FTC Issues Sweeping Ban on Non-Compete Agreements

By Anna B. Cole and Elek A. Miller

On April 23, 2024, the Federal Trade Commission (“FTC”) voted 3-2 to issue a sweeping nation-wide final rule (the “Final Rule”) banning virtually all non-compete clauses for for-profit employers.

The Final Rule, which began as a proposed draft rule in January of 2023, is expected to have significant impacts on employers, if it can withstand likely legal challenges from groups like the U.S. Chamber of Commerce and others. Whether the Final Rule will be enforced by courts and, if so, how, remains to be seen.

Provided the Final Rule is not put on hold by a court, it will go into effect 120 days after publication in the Federal Register.

Key Aspects of the Final Rule

  • The Final Rule applies to for-profit employers.1 
  • It imposes a ban on all new post-employment non-compete clauses between employers and all workers (including senior executives). This ban includes entering or attempting to enter into such clauses, enforcing or attempting to enforce such clauses, or representing to a worker that they are subject to a post-employment non-compete clause.
    • **Note that the Final Rule does not prohibit employers from prohibiting workers from competing with the employer while the worker is performing work for the employer. In other words, the Final Rule only applies to post-employment non-compete clauses.**
  • Workers include employees, independent contractors, externs, interns, volunteers, apprentices, and sole proprietors who provide a service.
  • Non-compete clauses are defined 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.”
    • **Note that this definition no longer includes the “de-facto” non-compete concept included in the proposed rule, which is a helpful point of clarity for employers.**
  • With respect to existing post-employment non-compete clauses entered into before the Final Rule’s effective date, such clauses may remain in effect, but only if they are with senior executives. For the purpose of the Final Rule, senior executives are generally defined as employees earning more than $151,164 annually who are in a policy-making position. A policy-making position means a president, chief executive officer of the equivalent, any other officer who has policy-making authority, or any other person who has policy-making authority similar to an officer with such authority. Policy-making authority is also specifically defined in the Final Rule.
  • For workers who are not senior executives, existing post-employment non-competes are no longer enforceable after the Final Rule’s effective date, and the prohibitions listed in the second bullet point above apply.
  • Employers covered by the Final Rule must provide non-senior executive workers subject to existing post-employment non-competes notice that such agreements/clauses are no longer enforceable. The Final Rule provides a model notice that satisfies this notice requirement, and use of the model notice provides a safe harbor for employers.
    • **Note that the formal recission process contemplated by the proposed rule is not included in the Final Rule.**
  • Notably, the Final Rule includes three explicit, but narrow, exceptions:
    • Bona fide sales of businesses. The Final Rule does not apply to non-competes that are entered into pursuant to a bona fide sale of a business entity, of someone’s ownership interest in a business entity, or of all or substantially all of a business entity’s operating assets.
    • Existing causes of action. The Final Rule does not apply where a cause of action related to a non-compete accrued prior to the effective date of the Final Rule.
    • Good faith. It is not an unfair method of competition to enforce or attempt to enforce a non-compete or to make representations about a non-compete where a person has a good-faith basis to believe that the Final Rule does not apply.
  • The Final Rule does not generally prohibit the use of non-disclosure or non-solicitation agreements.2

What Employers Should Do Now

Employers covered by the Final Rule that use restrictive covenants, such as non-competes, should develop a plan to address the requirements of the Final Rule. They should also take this time to review their existing restrictive covenant agreements and provisions (including non-competes, non-solicits, confidentiality, and liquidated damages related to violations of the same) to ensure that they comply with existing state laws (which, in some cases, are already somewhat restrictive), and other federal laws, such as the National Labor Relations Act. Ultimately, employers will be well-served to develop a comprehensive plan regarding use of restrictive covenant agreements that complies with both the Final Rule and state law, as applicable.

Our team will continue to follow developments related to the Final Rule and anticipated litigation.

We are also available to discuss the Final Rule and its impact on your business, so please do not hesitate to reach out to our Employment & Labor Team if you have questions.

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[1] **Note that while the FTC Act does not apply to non-profit corporations, Commissioner Slaughter warned that even if an entity registers as a non-profit tax-exempt entity but is in fact organized for the profit of members, then those entities, in that Commissioner’s opinion, would fall under the FTC Act and therefore be subject to the Final Rule.**

[2] However, private sector employers should nonetheless be cautious in the use of non-solicitation agreements and post-employment non-disclosure agreements. The National Labor Relations Board (NLRB) has held that some post-employment confidentiality agreements violate covered employees’ rights under Section 7 of the National Labor Relations Act, and the NLRB’s General Counsel has advocated for a similar position on non-solicitation agreements. Additionally, because “non-compete clause” is defined broadly in the Final Rule, certain other restrictive covenants could, in limit circumstances, still fall within the purview of the Final Rule and should be carefully assessed for compliance before being implement and/or enforced.