission should issue a Federal
standard for non-competes or continue
relying on existing law and case-by-case
litigation to address harms from non990 NPRM
at 3516.
at 3519–21.
992 Id. at 3521.
993 Id. at 3497.
991 Id.
989 Balasubramanian, Starr, & Yamaguchi, supra
note 74 at 44.
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competes. In this section, the
Commission discusses the comments
received regarding these alternatives
and the reasons it has decided not to
adopt them. This Part IX addresses these
comments but does not address
alternatives related to the design of
specific regulatory provisions, which
are discussed in the Part addressing the
relevant provision.
A. Categorical Ban vs. Rebuttable
Presumption
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1. The Rebuttable Presumption
Alternative Generally
While preliminarily finding that a
categorical ban would best achieve the
proposed rule’s objectives, the
Commission nevertheless sought
comment on the alternative of a
rebuttable presumption, under which it
would be presumptively unlawful for an
employer to use a non-compete, but a
non-compete would be permitted if the
employer could meet a certain
evidentiary burden or standard.994 The
Commission also sought feedback on the
form any rebuttable presumption should
take.995
Most commenters that addressed this
issue, including those both supporting
and opposing the proposed rule,
discouraged the Commission from
including a rebuttable presumption in
the final rule. These commenters
contended that a rebuttable
presumption would add complexity and
uncertainty to the rule.
Supporters of the proposed rule
asserted that a rebuttable presumption
would undermine the rule’s
effectiveness, failing to deter employers
from imposing non-competes while
making litigation too uncertain and
costly for most workers to pursue. Some
of these commenters contended that a
rebuttable presumption would also do
little to reduce the chilling effects of
non-competes. They argued that
employers would continue to impose
non-competes that are unlikely to
survive a rebuttable presumption.
Many commenters critical of the
proposed rule opposed a rebuttable
presumption for essentially the same
reasons they opposed the rule in
general. They contended that, in States
where non-competes are generally
enforceable, a rebuttable presumption
would inappropriately shift the burden
of proof from workers to employers.
Many of these commenters specifically
opposed a rebuttable presumption that
would use a test similar to antitrust
law’s ‘‘quick look’’ analysis, contending
994 Id.
995 Id.
at 3517.
at 3517–19.
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that the Commission’s analysis of
empirical research on non-competes
cannot substitute for the lengthy
experience courts usually have with a
particular restraint before giving it
quick-look treatment. A few
commenters contended that a rebuttable
presumption would increase litigation
and raise employers’ compliance costs
by complicating the determination of
whether a given non-compete is likely
valid, requiring more lawyer
involvement in drafting clauses and
more reliance on courts to determine a
non-compete’s validity.
A few commenters supported a
rebuttable presumption, arguing the
Commission’s proposed ban on noncompetes was too blunt an instrument.
Some also contended that a rebuttable
presumption would offer a more flexible
approach akin to the majority of State
law approaches. At least one commenter
stated a rebuttable presumption would
make the final rule more likely to
survive judicial review. A few
commenters stated a rebuttable
presumption would provide more
protections than most State laws by
allowing only non-competes that the
commenter contended are not unfair to
the worker, such as where highly paid
workers agree to narrow non-competes
in exchange for bargained-for
consideration. One commenter argued a
rebuttable presumption would enable
the Commission to accrue more
experience adjudicating non-competes
and assessing their impact on
competition.
Commenters advocating for a
rebuttable presumption generally
preferred a test focusing on one or more
factors, including: the non-compete’s
geographic scope and duration; the
presence and amount of any liquidated
damages or penalty provision; whether
the clause is narrowly tailored to
prevent competition with actual
competitors; the restrained worker’s
duties and income; and the availability
of less restrictive alternatives. A few
commenters supported a
‘‘preponderance’’ (as opposed to a
‘‘clear and convincing’’) standard to
permit as many non-competes as
possible but acknowledged that such a
rule may be so similar to the existing
common law as to be redundant.
After carefully reviewing and
considering the comments, the
Commission concludes that a rule
implementing a rebuttable presumption
is not preferrable to the final rule as
adopted. Based on the Commission’s
expertise, including careful review and
consideration of the entire rulemaking
record, the Commission finds that a
rebuttable presumption would be less
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effective than the final rule for
achieving the Commission’s stated
goals. A rebuttable presumption also
presents administrability concerns that
the final rule does not.
Overall, the comments reinforced the
Commission’s concerns that a rebuttable
presumption would foster substantial
uncertainty about the validity of a given
non-compete and would do little to
reduce the in terrorem effects of noncompetes. Research demonstrates that
employers maintain non-competes even
where they likely cannot enforce
them,996 that many workers are not
aware of the applicable law governing
non-competes or their rights under
those laws,997 and that the degree to
which non-competes inhibit worker
mobility is affected not only by whether
a non-compete is actually enforceable
but also on whether a worker believes
their employer may enforce it.998
Accordingly, the Commission concludes
that a rule implementing a rebuttable
presumption would be inadequate to
reduce the prevalence of non-competes,
their chilling effect on worker mobility,
or their tendency to negatively affect
competitive conditions. Relatedly, the
Commission believes a rebuttable
presumption would increase litigation
costs for workers and employers relative
to the final rule as adopted.
The Commission also believes that, in
important respects, a rebuttable
presumption for non-competes is
inconsistent with the Commission’s
findings in this final rule. As discussed
in greater detail in Part IX.C, a rule that
provides for case-by-case,
individualized assessment of noncompetes is unlikely to address the
negative effects of non-competes on
competition in the aggregate. In
addition, by focusing on considerations
specific to the worker and the employer,
a rebuttable presumption is unlikely to
address the external effects of noncompetes (i.e., the effects on persons
other than the parties to the noncompete), including their negative
effects on the earnings of workers who
are not covered by non-competes.
The Commission recognizes there
may be some benefits to a rebuttable
presumption relative to the status quo.
Because it puts the burden of proof on
employers, a rebuttable resumption
would be stricter than the current law
in States where non-competes are
allowed, and research suggests even a
small decrease in enforceability would
increase worker mobility, raise wages,
996 See
Part IV.B.2.b.
Prescott & Starr, supra note 413.
998 Starr, Prescott, & Bishara, supra note 68 at 633,
652, 664.
997 See
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and promote innovation.999 But the
categorical ban adopted in the final rule
would have greater benefits in these
respects without the drawbacks
explained in this Part IX.A.1.
2. Discrete Alternatives Related to
Rebuttable Presumptions
In the NPRM, the Commission also
sought comment on four discrete
alternatives to the proposed rule:
Alternative #1 (categorical ban below
some threshold, rebuttable presumption
above); Alternative #2 (categorical ban
below some threshold, no requirements
above); Alternative #3 (rebuttable
presumption for all workers); and
Alternative #4 (rebuttable presumption
below some threshold, no requirements
above).1000
As explained in Part IX.A.1, the
Commission finds a rebuttable
presumption would be ineffective in
addressing the harms to competitive
conditions caused by non-competes. For
the same reasons, the Commission
declines to adopt Alternatives #1, #3,
and #4, all of which contemplated a
rebuttable presumption for some or all
workers.
While the vast majority of
commenters supported the
Commission’s proposal to ban noncompetes categorically for all workers, a
number of commenters suggested that
the Commission permit non-competes
with senior executives (or other highly
skilled or highly paid workers) and
other workers. The Commission
addresses these comments in Part IV.C
and V.D.1, where it finds that such noncompetes tend to negatively affect
competitive conditions in labor markets
and in product and service markets, and
that non-competes are also exploitative
and coercive for workers other than
senior executives. For these reasons, the
Commission declines to adopt
Alternative #2, which contemplated
imposing no requirements on workers
above a certain wage or other threshold.
B. Other Discrete Alternatives
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1. Disclosure Rule
In the NPRM, the Commission sought
comment on the potential alternative of
adopting disclosure requirements
related to non-competes.1001 The
Commission explained that the rule
999 Johnson, Lavetti, & Lipsitz, supra note 388
(decreasing enforceability increases worker mobility
and earnings); Johnson, Lipsitz, & Pei, supra note
526 at 2–5 (enforceability negatively impacts patent
quantity and quality).
1000 NPRM at 3519.
1001 Id. at 3521 n.446 (noting certain provisions in
the Commission’s Franchise Rule (16 CFR part 436),
such as § 436.5(i) and (q), require non-competes to
be disclosed to a franchisee).
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could, for example, require an employer
to disclose to a worker prior to making
an employment offer that the worker
will be subject to a non-compete and/or
to explain the terms of the non-compete
and how the worker would be affected
by signing it.1002 The Commission noted
that a 2021 study by Starr, Prescott, and
Bishara finds that disclosure of noncompetes to workers prior to the
acceptance of a job offer was associated
with increased earnings, rates of
training, and job satisfaction.1003 The
authors of the study, however,
cautioned that their analysis ‘‘should
not be interpreted causally,’’ a point the
Commission noted in explaining why it
gave minimal weight to the study.1004
The Commission preliminarily
concluded in the NPRM that a
disclosure requirement would not
achieve the objectives of the proposed
rule.1005
In general, commenters stated they
agreed with the Commission’s
preliminary view that, while there may
be some benefits to a disclosure rule, it
would not achieve the objectives of the
rule. Workers and worker advocacy
groups stated that non-competes are
often presented to workers on their first
day on the job, or after they accept an
employment offer. Although these
commenters generally supported a
comprehensive ban, they noted that if
the Commission did not pursue a ban,
a disclosure requirement may help
improve workers’ awareness of noncompetes before accepting an offer. On
the other hand, these commenters
contended that a disclosure rule would
do little to reduce the prevalence of
non-competes, because workers have
little choice but to accept non-competes,
which are typically presented as ‘‘takeit-or-leave-it’’ terms and are ubiquitous
in many fields.
