On April 23, 2024, the Federal Trade Commission (FTC) voted to approve issuance of a Final Rule banning nearly all noncompete agreements nationwide. The Final Rule, a draft of which was released just one hour before it was voted on by the Commissioners, would – if it becomes effective – radically change the landscape of employer-employee relations in the United States.

What the Final Rule Would Change

• Nullifies current noncompete agreements for all employees other than “senior executives,” defined as employees in a policy-making position who earn an annualized salary of more than $151,164;
• Prohibits new noncompete agreements for all employees, including senior executives;
• Prohibits employers from representing to employees that they are bound by noncompete agreements (and, in the case of senior executives, prohibits employers from making such representations regarding noncompete agreements executed following the effective date of the Final Rule); and
• Requires employers to clearly and conspicuously notify all employees currently subject to noncompete agreements that such agreements are no longer valid or otherwise enforceable.

M&A Exception

In an important carve-out, the Final Rule does not apply to noncompetes entered into pursuant to a bona fide sale of a business entity or all of an entity’s operating assets.

Preemption

The Final Rule provides that it preempts state laws that allow noncompetes, but does not preempt state laws that are consistent with the Final Rule and offer greater protection against noncompetes (e.g., California).

Next Steps

The Final Rule is set to become effective 120 days following publication in the Federal Register, which will likely be in late August or early September. However, the Final Rule has already been challenged in federal court by the U.S. Chamber of Commerce and other business groups, and may be enjoined before it can be enforced. Given the fact that the sweeping Final Rule would upend the American workplace as it has existed for much of the past century, notwithstanding the existing near-complete bans on noncompete clauses in employment agreements in a few states (including California), it is likely that its legality and scope will not be determined until the United States Supreme Court weighs in on the matter.

View our previous webinar on noncompetes here.