On April 23, 2024, the Federal Trade Commission (FTC) voted 3-2 in favor of issuing a final rule that will essentially ban employers’ use of non-compete agreements in the workplace. Although the FTC’s non-compete rule isn’t scheduled to go into effect until 120 days after it is published in the Federal Register, the U.S. Chamber of Commerce has already filed a lawsuit challenging the legality of the FTC’s decision.

Despite the uncertainty of whether the FTC’s non-compete rule will survive judicial scrutiny, businesses must nonetheless understand what agreements are covered under the rule and begin taking steps to proceed as if the rule will go into effect late this summer or early fall.

Overview of the FTC’s Non-Compete Rule

The key takeaways from the FTC’s 570-page non-compete rule are as follows:

• All new non-compete agreements with workers and senior executives will be banned. (This includes non-compete agreements with employees, independent contractors, interns, externs, and volunteers.)
• Existing non-compete agreements for workers (other than senior executives) will no longer be enforceable after the effective date of the rule. (The FTC defines “senior executive” as a worker who is “in a policy-making position” and earns actual or annualized total compensation of more than $151,164.)
• The FTC broadly defines “non-compete” as meaning any contractual provision or workplace policy that “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 broadness of this definition means that other restrictive covenants (e.g., non-solicitation provisions, non-disclosure agreements, etc.) may fall within the reach of the FTC’s ban on non-competes.
• Employers must provide, in writing, all former and current workers (other than senior executives) who have an existing non-compete clause with “clear and conspicuous notice” that, by the effective date, such “non-compete clause will not be, and cannot legally be, enforced against the worker.”
• The rule provides an exception that permits a non-compete agreement for a seller in a bona fide sale of a business entity, so long as the sale involves the “person’s ownership interest” in the business entity, or “of all or substantially all of a business entity’s operating assets.”
• The rule supersedes all state laws and regulations (unless such laws and regulations are more restrictive than the FTC rule).

Impact of Legal Challenges on Rule

The FTC rule will not go into effect until late August or early September. However, businesses have already proceeded with filing legal challenges to the rule. Most notably, the U.S. Chamber of Commerce has filed a federal lawsuit in the Eastern District of Texas in which it seeks a ruling to vacate the rule in its entirety.

Although it will take years for these cases to fully work their way through the judicial system, the most likely outcome is that a party (such as the U.S. Chamber of Commerce in its case) will seek a temporary restraining order or preliminary injunction to delay the effective date of the rule while the legal challenges proceed in court. In all probability, a court will decide whether to issue a temporary restraining order or preliminary injunction in the next couple of months (i.e., prior to the scheduled effective date of the rule).

What Should Companies Do Now?

Even though the future of the FTC’s non-compete rule is uncertain, businesses should nonetheless proceed as if the rule will survive legal challenges and go into effect in late August or early September. Specifically, we recommend businesses prepare for the implementation of the rule by taking the following steps:

• Take a deep breath and proceed as normal. Because the FTC’s rule isn’t scheduled to become effective for several months, businesses do not have to take any immediate action. This is a time for preparation.
• Contact employment counsel. In the coming months, businesses should work closely with employment counsel to fully understand the impact of the rule and to prepare accordingly for if and when the rule becomes effective. This includes having employment counsel review existing non-competes to determine if there is language that may be considered as the functional equivalent to a non-compete provision under the rule (g., non-disclosure, non-solicitation, etc.). Furthermore, businesses should confer with employment counsel to explore whether there are lawful ways to accomplish the same goals of a non-compete agreement, such as a fixed-duration employment agreement.
• Take inventory of existing non-compete agreements. Businesses should begin preparing to comply with the rule by investigating whether there are any former or current workers (other than senior executives) who are subject to an existing non-compete agreement. This investigation should not only consist of employee non-competes, but also any non-competes a business may have with an independent contractor, intern, extern, volunteer, etc. as they will all be subject to the rule. As businesses will have to provide these individuals with written notice that their non-competes are no longer enforceable, businesses should compile a list of those former and current workers it will send notice to prior to the effective date of the rule. (Do not send out any notices until you are absolutely certain that the FTC rule is about to go into effect!)
• Carefully draft new non-compete agreements. In this regard, businesses should proceed with requiring non-compete agreements in those situations where such a restriction is warranted. However, when drafting these new non-compete agreements, businesses should ensure that the non-compete provisions are tailored as narrowly as possible and that agreements contain confidentiality clauses and other language to protect against a worker taking company trade secrets and proprietary information to a competitor. The FTC rule does not impact measures that businesses can lawfully take to protect their confidential and sensitive information.

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