Many trade organizations, advocacy
groups, and academics who were
generally supportive of the rule stated
that a disclosure rule would fail to
mitigate the competitive harms caused
by non-competes in the aggregate. While
acknowledging a disclosure rule may
ameliorate some problems related to
worker awareness of non-competes,
these commenters contended that noncompetes are unfair and coercive
because employees generally lack
adequate bargaining power to refuse to
sign or bargain over non-competes even
when they are presented at the time of
1002 Id.
at 3521.
citing Starr, Prescott, & Bishara, supra
note 68 at 75.
1004 Id. at 3487, citing Starr, Prescott, & Bishara,
supra note 68 at 73.
1005 Id. at 3521.
1003 Id.,
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an employment offer, and that a
disclosure rule would therefore not have
the effect of making non-competes less
unfair or coercive. A few commenters
opposed a disclosure rule generally but
urged the Commission to adopt a
disclosure requirement for any noncompetes permitted by the final rule,
including for any non-competes entered
into by a person who is selling a
business.
On the other hand, some trade
organizations, advocacy groups, and
businesses that generally opposed the
rule advocated for the Commission to
adopt a disclosure rule in lieu of the
proposed categorical ban. These
commenters contended that a disclosure
rule would substantially mitigate the
unfairness of non-competes that are
entered into without adequate notice to
the worker without drastically altering
the legal status quo, thereby maintaining
the protections for trade secrets, training
expenditures, and intellectual property
they contend that non-competes
provide. They stated that eight States
and the District of Columbia have
statutory notice requirements for noncompetes.
Most of the commenters who
supported a disclosure rule also argued
that rather than demonstrating that noncompetes tend to negatively affect
competitive conditions, the available
evidence merely demonstrates
opportunistic behavior by employers
(such as presenting non-competes only
after prospective workers have taken
hard-to-reverse steps towards accepting
employment) and workers (such as
seeking to be excused from a noncompete after recognizing its impact on
future job prospects). These commenters
asserted that a disclosure rule would be
better suited to address these types of
opportunistic behaviors than a
categorical ban.
Some commenters based their support
for a disclosure rule on their contention
that workers have sufficient bargaining
power to negotiate over non-competes
when they are provided with notice of
them. One such commenter pointed to
the cited research by Starr, Prescott, and
Bishara finding that disclosure of noncompetes to workers prior to acceptance
of a job offer may increase earnings,
increase rates of training, and increase
job satisfaction.1006 The commenter also
referenced the study’s finding that of
those workers who did not attempt to
negotiate a non-compete, 52% reported
that they thought the terms were
reasonable and 41% reported that they
assumed the terms to be non1006 Starr,
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negotiable.1007 The commenter
contended that a disclosure rule would
decrease the number of workers who
assumed non-competes were nonnegotiable.
A few commenters contended a
disclosure rule may be more likely to
withstand judicial review because the
Commission could promulgate a
disclosure rule in this context under its
UDAP authority pursuant to the
Magnuson-Moss Act. In addition, a few
commenters requested the Commission
adopt timing rules for when the
disclosure must be provided, such as by
requiring that employers disclose a noncompete in the job advertisement, at the
time of the job offer, or at least five
business days prior to the worker’s
deadline to sign an employment
agreement.
The Commission declines to adopt a
disclosure rule.1008 The Commission
finds that merely ensuring workers are
informed about non-competes would
not address the negative externalities
non-competes impose on workers,
rivals, and consumers. As described in
Part IV.B.3.a.ii, non-competes suppress
wages for workers across the labor force,
including workers who are not subject
to non-competes. Ensuring that a worker
who enters into a non-compete is
informed about the non-compete does
not address the harm to these other
workers. In addition, it does not address
the ways in which non-competes harm
consumers and the economy through
reduced new business formation and
innovation, described in Part IV.B.3.b.
In other words, non-competes have
negative spillover effects on workers,
consumers, businesses, and the
economy that disclosure cannot
remediate.
The Commission also finds that a
disclosure requirement would not be as
effective as a categorical ban in
addressing the exploitation and
coercion of workers through noncompetes. As described in Part
IV.B.2.b.i, there is a significant
imbalance in bargaining power between
employers and most workers, which is
particularly acute in the context of
negotiating employment terms such as
non-competes. And, as many comments
from workers and worker advocacy
groups attest, non-competes are often
included in standard-form contracts and
offered on a take-it-or-leave-it basis.1009
1007 Id.
at 72.
Commission notes that the Franchise
Rule requires franchisors to disclose any noncompete that franchisees must impose on managers.
16 CFR 436.5(o)(3). These non-competes are
prohibited by the final rule. See Parts III.D and
V.D.6.
1009 See Part IV.B.2.b.i.
1008 The
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As a result, workers have limited
practical ability to negotiate noncompetes even if they are notified of
such clauses prior to accepting their
employment offer. Indeed, as described
in Part IV.B.2.b.i, the comment record
reflects that very few workers (other
than senior executives) bargain over
their non-competes—whether the
worker knew about the non-compete
before the job offer and understood its
terms, or not.
The Commission gives the findings of
the Starr, Prescott, and Bishara study on
the impacts of disclosure little weight
because the study reflects only
correlation, not causation, with respect
to the effects of a disclosure rule
(similar to the ‘‘use’’ studies the
Commission gives little weight to, as
described in Part IV.A.2). The study
merely compares a set of workers whose
firms disclosed the non-compete and
workers whose firms did not, and any
correlation may thus be attributable to
confounding factors. This comparison—
similar to comparisons of workers with
and without non-competes—may be
polluted by differences between firms
that opt to disclose non-competes and
those that do not, or differences between
workers who are the beneficiaries of
disclosure versus those who are not.1010
For example, it is possible that firms
that disclose non-competes are also
more responsible employers in general
that tend to pay their workers more,
train their workers more, and have more
satisfied workers. The Commission
therefore does not find that this
evidence represents a causal
relationship between the disclosure of
non-competes and earnings and other
outcomes. Moreover, the weight of the
evidence discussed in Parts IV.B and
IV.C finding increased earnings, new
business formation, and innovation
from the final rule significantly surpass
the potential effects of disclosing noncompetes.
One commenter stated that the Starr,
Prescott, and Bishara study suggests that
a disclosure rule would decrease the
number of workers who assume a noncompete with which they are presented
is non-negotiable. The study suggests
that the potential effects of a disclosure
rule in this respect would be, at best,
limited.1011 For the reasons described in
this Part IX.B.1, the Commission is
skeptical that a disclosure requirement
1010 Indeed, the authors of this study note that
‘‘unobservables may more plausibly account for
these estimates.’’ See Starr, Prescott, & Bishara,
supra note 68 at 77 n.35.
1011 Id. at 72. The study finds that 38% of workers
asked to sign a non-compete before accepting a job
offer assumed they could not negotiate, versus 48%
of workers asked after accepting a job offer.
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would meaningfully increase the share
of workers who actually bargain over
non-competes.
A disclosure rule may address some
deceptive or misleading practices in
connection with non-competes.
However, considering that a disclosure
rule is not likely to significantly reduce
the negative competitive impacts of
non-competes on labor markets and on
product and service markets, this
benefit is significantly outweighed by
the limitations of a disclosure rule.1012
The Commission further concludes
that a disclosure rule is not necessary
for non-competes in the context of sales
of a business entity. As described in Part
V.A, persons selling a business entity
tend to have bargaining power in the
context of the transaction, and the
Commission is unaware of evidence that
deceptive and misleading practices in
connection with non-competes (such as
waiting to disclose a non-compete until
after the job offer) are common with
respect to business sales.
2. Reporting Rule
In the NPRM, the Commission sought
comment on a reporting rule as a
potential alternative to the proposed
rule.1013 The Commission stated that it
could require employers to report
certain information to the Commission
relating to their use of non-competes; for
example, employers that use noncompetes could be required to submit a
copy of the non-compete to the
Commission.1014 As the Commission
explained, a reporting rule might enable
the Commission to monitor the use of
non-competes and could potentially
discourage employers from using noncompetes that are not clearly justified
under existing law.1015
The Commission stated in the NPRM
that it did not believe a reporting rule
would achieve the objectives of the
proposed rule. The Commission stated
that merely requiring employers to
report their non-competes to the
Commission would not meaningfully
reduce the prevalence of non-competes
and would therefore fail to reduce the
negative effects non-competes have on
competitive conditions in labor markets
and product and service markets.1016 At
the same time, the Commission stated
that a reporting rule would impose
1012 The Commission considered whether a
disclosure rule would be appropriate for senior
executives, but concludes that it is not because it
would fail to address many of the ways in which
non-competes are restrictive and exclusionary and
tend to negatively affect competitive conditions.
1013 Id. at 3521.
1014 Id.
1015 Id.
1016 Id.
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significant and recurring compliance
costs on employers.1017
Most commenters addressing this
topic agreed with the Commission’s
preliminary view that a reporting rule
would not achieve the goals of the
proposed rule. At least one business
opposed any reporting requirement due
to the cost of compliance and to avoid
exposing any confidential information
contained in employment agreements.
