The FTC’s Final Rule banning non-competes in worker agreements contains a noteworthy exception that its provisions “do not apply where a cause of action related to a non-compete clause accrued prior to the effective date.”[1] The “existing cause of actions” exception, codified as Section 910.3(b), is a new addition that was not included in the FTC’s proposed rule issued last January. According to the FTC, Section 910.3(b) was added to the Final Rule in response to commenters who raised concerns that an invalidation or rescission of existing non-competes would be impermissibly retroactive, present due process concerns, and/or constitute an impermissible taking under the Fifth Amendment.[2]  However, it unclear whether this provision satisfactorily addresses these concerns, and it may have raised new concerns of its own.

The plain language of the exception suggests that parties may continue to bring suit for violations of then-existing non-competes after the Non-Compete Rule’s Effective Date, so long as the violation occurred prior to the Effective Date. Certain statements provided by the FTC in the Final Rule appear to support to this interpretation. As stated in the Federal Register, “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 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.”[3]

However, other statements by the FTC indicate, rather, that the Commission considers the Effective Date as the cutoff date after which any enforcement action related to then-existing non-competes are prohibited, even if the cause of action accrued prior to the Effective Date.  For example, the FTC declared in the Federal Register that it “adopts § 910.3(b) . . . to be clear that the final rule does not render any existing non-competes unenforceable or invalid from the date of their origin. Instead, it is an unfair method of competition to enforce certain non-competes beginning on the effective date.[4]  No reference is made here excepting causes of action accruing before the Effective Date.

If the FTC intends to foreclose all suits arising from alleged prior violations of employee non-competes from the Effective Date forward, as it statements suggest, there is a marked tension between the FTC’s intended purpose and the plain language of the final rule.

This tension can conceivably be reconciled by interpreting the exception as a concession by the FTC to allow for existing non-competes claims that have accrued and been filed before the Effective Date to continue.  However, to read the additional requirement to file suit into the text contravenes what it means for a cause of action to “accrue.” The United States Supreme Court, for one, has held that a cause of action accrues “when the plaintiff has a complete and present cause of action,” and “when the plaintiff can file suit and obtain relief.”[5]

Under the doctrine articulated by the United States Supreme Court in Auer v. Robbins, deference is typically granted to an agency’s reasonable interpretations of its own genuinely ambiguous regulations unless “plainly erroneous or inconsistent with the regulation.”[6] We believe that the Final Rule’s use of the phrase “cause of action . . . accrued” in the final rule is unambiguous, however, and a contrary interpretation by the FTC would not be protected by Auer deference if challenged in court, particularly after the Supreme Court severely limited the doctrine’s applicability in Kisor v. Wilkie.[7]  

Notwithstanding questions regarding the proper interpretation of the existing causes of action exception, the exception may, by its existence, lend some credence to those who oppose the Final Rule on constitutional grounds. The FTC has given a preview[8] of its arguments as to why it believes the existing causes of action exception insulates the final rule to constitutional challenges for impermissible retroactivity, unlawful takings, and lack of due process.  The question is –  will this exception be enough to allow the Final Rule to survive constitutional challenge on these grounds?

Until the FTC provides further guidance with respect to the existing causes of action exception, it remains uncertain whether a party may face the FTC’s ire for enforcing or attempting a non-compete after the Effective Date for behavior that occurred prior to the Effective Date.  Of course, if the Final Rule is stayed or struck down before the Effective Date, we may never see whether this becomes an issue in practice.  What we anticipate seeing, however, is a flood of litigation in the lead up to the Final Rule’s Effective Date to enforce non-competes whose enforcement will become “unfair” on the Effective Date.

[1] 16 C.F.R. § 910.3(b).

[2] 89 Fed. Reg. 38349 (May 7, 2024).

[3] 89 Fed. Reg. 38341 (May 7, 2024).

[4] 89 Fed. Reg. 38345 (May 7, 2024) (emphasis added).

[5] Wallace v. Kato, 549 U.S. 384, 388, 127 S. Ct. 1091, 1095, 166 L. Ed. 2d 973 (2007) (internal quotations omitted).

[6] Auer v. Robbins, 519 U.S. 452, 117 S. Ct. 905, 137 L. Ed. 2d 79 (1997).

[7] See Kisor v. Wilkie, 588 U.S. 558, 574, 139 S. Ct. 2400, 2415, 204 L. Ed. 2d 841 (2019) (“First and foremost, a court should not afford Auer deference unless the regulation is genuinely ambiguous.); see also Auer v. Robbins, 519 U.S. 452, 117 S. Ct. 905, 137 L. Ed. 2d 79 (1997).

[8] 89 Fed. Reg. 38440-41 (May 7, 2024).