On April 23, 2024, the U.S. Federal Trade Commission (FTC) voted 3-2 (along party lines) to adopt a final rule (Final Rule) that prohibits the imposition of non-compete agreements in the employment context, with very limited exceptions, stating that such agreements are an “unfair method of competition.” The Final Rule is substantially the same as the proposed rule we highlighted early last year: (FTC Proposes Rule Prohibiting Non-Competes). Key elements of the Final Rule are:
Non-compete Ban for Most Workers
With few exceptions, the Final Rule bans all new post-employment non-compete agreements, regardless of level of employment. According to the FTC, a “non-compete” is a contractual term between an employer and a worker that prevents the worker from (or penalizes a worker for) seeking or accepting employment with a person, or operating a business, after the conclusion of the worker’s employment with the employer. So-called “garden leave” arrangements, where a departing employee remains employed, but goes on paid leave, for a period of time are not prohibited by the new rule. Notably, a “worker” is any employee (from the CEO to the lowest entry-level staff member), and the term includes independent contractors. However, as the Final Rule only applies to post-employment non-compete agreements, it does not apply to non-competes that prohibit an employee from competing against the employer while still employed.
Retroactive Effect
The Final Rule will be retroactive, invalidating non-competes that existed prior to the rule, with the exception of existing noncompete agreements with “senior executives” (described directly below). While formal recission of existing non-compete agreements is not required, once the Final Rule becomes effective employers must advise their employees and former employees in writing that their non-competes are no longer enforceable.
Exemption for Senior Executives
Existing non-compete agreements will remain enforceable for “senior executives” defined as those earning above $151,164 annually and in a policy-making position. New non-compete agreements with senior executives will be prohibited after the effective date.
Exemption for Sale of a Business Regardless of Ownership Percentage
Non-compete agreements entered into in a “bona fide” sale of a business will remain enforceable. And in a departure from the January 2023 proposed rule, the final rule broadens this exception, which is often a critical piece of a business sale transaction, so that even individuals who own less than 25% of a company may be subject to a non-compete.
Exempted Entities and Sectors
Some entities that would otherwise be employers are not subject to the Final Rule, as they fall outside of the FTC’s jurisdictional reach under the Federal Trade Commission Act (FTC Act), including banks, non-profits, insurance companies, transportation and communications carriers, air carriers, and employers subject to the Packers and Stockyards Act. In addition, the Final Rule also does not apply to franchisee/franchisor contracts, although it does apply to employees working for a franchisee or franchisor.
Effective Date
The Final Rule will be effective 120 days after publication in the Federal Register. It is expected, however, that the effectiveness of the Final Rule will be delayed by lawsuits. The U.S. Chamber of Commerce and several other business groups have already filed suit against the FTC challenging the noncompete ban, asserting, among other things, that it exceeds the agency’s statutory rulemaking authority under the FTC Act.
In the meantime, business owners now face the challenge of revisiting their current employment contracts to ensure they align with this new regulation, while keeping an eye on the judicial response to challenges to the Final Rule. We will continue to monitor developments in this space and would be happy to discuss any questions and concerns, including assistance with reexamining existing non-compete agreements and review of protections and controls over confidential and trade secret information and restrictions on solicitation of employees, customers, and others, which, if properly structured, are not subject to the new rule.
The full text of the Final Rule is available here.