At the same time, some commenters
stated that a reporting rule may assist
enforcement and provide quantitative
data sets to measure compliance, while
recognizing that such benefits would
lose significance if the Commission
were to adopt the proposed rule. One
commenter suggested that, to improve
the effectiveness of any reporting rule,
any such rule should include a
provision stating that any non-competes
which were not properly disclosed to
State and Federal authorities are null
and void.
The Commission declines to adopt a
reporting rule. A reporting rule would
impose recurring compliance costs on
employers, compared with the proposed
rule, which largely imposes one-time
costs. At the same time, a reporting rule
would be inadequate to address the
negative effects of non-competes on
competitive conditions in labor markets
and product and service markets, or the
Commission’s concerns about
exploitation and coercion through the
use of non-competes, since it would
allow for the continued use of noncompetes.
3. Limitations on Scope and Duration
In addition to those alternatives listed
in the NPRM, a few commenters
suggested adopting an alternative rule
that allows non-competes but sets a
limitation on their geographic scope
and/or duration. Some commenters
suggested a geographic limit of five, ten,
or thirty miles and/or a temporal limit
of six months or one, two, or three
years, while others suggested a factspecific requirement that the geographic
scope or duration of a non-compete be
‘‘reasonable.’’ Many of these
commenters cited State laws that take a
similar approach.
A few commenters opposed this
alternative. One worker advocacy group
argued that any bright-line limit may
end up serving as a default, encouraging
employers to impose non-competes of
the maximum allowable scope or
duration even if that limit is longer or
broader than they otherwise would have
imposed. At least one academic
commenter argued that setting
1017 Id.
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geographic scope or duration limitations
on non-competes is unlikely to have a
substantial impact, pointing to the
continued prevalence of overly broad
non-competes despite State laws
designed to set upper limits on
geographic scope and duration.
The Commission declines to adopt a
standard providing that the geographic
scope or duration of non-competes must
be ‘‘reasonable.’’ The Commission is
concerned a reasonableness standard
would foster significant uncertainty
among workers and businesses about
the enforceability of non-competes, for
the same reasons a rebuttable
presumption would. In addition, as
described in Part II.C.1 of the NPRM, all
States where non-competes are
enforceable currently apply a
reasonableness standard, so a Federal
reasonableness standard would not
mitigate the negative effects of noncompetes that are presently occurring.
The Commission also declines to
adopt the alternative of imposing limits
on the scope and duration of noncompetes. Such a rule would be
insufficient to address the negative
effects of non-competes on competitive
conditions in labor markets or products
and services markets. Although a noncompete that lasts for a shorter duration
or within a smaller geographic area
curtails job mobility for the individual
worker it binds to a lesser degree, it
nonetheless curtails the worker’s job
mobility and the ability of competing
employers to recruit and access talent.
Non-competes limited in duration and
scope still tend to inhibit efficient
matching between workers and
employers, with spillover effects on new
business formation and innovation
through the mechanisms described in
Parts IV.B and IV.C. Furthermore,
limitations on the scope and duration of
non-competes would not address the
spillover effects from non-competes on
other workers and consumers. In short,
even if a non-compete applies only to a
relatively delimited location or time
period, it still—by design—cuts off free
and fair competition in labor and
product and service markets.
In addition, most of the commenters
who stated that they were exploited and
coerced by non-competes did not do so
on the basis that the non-compete was
overbroad in scope or duration. Instead,
most of the commenters who described
the terms of their non-competes
described limits on scope and duration
that were within the bounds of what is
typically permissible under State
law.1018 Some of these commenters even
stated expressly that they were subject
1018 See
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to the non-compete that was standard or
typical in their field. Even these
commenters, however, explained how
they were exploited and coerced in
connection with non-competes because
the non-compete was unilaterally
imposed and because the non-compete
trapped them in worse jobs or forced
them to bear significant harms or costs.
For these reasons, the Commission
declines to adopt bright-line limits on
the scope and duration of noncompetes.
4. Compensation Requirement
Some commenters requested that the
Commission adopt an alternative that
would permit non-competes so long as
the worker is compensated. Some
commenters pointed to Massachusetts
and Oregon law governing noncompetes under which, for certain
workers, non-competes may be enforced
if, inter alia, they include a minimum
level of compensation or consideration
to the worker separate from
compensation for employment.1019
The Commission declines to adopt a
rule requiring compensation for noncompetes. First, such a rule would not
address the harms to competitive
conditions that non-competes cause,
which result in harm to other workers,
to rivals of employers, and to
consumers. The Commission finds in
Parts IV.B.3.a.ii and IV.C.2.c.ii. that noncompetes harm workers other than the
workers who sign them, by reducing the
number of job opportunities and thereby
inhibiting efficient matching for all
workers. The Commission further finds
in Parts IV.B.3.b and IV.C.2.c.i that noncompetes inhibit new business
formation and innovation, which affects
consumers. Therefore, even if a worker
were fully compensated for a noncompete, the fact of that compensation
would not redress these negative
externalities. Second, this alternative
would be ineffective or significantly less
effective because of the in terrorem
effect of non-competes, which the
Commission finds to be grounded in
empirical evidence and supported by
the comment record described in Part
IV.B.2.b. Third, such a rule would be
difficult to administer and potentially
easy to evade, as employers could
suppress other wages or job quality
while labeling some compensation as
attributable to the non-compete.
5. Combination of Different Alternatives
Some commenters suggested the
possibility of combining two or more of
the alternatives discussed in this Part IX
1019 Mass. Gen. Laws Ann. ch. 149, sec. 24L; Or.
Rev. Stat. Ann. sec. 653.295.
Part IV.B.2.b.
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in place of a categorical ban. While a
combination of these regulations or
limitations might modulate some of the
ways in which non-competes are
exploitative and coercive, they would
not be as effective as a comprehensive
ban. In particular, a combination
approach would lack the clarity of a
comprehensive ban and thus would not
be as effective as a categorical ban in
addressing the exploitation and
coercion of workers through noncompetes. Moreover, as noted
previously, the alternatives discussed
would do little to address the tendency
of non-competes to negatively affect
competitive conditions and to cause
spillover effects on other workers and
on consumers. Accordingly, a
combination of these alternative
regulations or limitations would fail to
remedy the aggregate and spillover
effects of non-competes and thus would
not achieve the Commission’s stated
goals.
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C. The No-Action Alternative: Reliance
on Existing Legal Frameworks Instead of
a Clear National Standard
The Commission sought comment on
whether a Federal standard for noncompetes would promote certainty for
employers and workers.1020 The
Commission finds that a clear national
standard for non-competes will more
effectively address non-competes’
tendency to negatively affect
competitive conditions than case-bycase adjudication or relying on existing
law alone. The Commission also finds
that declining to adopt the final rule,
and instead relying on case-by-case
adjudication or existing law alone,
would not address the exploitation and
coercion of workers through noncompetes.
1. Comments Received
Many commenters expressed support
for the NPRM because they viewed
current laws as insufficient to protect all
workers, rivals, or consumers, regardless
of where they are located, from the
negative effects of non-competes on
competitive conditions in labor markets
and markets for products and services.
Numerous workers, businesses, and
other commenters said the patchwork of
State laws and confusion about those
laws, particularly reasonableness tests,
makes it difficult for workers and
businesses to understand the law and in
turn contributes to the use of
unenforceable or overbroad noncompetes and chills worker mobility.
Several commenters also said that caseby-case adjudication and reasonableness
1020 NPRM
16:27 May 06, 2024
2. Responses to Comments and the
Commission’s Findings
a. The Value of Rulemaking
The Commission has the authority to
make rules and regulations to carry out
1021 Comment of the Attys. Gen. of 17 States and
DC, FTC–2023–0007–21043 at 11.
at 3497.
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tests make it difficult for parties to
predict outcomes, which in turn raises
litigation costs. Even some organizations
opposed to the proposed rule or who
supported a different policy believed
that a Federal rule could be beneficial,
such as to businesses operating in
multiple jurisdictions.
In addition, according to commenters,
case-by-case adjudication under State
law cannot address the harms caused by
non-competes through their use in the
aggregate. Some commenters also
asserted that the patchwork of State
laws is complicated by remote and
hybrid workers. Others argued that State
laws are skewed in favor of employers
or leave workers vulnerable to
unreasonable agreements. Some argued
that many workers, businesses, noncompetes, and labor markets cross State
lines, demonstrating the need for one
standard. Several State Attorneys
General also said that numerous
complications arise when localities span
more than one State and those States
have different laws on non-competes;
workers become confused and
enforcement of non-competes can have
spillover effects in another State.1021
In contrast, many commenters stated
that case-by-case adjudication is
preferable to a Federal rule because it
allows individual facts to be considered.
In addition, many commenters argued
that existing State legislative and
judicial decisions are sufficient to
impose limitations on non-competes
while recognizing legitimate business
interests. Commenters also argued that
States should be allowed to continue
their natural experiments with noncompetes; that non-competes
historically have been and should
remain an issue of State law; and that
States are best suited to make policy
judgments for their citizens.
Some commenters argued that
unenforceable or overly broad noncompetes are not a problem because
courts can strike down or reform them.
Some employers asserted that they
specifically, or employers more
generally, did not enter into
unenforceable non-competes. Other
commenters argued that employers did
not use choice of law clauses to evade
State laws, stating the clauses are the
products of arms-length bargaining and
provide certainty and predictability.
