On April 23, 2024, the Federal Trade Commission (“FTC”) voted 3-2 to approve a Final Rule banning all new non-compete clauses (“Final Rule”), voiding existing non-compete agreements, and requiring that employers notify workers, both past and present, that any non-compete clauses they may have previously signed are no longer enforceable. However, the Final Rule provides an exception for senior executives (defined as those who are in a policy-making position, and earning over $151,164 annually), stating that existing non-competes can remain in effect. The FTC has created a model notice for employers to notify workers.
According to the Final Rule, a “non-compete clause” is defined as “a term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from (1) 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 (2) operating a business in the United States after the conclusion of the employment that includes the term or condition.” The FTC holds that pursuant to Section 5 of the Federal Trade Commission Act, non-competes are an unfair method of competition.
Notably, the Final Rule does not apply to (1) a non-compete clause that is entered into by a person pursuant to a bona fide sale of a business entity, of the person’s ownership interest in a business entity, or of all or substantially all of a business entity’s operating assets; (2) existing causes of action related to a non-compete clause accrued prior to the effective date of the Final Rule; and (3) a good faith belief that the Final Rule is inapplicable.
Further, the Final Rule does not prohibit non-disclosure/confidentiality or non-solicitation agreements or clauses unless same are so broad that that their language functions as a de facto non-compete clause.
The Final Rule supersedes any state statute, regulation, order, or interpretation to the extent that such statute, regulation, order, or interpretation is inconsistent with the non-compete rule.
The Final Rule is scheduled to go into effect 120 days after its publication in the Federal Register, however legal challenges have already begun and the U.S. Chamber of Commerce has indicated its intention to sue the FTC with respect to the Final Rule contending that, “The Federal Trade Commission’s decision to ban employer non-compete agreements across the economy is not only unlawful, but also a blatant power grab that will undermine American businesses’ ability to remain competitive.”
This summary is for informational purposes only and is not intended to constitute legal advice. This information should not be reused without permission.
