FTC Approves New ‘Non-Compete Clause Rule’

On April 23, 2023, the Federal Trade Commission (“FTC”) approved by a vote of 3-2 a new administrative rule titled the “Non-Compete Clause Rule”, 16 CFR Part 910. This rule establishes that, pursuant to 15 U.S.C. § 45, it would be illegal to implement non-compete clauses in employee contracts for all types of workers. This rule will be effective 120 days after the date of publication in the Federal Register. However, certain exceptions apply to this general rule. For those existing contracts that include non-compete clauses, only those clauses in senior executive positions may still be enforced. For all other types of workers, existing non-competes will not be enforceable. Other exceptions include: (1) non-compete clauses entered into by a person pursuant to a bona fide sale of a business entity; (2) where a cause of action related to a non-compete clause accrued prior to the effective date of the “Non-Compete Clause Rule”; and (3) when there is a good faith basis to believe that the “Non-Compete Clause Rule” is inapplicable for the purposes of attempting to enforce or to enforce an existing non-compete clause.

The “Non-Compete Clause Rule” does have an effect in Puerto Rico, notwithstanding current and possible upcoming legal developments that may vacate and set aside the implementation of the rule. There are currently two cases that are attempting to do just that:  Chamber of Commerce of the United States of America, et al. v. Federal Trade Commission, Case 6:24-cv-00148 (E.D. Tex., 2024) and Ryan, LLC v. Federal Trade Commission, Case 3:24-cv-00986 (N.D. Tex., 2024). If the rule is allowed to stand, then state and territorial laws that allow, limit, or prohibit non-compete clauses will be affected. As stated in § 910.4(a) of the “Non-Compete Clause Rule”:

• This part 910 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 clause, including, but not limited to, State antitrust and consumer protection laws and State common law, except that this part 910 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).

This clause establishes that the “Non-Compete Clause Rule” will not have an effect on those state laws that limit or prohibit non-compete clauses if they are not in conflict with the federal rule. However, state law that allows for non-compete clauses cannot be enforced. Since the FTC does have jurisdiction over Puerto Rico pursuant to 15 U.S.C. § 44 and 15 U.S.C. § 45(a)(1), the decision made by the Supreme Court of Puerto Rico in Arthur Young & Co. v. Vega III, 136 P.R. Dec. 157 (1994) and Martin’s BBQ v. García de Gracia, 178 P.R. Dec. 978 (2010); and Art. 1438 of the Puerto Rico Civil Code of 2020, P.R. Laws Annotated tit. 31, § 10457, will no longer have any effect in the jurisdiction.