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the FTC Act’s prohibition on unfair
methods of competition under sections
5 and 6(g) of the FTC Act as described
in Parts II.A through II.C, and the
Supreme Court has stated that agencies
generally have discretion to choose
between rulemaking and
adjudication.1022 Based on the empirical
evidence, the comments, and the
Commission’s expertise, the
Commission finds that rulemaking is the
appropriate method of addressing noncompetes.
The prevalence of non-competes
across the economy, described in Part
I.B.2, and the scale of the harms they
cause, described in Parts IV.B and IV.C,
show that it is more efficient to address
the harms to competition from noncompetes via rulemaking compared to
case-by-case adjudication. As the D.C.
Circuit stated in ruling that the
Commission had the authority to
promulgate unfair methods of
competition rules, ‘‘the availability of
substantive rule-making gives any
agency an invaluable resource-saving
flexibility in carrying out its task of
regulating parties subject to its statutory
mandate.’’ 1023 The Commission
estimates that there are 2.92 million
firms using non-competes in the
U.S.1024 Adjudicating individual cases
against even just one-tenth of 1% of
these employers would be slow,
inefficient, and costly for the
Commission, employers, and workers.
Rulemaking provides notice of the
application of section 5 to non-competes
in a clearer and more accessible way
than piecemeal litigation and avoids
compliance delays.1025 The final rule
will provide all market participants
greater clarity about their obligations
under section 5 of the FTC Act,
facilitating compliance. Additionally,
1022 SEC v. Chenery Corp., 332 U.S. 194, 203
(1947); NLRB v. Bell Aerospace Co. Div. of Textron,
Inc., 416 U.S. 267, 293 (1974); Wright & Miller,
Federal Practice and Procedure sec. 8117 (2d ed.
2023).
1023 Nat’l Petroleum Refiners Ass’n v. FTC, 482
F.2d 672, 681–82 (D.C. Cir. 1973); see also id. at 690
(stating that ‘‘the historic case-by-case purely
adjudicatory method of elaborating the Section 5
standard and applying it to discrete business
practices has not only produced considerable
uncertainty’’ but has also spawned lengthy
litigation).
1024 See Part X.F.6 (estimating that 49.4% of the
5.91 million firms in the U.S. use non-competes).
1025 See Wright & Miller, Federal Practice and
Procedure sec. 8117 (2d ed. 2023); Nat’l Petroleum
Refiners, 482 F.2d at 690 (‘‘[W]hen delay in agency
proceedings is minimized by using rules, those
violating the statutory standard lose an opportunity
to turn litigation into a profitable and lengthy game
of postponing the effect of the rule on their current
practice. As a result, substantive rules will protect
the companies which willingly comply with the
law against what amounts to the unfair competition
of those who would profit from delayed
enforcement as to them.’’) (citation omitted).
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the final rule will simplify enforcement
proceedings by streamlining the proof
required.1026
In addition, the principal harms from
non-competes arise from their tendency
to negatively affect competitive
conditions in the aggregate. A single
non-compete with a single worker may
not do much to inhibit efficient
matching between workers and
employers across a labor market or
suppress new business formation or
innovation (and what effects it does
have would be difficult to measure), but
the Commission finds based on
empirical evidence that the use of many
non-competes across the labor market
does have these aggregate net negative
effects.1027 For this reason, rulemaking
is preferable to individual litigation for
addressing the negative effects of noncompetes. Past Commission experience
has also illustrated that case-by-case
enforcement, education, and other
enforcement mechanisms are not always
sufficient to stop widespread harms.1028
A Federal rulemaking is the most
efficient method to address the scale of
harm to competitive conditions in labor,
product, and service markets caused by
non-competes.
Finally, ‘‘utilizing rule-making
procedures opens up the process of
agency policy innovation to a broad
range of criticism, advice and data that
is ordinarily less likely to be
forthcoming in adjudication.’’ 1029
Rulemaking is particularly beneficial
when, as here, ‘‘a vast amount of data
had to be compiled and analyzed, and
the Commission, armed with these data,
had to weigh the conflicting
policies.’’ 1030 Rulemaking also allows
for more fulsome engagement from the
public by providing for public comment
on a complete regulatory scheme. The
Commission greatly benefited from the
submitted comments.
1026 See Nat’l Petroleum Refiners, 482 F.2d at 690
(‘‘With the issues in Section 5 proceedings reduced
by the existence of a rule delineating what is a
violation of the statute or what presumptions the
Commission proposes to rely upon, proceedings
will be speeded up.’’).
1027 See Part IV.B.3.a–b.
1028 See, e.g., Combating Auto Retail Scams Trade
Regulation Rule, 89 FR 590, 600 (Jan. 4, 2024)
(stating that rulemaking was necessary because
certain unfair and deceptive acts and practices had
persisted despite more than a decade of Federal and
State enforcement, education, and other action in
the motor vehicle dealer marketplace).
1029 Nat’l Petroleum Refiners, 482 F.2d at 683
(citations omitted); see also Wright & Miller,
Federal Practice and Procedure sec. 8117 (2d ed.
2023).
1030 Nat’l Petroleum Refiners, 482 F.2d at 683
(citations omitted).
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b. Case-by-Case Litigation Alone Cannot
Address the Negative Effects of NonCompetes on Competition
The Commission finds that case-bycase litigation alone is insufficient to
address the harms to competition from
non-competes due to the cost of
litigation, which deters many workers
from challenging non-competes, and the
limited resources of public enforcement
agencies. In addition, individual
litigation is not well-suited to redress
the negative externalities non-competes
impose on other workers, other
employers, consumers, and the
economy from their use in the aggregate.
Many commenters addressed the
shortcomings of individual litigation as
a means for addressing the harms of
non-competes. Numerous commenters
noted that litigation is costly and many
workers cannot afford to litigate their
non-competes.1031 Many commenters,
including workers, entrepreneurs, and
employment attorneys, shared examples
of five-figure and six-figure litigation
costs related to non-compete lawsuits.
Numerous commenters reported that the
fear of litigation costs induced them to
refrain from seeking or accepting other
work or starting a business, even though
they thought the non-compete was
likely unenforceable. Many other
commenters stated that they complied
with a non-compete after they were
threatened with enforcement, even
though they were unsure about the noncompete’s enforceability. One study
finds that 53% of workers subject to
non-competes are hourly workers,1032
who are particularly unlikely to be able
to afford a court challenge.
Commenters also noted some noncompetes include liquidated damages
clauses or fee-shifting provisions
requiring the worker to pay the
employer’s attorney and other costs if
the employer wins, further increasing
the costs (and risks) of challenging a
non-compete. In addition, commenters
stated that litigation is time-consuming
and could take as long or longer than
the non-compete period. For example,
one commenter shared a decision in the
commenter’s own case where the
appellate court found the non-compete
violated public policy by leaving an area
with only one surgeon in a specialty—
but reached that decision only after the
two-year non-compete had already run
its course.1033 Commenters also said
1031 See also Part IV.B.2.b.ii (describing
exploitative and coercive effects of the risk and cost
of being subject to a non-compete suit).
1032 Lipsitz & Starr, supra note 72 at 144
(analyzing data from the Starr, Prescott, & Bishara
survey).
1033 Graham v. Cirocco, 69 P.3d 194, 200 (Kan.
App. 2003).
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workers who sued their employer could
experience reputational harm and
difficulty finding work going forward.
Litigation can be even riskier if a
court might reform a non-compete,
which leaves the worker subject to some
restrictions even if the initial noncompete was impermissibly broad.
Several commenters cited a Harvard
Law Review article that discusses the
consequences of allowing courts to
sever or reform overbroad noncompetes:
For every covenant that finds its way to
court, there are thousands which exercise an
in terrorem effect on employees who respect
their contractual obligations and on
competitors who fear legal complications if
they employ a covenantor, or who are
anxious to maintain gentlemanly relations
with their competitors. Thus, the mobility of
untold numbers of employees is restricted by
the intimidation of restrictions whose
severity no court would sanction. If
severance is generally applied, employers
can fashion truly ominous covenants with
confidence that they will be pared down and
enforced when the facts of a particular case
are not unreasonable.1034
If there is no penalty for drafting
overbroad non-competes (as is true in
most States),1035 employers have little
incentive to draft non-competes
narrowly, particularly if a court is likely
to revise it rather than strike it down, or
if a worker is unlikely to be able to
litigate at all. An employment attorney
commented it is particularly difficult to
advise workers about whether their
specific non-compete is enforceable
when it is possible a court may modify
the underlying non-compete.
Case-by-case litigation under other
antitrust laws alone is also insufficient
to address the harms from noncompetes. Non-competes restrain trade
and therefore are subject to the Sherman
Act.1036 While private litigants may
bring private causes of action to enforce
the Sherman Act,1037 the Commission
views private litigation under the
Sherman Act as an ineffectual response
in the context of non-competes based on
the history of cases by private litigants
arising under that Act, as explained in
the NPRM.1038 For an individual
litigant, proving harm to competition in
the relevant geographic and product
markets is a resource-intensive task that
1034 Blake, supra note 22 at 682–83 (noting that
this may not be applicable if the worker has
bargaining power and it may be inefficient to tailor
non-competes to each worker, and recommending
that courts only sever when they determine the
employer acted fairly).
