On April 23, 2024, the Federal Trade Commission (FTC) voted 3-to-2 to issue a final rule that will ban most employer-employee non-compete agreements.  The final rule is scheduled to go into effect 120 days after it is published in the Federal Register. 

The FTC’s Final Rule:

Under the FTC’s new rule, existing non-compete agreements for most workers will no longer be enforceable after the rule’s effective date.  

The rule defines a “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: (i) 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 (ii) operating a business in the United States after the conclusion of the employment that includes the term or condition.

The prohibition is quite broad, and includes agreements with employees, independent contractors, externs, interns, volunteers, apprentices, or sole proprietors who provide a service to a client or customer.  The rule applies to virtually all persons or businesses that operate for profit.

The FTC’s final rule defines non-compete clauses broadly to capture many other types of commonly used restrictive covenants such as:

• Overly broad confidentiality and nondisclosure agreements;
• Overly broad coworker non-solicitation agreements;
• Training repayment agreements; and
• Overly broad customer non-solicitation agreements.

Exceptions:

The Rule does contain an exception for Senior Executives – but only for non-compete agreements that were entered into with Senior Executives prior to the effective date of the Rule. The regulation defines “Senior Executive” as a worker (a) in a “policy-making position”; and (b) earning an actual or annualized sum of $151,164 (through salary, bonuses, and/or commissions, but excluding fringe benefits, retirement contributions, and medical/life insurance premium payments).

Non-compete clauses entered into with a seller of a business entity are exempt from the Rule (and therefore permissible), so long as the sale involves the disposition of the person’s ownership interest in the business entity, or of all or substantially all of a business entity’s operating assets.

The FTC rule also states that it is not an unfair method of competition to enforce or attempt to enforce a non-compete clause, or to make representations about a non-compete clause where a person has a good-faith basis to believe the FTC’s rule does not apply.

Required Notices:

Employers are banned from entering into any non-compete agreements after the effective date of the Rule, even if they involve Senior Executives.    Employers will be required to provide “clear and conspicuous” written notice to workers, other than Senior Executives, who are bound by an existing non-compete agreement that the agreement is not enforceable.

Effective Date

The FTC rule was passed on April 23, and absent judicial intervention, will become effective 120 days after it is published in the Federal Register.

The day after the Rule was passed, the United States Chamber of Commerce and other trade groups sued the FTC in the United States District Court for the Eastern District of Texas, seeking to invalidate the FTC’s ban on post-employment non-compete agreements and provisions.  The case is Chamber Of Commerce Of The United States Of America et al v. Federal Trade Commission et al, Case No. 6:24cv148.  Other federal lawsuits have already been filed seeking judicial review of the FTC’s authority to promulgate the rule and challenging the rule on other grounds. These lawsuits include requests for injunctive relief to prevent the FTC rule from becoming effective while the courts resolve the merits of the case(s). It is difficult to predict how long the judicial process will take and when the Rule will become effective, if at all.  

What Should Employers Do Now?

• Review and evaluate current versions of restrictive covenants, including those found in existing agreements, handbook policies, or communicated verbally to workers to determine if they might be covered by the new FTC rule if and when it is implemented.
• Review non-solicitation and confidentiality agreements to ensure they are not so overbroad as to constitute a prohibition against competition under the new FTC Rule and/or state law.
• Consider whether your existing agreements will be enforceable under applicable state laws.  Many states have recently limited or restricted the use of non-competition clauses and agreements, particularly with respect to lower wage-earning employees. 
• Consider having Senior Executives execute non-compete agreements now, before the FTC ban on non-competes becomes effective.  After the effective date, only agreements previously executed by Senior Executives will survive.

Remember that under the new FTC Rule, non-compete agreements are still permissible in the case of the sale of a business.  Care should be taken to ensure that such clauses are also permissible under applicable state law.