1035 See NPRM at 3495.
1036 See Part I.B.1.
1037 See 15 U.S.C. 15.
1038 NPRM at 3496.
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typically requires expert testimony.1039
This makes an already expensive
proposition even less palatable for most
workers and further tips the risk-versusreward calculus away from litigation. In
addition, to succeed on a Sherman Act
claim, a plaintiff must show harm to
competition as a whole, not just to
themselves. It may be difficult or
impossible for a worker to establish that
their individual non-compete—or a
single firm’s use of a non-compete—
adversely affected competition in a
labor market or product/service market
sufficiently to violate the Sherman
Act.1040 Section 5, on the other hand, is
more inclusive than the Sherman
Act.1041 As outlined in Part II.F, section
5 requires a showing of indicia of
unfairness and a tendency to negatively
affect competitive conditions. It does
not require a separate showing of market
power or market definition—nor does it
require proof of harm to competition by
each non-compete.1042
Case-by-case litigation by public
enforcers, such as the Commission or
State attorneys general, is a potential
alternative or supplement to private
litigation under other antitrust laws. But
the ability of public enforcers to engage
in effective case-by-case litigation
related to non-competes, absent a rule,
is limited.
As cited in Parts I.B. and II.C.2, the
FTC has previously secured consent
orders premised on the use of noncompetes being an unfair method of
competition under section 5, and the
Commission has the authority to
determine that non-competes are unfair
methods of competition through
adjudication. However, FTC resource
constraints limit the potential
effectiveness of enforcement of section 5
on a purely case-by-case basis. The
Commission is an independent agency
that works to promote fair and open
markets and protect the entire American
public from unfair and deceptive
business practices. The Commission has
fewer than 1,500 employees for its
entire body of work related to this
mission,1043 which includes
investigating, challenging, and litigating
anticompetitive mergers and conduct;
1039 See, e.g., U.S. Healthcare, Inc. v.
Healthsource, Inc., 986 F.2d 589, 599 (1st Cir. 1993)
(‘‘In practice, the frustrating but routine question
how to define the product market is answered in
antitrust cases by asking expert economists to
testify.’’).
1040 See NPRM at 3496–97 (discussing noncompete cases that have been brought under the
antitrust laws).
1041 See Part II.A.
1042 See Part II.F.
1043 FTC, Congressional Budget Justification—
Fiscal Year 2025, at 8 (2024), https://www.ftc.gov/
system/files/ftc_gov/pdf/fy25-cbj.pdf.
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processing and reviewing merger filings;
and investigating and challenging a
wide range of consumer protection
issues.1044
Similarly, several State Attorneys
General commented that the multifactor common law approaches to noncompete law result in piecemeal
decisions that do not address the noncompete problem in a uniform
manner.1045 These State Attorneys
General also noted that some State
enforcement agencies lack
straightforward authority to enforce
existing common law protections
related to non-competes and argued that
the challenges associated with common
law enforcement underscore the need
for a Federal rule.1046 And the resource
limitations to pursue non-competes
comprehensively through enforcement
limit States equally—if not more.
The Commission estimates that there
are approximately 30 million individual
non-competes in the U.S.1047 In contrast
to the large volume of non-competes,
the resources of public enforcement
agencies are limited. Public enforcers
must balance competing demands for
resources and priorities when they bring
public enforcement actions. Public
enforcers cannot conceivably investigate
the specific details of every noncompete or initiate litigation concerning
more than a small fraction of unlawful
non-competes. A Federal rule provides
clarity to market participants, engages
all stakeholders in the development of
the rule, and more effectively ceases an
unfair method of competition.
The significant limitations on the
ability of private and public litigants to
challenge unlawful non-competes have
practical implications. Courts cannot
strike down an unenforceable noncompete that they never had the
opportunity to review. Moreover, as
detailed in Part IV.B.2.b, non-compete
restrictions may still have significant in
terrorem effects when workers are
uncertain about the enforceability of
their non-competes or lack the ability to
challenge their use.
Furthermore, case-by-case litigation is
insufficient to address negative
externalities from non-competes (i.e.,
harms non-competes cause to persons
other than the parties to the noncompete). As described in Parts IV.B
and IV.C, non-competes impose
significant negative externalities on
other workers, other firms, consumers,
and the economy. Individual non1044 Id.
1045 Comment of the Attys. Gen. of 17 States and
DC, FTC–2023–0007–21043 at 7.
1046 Id.
1047 See Part I.B.2.
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compete cases are not well-suited for
redressing these harms. For example,
while the precise reasonability test for
non-competes differs from State to State,
the test typically considers the business
interest asserted by the employer; the
harm to the worker; and the injury to
the public from the loss of the worker’s
services.1048 This test does not generally
account for the harms experienced by
other workers, other firms, consumers,
and the economy resulting from the
negative effects of non-competes on
competition.
Furthermore, because the significant
harms of non-competes result from their
aggregate use, they are unlikely to be
captured by an assessment of an
individual worker’s non-compete or an
individual firm’s use of non-competes.
This is true regardless of whether those
non-competes are challenged under
State non-compete laws or under other
antitrust laws. It is likewise true
regardless of whether non-competes are
challenged by private litigants or public
enforcers. Accordingly, the Commission
finds that case-by-case litigation alone is
insufficient to address the negative
externalities of non-competes.
The Commission, by contrast, is wellpositioned to evaluate non-competes
holistically. The Commission is an
expert agency and has used its expertise
to assess the weight of the empirical
evidence and comment record to
evaluate the aggregate effects of noncompetes. The Commission here
implements a clear national standard
through notice-and-comment
rulemaking to protect competition,
based on the evidence that the use of
non-competes in the aggregate
negatively affects competition and
harms workers and consumers.
For all these reasons, the Commission
finds that case-by-case litigation is not
a viable alternative to the final rule.1049
1048 See
NPRM at 3494–95.
few commenters suggested that the
Commission could create guidelines instead of a
rule to explain what factors the agency would look
at in an enforcement action. By definition, however,
a guidance document would ‘‘not have the force
and effect of law.’’ Perez v. Mortg. Bankers Ass’n,
575 U.S. 92, 97 (2015) (quoting Shalala v. Guernsey
Mem’l Hosp., 514 U.S. 87, 99 (1995)). Guidelines
would not bind employers or courts and would not
provide workers with the same clarity about the
enforceability of their non-competes. Moreover,
case-by-case litigation itself is not suited to address
the negative externalities of non-competes, a
concern the issuance of guidelines would not
address. The Commission finds that the issuance of
guidelines is not a viable alternative to the final rule
for the same reasons that it finds that the no-action
alternative generally is not a viable alternative to
the final rule.
1049 A
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c. State Law Alone Cannot Address the
Negative Effects of Non-Competes on
Competition
The Commission appreciates that
States have enacted legislation in recent
years to ban or restrict non-competes
and ameliorate their negative effects.1050
The Commission has long recognized
the value of concurrent enforcement of
Federal and State law and believes
States have an important role to play in
restricting the use of non-competes.
Indeed, in this final rule, the
Commission has revised § 910.4 to
ensure that States may continue to
enforce laws that restrict non-competes
and do not conflict with the final rule.
However, the Commission believes that
reliance on State law alone is
insufficient to address the negative
effects of non-competes on competition.
The practical ability of States to address
the harms to their residents from noncompetes is limited by various factors,
including employers’ use of choice-oflaw, forum-selection, and arbitration
clauses; significant confusion among
both employers and workers resulting
from the patchwork of State law, which
chills workers from engaging in
competitive activity even where noncompetes are likely unenforceable under
State law and also increases employers’
compliance costs, particularly given the
increase in interstate remote work;
spillover effects from other States’ laws;
and incentives for States to adopt
permissive non-compete policies.
Many States have adopted statutory
restrictions or compete bans on noncompetes. Four States—California,
Minnesota, North Dakota, and
Oklahoma—have adopted statutes
rendering non-competes void for nearly
all workers.1051 The majority of the
remaining 46 States have statutory
provisions or case law that ban or limit
the enforceability of non-competes for
workers in certain specified
occupations.1052 The general language
of the test for whether a non-compete is
reasonable is fairly consistent from State
to State.1053 However, the specifics of
the application of the standard differ
1050 See NPRM at 3494 (summarizing recent State
non-compete legislation).
1051 See Cal. Bus. & Prof. Code sec. 16600; N.D.
Cent. Code sec. 9–08–06; Okla. Stat. Ann. tit. 15,
sec. 219A. Minnesota banned non-competes signed
on or after July 1, 2023, after the comment period
closed. Minn. Stat. Ann. sec. 181.988.
1052 In most States, those limits apply to just one
or two occupations (most commonly, physicians).
See Beck Reed Riden LLP, Employee Noncompetes:
A State-by-State Survey (Feb. 19, 2024), https://
beckreedriden.com/wp-content/uploads/2024/02/
BRR-Noncompetes-20240219-50-State-NoncompeteSurvey-Chart.pdf (hereinafter ‘‘Beck Reed Riden
Chart’’).
1053 See NPRM at 3494–95.
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from State to State. For example, States
vary in how narrowly or broadly they
define legitimate business interests and
the extent to which courts are permitted
to modify an unenforceable noncompete. States also differ with respect
to statutory restrictions on noncompetes.1054 As a result, among the 46
States where non-competes may be
enforced, variation exists with respect to
the enforceability of non-competes.1055
State law also differs with respect to
the steps courts take when they
conclude that a non-compete is
unenforceable as drafted. As noted in
the NPRM, the majority of States have
adopted the ‘‘reformation’’ or ‘‘equitable
reform’’ doctrines, which allow courts
to revise the text of an unenforceable
non-compete to make it enforceable.1056
Because the enforceability of noncompetes and courts’ positions with
respect to unenforceable non-competes
vary from State to State, the question of
which State’s law applies in a legal
dispute can determine the outcome of a
non-compete case. Non-competes often
contain choice-of-law provisions
designating a particular State’s law for
resolution of any future dispute.1057
Furthermore, some non-competes
include forum-selection provisions
specifying the court and location where
a dispute may be heard.1058 The default
rule under conflict-of-laws principles is
that the court honors the parties’ choice
of law, meaning that the burden is
typically on the worker—the vast
majority of whom the Commission finds
are exploited and coerced when
entering into a non-compete—to
negotiate for the law of a different forum
to apply.1059
There is significant variation,
however, in how courts apply choice of
law rules in disputes over noncompetes.1060 As a result, it can be
difficult for employers and workers to
predict how disputes over choice of law
1054 See,
e.g., Beck Reed Riden Chart, supra note
1052.
1055 NPRM
at 3495.
1056 Id.
1057 Gillian Lester & Elizabeth Ryan, Choice of
Law and Employee Restrictive Covenants: An
American Perspective, 31 Comp. Lab. & Pol’y J. 389,
396–402 (2010).
1058 Id. at 402–04.
1059 Id. at 397 (‘‘In general, courts defer to choice
of law clauses because they are presumed to
represent the express intention of the parties.’’). Cf.
Cal. Lab. Code sec. 925(a) (stating that employers
shall not require an employee who primarily
resides and works in California, as a condition of
employment, to agree to a provision that would
either (1) require the employee to adjudicate
outside of California a claim arising in California or
(2) deprive the employee of the substantive
protection of California law with respect to a
controversy arising in California).
1060 Lester & Ryan, supra note 1057 at 394–95.
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(and, in turn, the enforceability of the
non-compete) will be resolved.1061
Several commenters agreed that a
Federal rule would alleviate these
problems.
Choice of law provisions may also
mean that workers lose their own State’s
protections. For example, workers from
States where non-competes are banned
commented that they faced enforcement
of non-competes that selected the law of
another State. This raises the concern
that choice of law clauses can be used
to evade State bans or restrictions by
forum shopping.1062 As two scholars
note, when ‘‘the parties or issues
involved have connections to multiple
jurisdictions,’’ the law ‘‘confounds
lawyers and commentators because of
its complexity and
unpredictability.’’ 1063
Employers may also impose
arbitration clauses, which require that
legal disputes with the employer—
including disputes related to noncompetes—be resolved through binding
arbitration rather than in court.1064
Where such clauses are valid, the
Federal Arbitration Act requires that
courts enforce them.1065 Choice of law,
forum selection, and arbitration clauses
create opportunities for employers to
forum-shop in ways that undermine any
given State’s ability to effectively
regulate non-competes.
Numerous workers, businesses, and
other commenters said the patchwork of
State laws and confusion about those
laws makes it difficult for workers and
businesses to understand whether a
particular non-compete would be
enforceable. The lack of a clear national
standard, and resulting confusion,
1061 Id. at 395 (‘‘The state of the law is perhaps
characterized more by inconsistency than anything
else, so much so that commentators lament the
‘disarray’ and ‘mish-mash’ of the law, and criticize
courts for their ‘post-hoc rationalizing of intuitions’
or their use of a ‘hodgepodge of factors, often with
insignificant explanation of how they decide what
weight to give each.’’’) (internal citations omitted).
1062 See generally Timothy P. Glynn,
Interjurisdictional Competition in Enforcing NonCompete Agreements: Regulatory Risk Management
and the Race to the Bottom, 65 Wash. & Lee L. Rev.
1381, 1386 (2008) (noting ‘‘judicial attempts to
preempt other courts from disregarding the parties’
choice of law’’). Some States have attempted to
defend against this by enacting statutes banning
selection of a different State’s law for a noncompete. See Minn. Stat. Ann. sec. 181.988(3)(a)
(Minnesota); Cal. Lab. Code sec. 925 (California);
Colo. Rev. Stat. sec. 8–2–113(6) (Colorado); Mass.
Gen. Laws ch. 149, sec. 24L(e) (Massachusetts); La.
Rev. Stats. 23:921(2) (Louisiana). Many of these
statutes are relatively recent, however, and it
remains to be seen how effective they will be.
1063 Lester & Ryan, supra note 1057 at 389.
1064 See, e.g., Alexander J.S. Colvin, Econ. Pol’y
Inst., Report, The Growing Use of Mandatory
Arbitration (Apr. 6, 2018).
1065 See, e.g., Nitro-Lift Techs. v. Howard, 568
U.S. 17, 20–22 (2012).
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contributes to non-competes being used
in jurisdictions where they are
unenforceable. Starr, Prescott, and
Bishara find that employers frequently
use non-competes even when they are
unenforceable under State law.1066
Similarly, Colvin and Shierholz find
that 45.1% of workplaces in California
use non-competes even though they are
unenforceable there.1067 Anecdotally, an
economist commented that the
Commission’s Prudential Security case,
in which the employer continued using
non-competes after they were held
unenforceable by a court, was an
example of employers enforcing
unenforceable non-competes.1068
While the Commission has no doubt
that many employers aim to ensure their
contracts comply with applicable law,
the empirical evidence indicates that at
least some employers are using
unenforceable non-competes, and some
workers are turning down jobs where
their non-competes are likely
unenforceable. Some commenters
referenced Starr, Prescott, and Bishara’s
finding that workers frequently cite noncompetes as a factor in turning down job
offers in both States that enforce noncompetes and in those that do not.1069
The study also finds that workers are
more likely to report that they would be
willing to leave for a competitor when
they did not believe their employer
would attempt to enforce a non-compete
in court.1070 The study suggests that
whether a worker’s non-compete is
enforceable may matter less than
whether the employer is willing to try
to enforce it.1071 The Commission notes
that this study does not necessarily
indicate a causal relationship, but it
does indicate that for many workers, the
in terrorem effect of non-competes may
outweigh any State protections.
Furthermore, the ability of States to
address harms to their residents from
non-competes is limited by spillover
effects from other States. The economies
of States are closely interconnected.
Therefore, even where a State adopts a
law that strictly regulates non-competes,
such a law can be undermined by
permissive non-compete laws in a
nearby State.1072
1066 Starr,
Prescott, & Bishara, supra note 68 at 53,
81.
1067 Colvin
& Shierholz, supra note 65 at 5–6.
FTC, Analysis of Agreement Containing
Consent Order to Aid Public Comment, In re
Prudential Sec., Inc. et al., Matter No. 211 0026 at
1, 5–7 (Dec. 28, 2022).
1069 Starr, Prescott, & Bishara, supra note 68 at
633, 663.
1070 Id. at 633, 652, 664.
1071 Id.
1072 See, e.g., Johnson, Lavetti, & Lipsitz, supra
note 388 (finding that increases in non-compete
enforceability in one State have negative impacts on
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Finally, several comments argued that
State regulation of non-competes should
continue by quoting Justice Brandeis’s
dissent in New State Ice Co. v.
Leibmann: ‘‘[i]t is one of the happy
incidents of the [F]ederal system that a
single courageous State may, if its
citizens choose, serve as a laboratory;
and try novel social and economic
experiments without risk to the rest of
the country.’’ 1073 The Commission
disagrees that further laboratory testing
by States is needed. States have been
experimenting with non-compete
regulation for more than a century, with
laws ranging from full bans to notice
requirements, compensation thresholds,
bans for specific professions,
reasonableness tests, and more.1074 Past
State experimentation and legal changes
yielded a considerable body of
empirical research, which as described
in Parts IV.B and IV.C, demonstrates
that non-competes negatively affect
competitive conditions in labor markets
and in product and service markets.
This evidence supports the
Commission’s finding that noncompetes are an unfair method of
competition.
Individual States’ non-compete
policies can cause spillover effects that
negatively affect competitive conditions
in other States. Individual States’ noncompete policies can also affect the
operation of legal regimes in other
States. Choice of law provisions cause
confusion for workers even in States
where non-competes are unenforceable.
There are incentives for some States to
adopt extremely permissive noncompete policies to attract employers
that favor non-competes, and potentially
even to enable employers to ‘‘export’’
those permissive policies to other States
through choice-of-law provisions.1075 In
short, States are interconnected with
respect to non-competes. Without a
uniform standard through the final rule,
States are forced to balance the benefit
to their residents of laws regulating noncompetes against the fear that some
employers may shift jobs to States
where non-competes are more
enforceable. One benefit of the
workers’ earnings in bordering States, and that the
effects are nearly as large as the effects in the State
in which enforceability changed, but taper off as the
distance to the bordering State increases).
1073 New State Ice Co. v. Leibmann, 285 U.S. 262,
311 (1932) (Brandeis, dissenting).
1074 See Beck Reed Riden Chart, supra note 1052.
1075 See, e.g., Glynn, supra note 1062 at 1385–86
(stating that ‘‘because employers typically are the
first movers in [non-compete] litigation, they often
can litigate in a hospitable judicial forum,’’ and
noting a rise in interjurisdictional disputes related
to non-compete enforcement and ‘‘judicial attempts
to preempt other courts from disregarding the
parties’ choice of law’’).
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Commission’s rulemaking is it resolves
this problem. The rulemaking record
shows banning non-competes will
improve competitive conditions in all
States and will benefit workers in all
States.
X. Regulatory Analysis
A. Introduction
The Commission has examined the
economic impacts of the final rule as
required by section 22 of the FTC Act
(15 U.S.C. 57b–3). Section 22 directs the
Commission to issue a final regulatory
analysis that analyzes the projected
benefits and any adverse economic
effects and any other effects of the final
rule. The final regulatory analysis must
also summarize and assess any
significant issues raised by comments
submitted during the public comment
period in response to the preliminary
regulatory analysis.1076
B. Preliminary Analysis
Pursuant to section 22 of the FTC Act,
the Commission issued a preliminary
regulatory analysis of its proposed
rule.1077 The preliminary regulatory
analysis contained (1) a concise
description of the need for, and
objectives of, the proposed rule; (2) a
description of any reasonable
alternatives to the proposed rule that
may accomplish the stated objective of
the final rule in a manner consistent
with applicable law; and (3) for the
proposed rule and for each of the
alternatives described, a preliminary
analysis of the projected benefits and
any adverse economic effects and any
other effects.1078
In the preliminary regulatory analysis,
the Commission described the
anticipated effects of the proposed rule
and quantified the benefits and costs to
the extent possible. For each benefit or
cost quantified, the analysis identified
the data sources relied upon and, where
relevant, the quantitative assumptions
made. The preliminary analysis
measured the benefits and costs of the
proposed rule against a baseline in
which the Commission did not
promulgate a rule regarding noncompetes and included in the scope of
the analysis the broadest set of
economic actors possible. Several of the
benefits and costs were quantifiable, but
not monetizable—especially with
respect to differentiating between
transfers, benefits, and costs. The
Commission preliminarily found that
others were not quantifiable. The
1076 15
U.S.C. 57b–3(b)(2)(C), (E).
at 3521–31.
1078 See 15 U.S.C. 57b–3(b)(1)(A) through (C).
1077 NPRM
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preliminary analysis discussed any
bases for uncertainty in the estimates.
The Commission preliminarily found
substantial positive effects of the
proposed rule: an increase in workers’
earnings by $250–$296 billion annually
(with some portion representing an
economic transfer from firms to
workers); an increase in new firm
formation and competition; a reduction
in health care prices (and prices in other
markets may also fall); and an increase
in innovation. The Commission noted
that several of these benefits overlap
(e.g., increases in competition may fully
or in part drive decreases in prices and
increases in innovation). The
Commission also preliminarily found
some costs of the proposed rule. Direct
compliance and contract updating
would result in $1.02 to $1.77 billion in
one-time costs, and firm investment in
human capital and capital assets would
fall.
The Commission preliminarily
concluded that the substantial labor
market and product and service market
benefits of the proposed rule would
exceed the costs. Furthermore, the
Commission preliminarily found the
benefits would persist over a
substantially longer time horizon than
most costs of compliance and contract
updating.
C. Public Comments on the Preliminary
Regulatory Impact Analysis
Based on the comments received, the
final regulatory analysis reflects greater
quantification where possible and
includes sensitivity analyses to reflect
different assumptions, including
assumptions commenters suggested.
The final regulatory analysis concludes,
consistent with the preliminary
analysis, that the benefits of the final
rule justify the costs.
Some commenters urged the
Commission to quantify the costs and
benefits to a greater degree. In the final
analysis, the Commission incorporates
greater quantification where possible.
That some effects cannot be quantified
or monetized does not, however,
undermine the Commission’s
conclusion that the benefits justify the
costs.
Some commenters focused on the
methodology used to estimate earnings
effects in the preliminary analysis,
stating that extrapolating estimated
effects on earnings based on linear
predictions may result in incorrect
estimates. These commenters stated that
linear predictions might be particularly
unreliable outside the range observed in
the data. While as a general matter,
linear extrapolation may not be
appropriate in all circumstances,
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especially in the absence of data
supporting such an approach, the
Commission notes the linear effect of
non-compete enforceability on earnings
was statistically tested in the economic
literature.1079
Nevertheless, to test and confirm the
robustness of the conclusions drawn in
the preliminary analysis from the linear
approach, in this final analysis, the
Commission uses several estimation
approaches. For its primary analysis, the
Commission adopts an approach that
does not rely on extrapolation.
Specifically, the Commission assumes
that the historical average change 1080 in
non-compete enforceability observed at
the State level represents the total
change in enforceability that results
from the rule. This approach is hereafter
referred to as the ‘‘average enforceability
change approach.’’ It likely
underestimates the effects of the rule
because the State-level changes that
would occur under the rule (which
adopts a near comprehensive ban)
would be substantially larger than the
changes observed historically. The
Commission also conducted sensitivity
analyses with two other approaches—
described further in Parts X.C and
X.F.6.a—that use linear extrapolation to
scale up the effects estimated in the
literature to estimate the effects of the
final rule (i.e., a near comprehensive
ban).
Some commenters alleged the
proposed rule would increase inflation.
Some commenters also stated the
proposed rule would harm shareholders
by decreasing corporate profits. In
response, the Commission notes that the
regulatory analysis attempts to quantify
and monetize real costs and benefits of
the final rule as opposed to nominal
costs and benefits. Therefore, net
benefits are benefits that represent
increased economic efficiency resulting
from the final rule rather than increases
in the dollar value of output that may
be due to inflation. Additionally,
earnings increases are due, at least in
part, to increased economic efficiency,
which would likely lower prices.
Accordingly, the Commission does not
expect that prices will rise because of
the rule. Indeed, empirical evidence
shows that in physician clinics, prices
fall with decreased non-compete
1079 Johnson,
Lavetti, & Lipsitz, supra note 388 at
1080 In other words, taking all changes in noncompete enforceability between 1991 and 2014 (the
range studied in the relevant literature) into
account, the Commission considers a change whose
magnitude is equal to the average of the magnitudes
of all those changes. See Johnson, Lavetti, & Lipsitz,
supra note 388 for more details.
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enforceability.1081 Similarly, while the
effect of the final rule on corporate
profits is unclear,1082 the Commission’s
analysis is focused on overall gains or
losses in economic surplus—i.e., the net
benefits to society, not to individual
corporations.
Some commenters stated that certain
costs may be missing from the
preliminary analysis, including costs
related to worker misconduct and
litigation over the validity of the final
rule. The Commission finds no evidence
or compelling arguments directly
linking non-competes to worker
misconduct and therefore does not
consider such costs.1083 Costs related to
litigation over the validity of the rule are
outside the scope of the regulatory
analysis under section 22, which is
concerned with costs and benefits
should the final rule be implemented.
Some commenters stated the rule may
have beneficial tax ramifications for
businesses and workers with noncompetes that are no longer enforceable,
including based on changes in
amortization schedules. In response, the
Commission notes that any tax savings
under the final rule represent transfers
from the government to firms that
previously used non-competes.
Significantly, the Commission is
allowing existing non-competes with
senior executives, who may be most
likely to have non-competes with tax
implications, to remain in effect. This
will mitigate the need for tax-related
administrative work. In response to
comments on the tax ramifications of
clawed back pay, the final rule does not
encourage or require firms to ‘‘claw
back’’ compensation and given the
exclusion for senior executives’ existing
non-competes in the final rule,
situations in which a firm would be in
a position to consider clawing back pay
are likely to be extremely limited, if any.
Some commenters stated workers may
be harmed if firms claw back workers’
earnings, if workers lose long-term
incentive payments, retention bonuses,
and severance payments, or if workers
must pay for training out of pocket in
response to the rule. First, in Parts
IV.B.3.a.iiv and X.F.6.a, the Commission
finds earnings increases overall
associated with decreases in noncompete enforceability. With respect to
existing non-competes, non-competes
1081 Hausman
& Lavetti, supra note 590.
evidence in the empirical literature is
mixed. Younge & Marx (supra note 755) find an
increase in firm value when non-competes became
enforceable in Michigan. Hiraiwa, Lipsitz, & Starr
(supra note 502) find no effect on firm value when
non-competes were prohibited for the majority of
workers in Washington.
1083 See Part V.D.3.
1082 The
17.
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with senior executives, which are most
likely to be structured with incentive
payments, bonuses, and severance, may
remain in effect under the final rule. To
the extent any other existing noncompetes with such structures are not
excluded from the final rule, as noted in
Parts III.D and IV.D, deferred
compensation and other structured
payments generally have many material
contingencies other than a non-compete,
which means incentive payments and
retention bonuses will continue to
retain value for the employer. Going
forward, under the final rule,
agreements for deferred compensation
and other structured payments may be
permissible as long as they do not fall
within the definition of non-compete
clause in § 910.1. With respect to
payments for training, the Commission
notes evidence that worker-sponsored
training is unaffected by legal
enforceability of non-competes,1084 and
it is therefore unlikely that workers will
incur costs related to training as a result
of the final rule.
Some commenters disagreed with the
Commission’s use of patenting activity
as a proxy for innovation in the
preliminary analysis, stating that the
value of innovation may not be captured
in patenting, in part because employers
may use patents as a substitute for noncompetes. First, the Commission agrees
that innovation likely has value above
and beyond patenting. That patenting
does not capture the full value of
innovation is not a basis for dismissing
its value as a proxy altogether. Second,
while it is theoretically possible firms
may substitute from the use of noncompetes to the use of patents to protect
intellectual property, the empirical
literature shows increases in innovation
do not follow from the simple
substitution of protections between noncompetes and patents. Specifically, the
empirical literature confirms the
innovations prompted by decreased
non-compete enforceability are
qualitatively valuable, and—examining
the relationship between non-compete
enforceability and patenting for drugs
and medical devices, where patenting is
ubiquitous 1085—it shows the patents
reflect true net increases in innovation
(as opposed to substitutions). One
commenter stated there can be difficulty
ascertaining the value of patenting. The
Commission finds that there are several
estimates of the private value of a patent
(e.g., the value to the patenting firm) in
the literature, but no estimates of the
social value of a patent, as further
1084 Starr,
supra note 445.
Part IV.B.3.b.ii, discussing Johnson,
Lipsitz, & Pei, supra note 526.
1085 See
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discussed in Part X.F.6.b. The
Commission therefore stops short of
monetizing this benefit. The final
analysis addresses effects on innovation
in greater detail in Part X.F.6.b.
Some commenters asserted the
research related to investment in human
capital does not distinguish between
two different types of training: core
training, i.e., training required to
perform job duties, and advanced
training, i.e., training with potential to
increase productivity beyond the
baseline requirements for job
performance.1086 Commenters stated
that when non-competes are more
enforceable, workers may receive
additional core training rather than
advanced training. In other words, when
non-competes are more enforceable,
labor mobility decreases and workers
may also move to new industries to
avoid potentially triggering noncompete clause violations (as discussed
in Part IV.B.3.b.ii), both of which make
experienced workers less often available
for hire. Firms therefore may need to
train workers at a greater rate because
they will hire inexperienced workers
who require more core training.
Research finding increases in training
associated with increases in noncompete enforceability therefore may
not imply increases in advanced
training—i.e., the kind of training that
increases productivity of workers
already able to perform job duties, with
net benefits for society as a whole. In
response, the Commission agrees that
decreases in training under the final
rule may represent decreases in core,
rather than advanced, training. It is not
possible to discern whether the
observed effects on training in the
literature represent core versus
advanced training because evidence that
would facilitate such an analysis does
not exist. Importantly, a decrease in core
training would be economically
beneficial because it would reflect a
more efficient use of the labor force.
Therefore, to the extent a decrease in
training reflects a change in core
training, this would be a net benefit of
the final rule—not a cost. On the other
hand, to the extent a decrease in
training is due to a change in advanced
training, this would represent a net cost
of the final rule. The Commission
further discusses investment in human
capital in Part X.F.7.a.
Some commenters stated that costs
associated with rescinding existing noncompetes and updating contractual
practices may be greater than estimated
1086 Commenters used the words ‘‘requisite’’ and
‘‘discretionary’’ in lieu of ‘‘core’’ and ‘‘advanced,’’
respectively.
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in the NPRM and attributed the greater
cost to the need for high-cost outside
counsel. In response, the Commission
finds it likely that many firms will not
need to use costly outside counsel (or
indeed, any counsel) to comply with the
final rule. This is especially true since
the final rule allows non-competes for
senior executives to remain in effect,
since it does not require rescission of
any existing contracts, and since it
provides a model safe harbor notice for
other workers and makes other
adjustments to simplify the notice
process. In response to commenters
stating that firms will need more time to
implement than estimated in the NPRM,
the Commission conducts an updated
analysis in Part X.F.7.b. The
Commission notes that the model
language provided in the final rule and
allowing employers to use the last
known address, mail or electronic, will
significantly simplify the notice process
for employers. Additionally, the
Commission performs two sensitivity
analyses in Part X.F.7.b. The first
assumes an attorney’s time is more
costly—it replaces the primary estimate
of the average hourly productivity of an
attorney ($134.62 per hour, based on
BLS earnings data) with an estimated
rate of the cost of outside counsel who
is a tenth-year attorney ($483 per
hour).1087 The second makes different
assumptions about the time spent by
employers related to existing noncompetes that will be no longer be
enforceable and updating contractual
practices. Finally, the Commission
clarifies the definition of ‘‘non-compete
clause’’ in Part III.D to reduce confusion
and give employers and workers a
clearer understanding of what is
prohibited. This, in turn, will reduce
compliance costs and potential
litigation costs over what constitutes a
non-compete.
One commenter from the retail
industry claimed the cost of
implementing the proposed rule could
1087 This estimate is drawn from the Fitzpatrick
Matrix, which is a fee schedule used by many U.S.
courts for determining the reasonable hourly rates
in the District of Columbia for attorneys’ fee awards
under Federal fee-shifting statutes. It is used here
as a proxy for market rates for litigation counsel in
the Washington, DC area, which likely represent the
high end of rates for litigation counsel in the U.S.
The estimate is therefore adjusted to reflect a
national rate by multiplying by the ratio of the
hourly wage of attorneys nationwide to the hourly
wage of attorneys in the Washington, DC metro
area, based on BLS Occupational Employment and
Wage Statistics data. The Commission
conservatively uses the rates of a tenth-year
attorney—a much more experienced attorney than
is likely to be needed (and indeed no attorney at
all may be needed). See Fitzpatrick Matrix, https://
www.justice.gov/usao-dc/page/file/1504361/
dl?inline. See BLS Occupational Employment and
Wage Statistics, https://www.bls.gov/oes/data.htm.
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be $100,000 to $200,000 per firm but
did not support this assertion with any
evidence. The Commission disagrees
with this assertion, which does not align
with its careful estimates based on
empirical evidence and significant
expertise presented in Part X.F.7.b.ii.
The Commission’s estimates also
acknowledge and account for
potentially heterogeneous costs across
firms.
Some commenters stated that
employers would need to spend
substantial resources to litigate trade
secret disputes and violations of postemployment restrictions other than noncompetes. One commenter stated that
the cost of a trade secret case may range
from $550,000 to $7.4 million,
depending on the monetary value of the
trade secret claim. The Commission
analyzes costs of litigation in Part
X.F.7.c. The Commission agrees with
commenters that trade secret litigation,
and litigation over post-employment
restrictions other than non-competes,
may be costly. However, the
Commission notes that no evidence
exists to support the hypothesis that
litigation on these fronts will increase
because of the final rule. Indeed, recent
evidence suggests that trade secret
litigation does not increase following
bans on non-competes.1088 Moreover,
the final rule, with its clear and brightline standard (as compared to the
current patchwork of State laws), would
likely decrease litigation attempting to
enforce non-competes, including
litigation initiated by former employers
against workers who start their own
business or who find a new employer.
While the Commission does not have
evidence on the frequency of these
different types of litigation, it expects
the decrease in non-compete litigation
would likely offset potential increases
in other litigation.
Positing that firms will be reluctant to
share trade secrets with workers under
the rule, some commenters also stated
that the costs of lessened sharing of
trade secrets should be taken into
account. Since no data exists on the
effect of non-competes on the monetary
value of shared trade secrets, the
Commission does not quantify or
monetize this effect. Moreover, there is
no evidence that employers will lessen
the extent to which they share trade
1088 Greenwood, Kobayashi & Starr, supra note
757. The Commission notes that this study
supplements—but is not necessary to support—its
finding that no evidence supports the conclusion
that litigation costs will increase under the final
rule. That finding is based on the Commission’s
expertise and the rulemaking record, including
relevant comments. This study was published after
the close of the comment period.
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secrets under the final rule, much less
that any change would be material. As
detailed in Part IV.D, employers have
less restrictive alternatives to noncompetes that mitigate these concerns.
Some commenters reference the Starr,
Balasubramanian, and Sakakibara
study 1089 and the Commission’s
interpretation of it in the NPRM to
assert that firms founded because of the
rule may be of lower quality than
existing firms in terms of average
employment and survival rates, and
adjustments should be made to the
Commission’s analysis to account for
these differences. Upon further review,
the Commission interprets the authors’
findings to show that within-industry
spinouts resulting from lessened noncompete enforceability tend to be lower
quality than non-within industry
spinouts resulting from lessened noncompete enforceability. However, both
types of spinouts are better, on average,
than spinouts that form under stricter
non-compete enforceability. The study’s
results therefore suggest that, if
anything, the Commission
underestimates the final rule’s benefits
from new business formation, because
the estimates do not adjust for quality.
Some commenters asserted that,
because of the positive effects of the
proposed rule on labor mobility, firms
may face greater costs associated with
turnover (especially firms that currently
use non-competes) due to the cost of
finding a replacement, the cost of
training a replacement, and the cost of
lost productivity. Based on Pivateau
(2011),1090 one commenter estimated
that turnover costs 25% of the annual
salary of a worker. Some commenters
also argued that some firms may face
decreased costs of turnover, because
more plentiful availability of labor can
reduce the cost of hiring. The
Commission finds that there may be
distributional effects of increased
turnover—benefits for firms that face a
lower cost of hiring and costs for firms
losing workers who had been bound by
non-competes—and assesses the same
in Part X.F.9.c.
Some commenters offered additional
empirical evidence not discussed in the
NPRM that was not specific to the
proposed regulatory analysis. The
Commission responds to those
comments in Part IV.
1089 Starr, Balasubramanian, & Sakakibara, supra
note 518.
1090 Griffin Toronjo Pivateau, Preserving Human
Capital: Using the Noncompete Agreement to
Achieve Competitive Advantage, 4 J. Bus.
Entrepreneurship & L. 319 (2010).
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38469
D. Summary of Changes to the
Regulatory Analysis
In the final regulatory analysis
presented in Part X.F, the Commission
updates its analyses based on the
parameters of the final rule, comments
received, supporting empirical evidence
raised by commenters, changes in the
status quo regarding regulation of noncompetes, and reanalysis of evidence
presented in the NPRM.1091 This
includes the Commission’s attempt to
quantify and monetize, to the extent
feasible, all costs and benefits of the
final rule, as well as transfers and
distributional effects. The Commission
additionally analyzes hypothetical
scenarios to assess what otherwise
unmonetized benefits and costs would
lead to a final rule that
