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Background
On Tuesday, April 23, 2024, the Federal Trade Commission (FTC)
voted to publish a Final Rule that will effectively ban existing
and future non-compete agreements with workers in the United
States, with limited exceptions. The Final Rule will not take
effect until 120 days after it is published. Assuming the Final
Rule is published in the next two weeks as anticipated, it will not
take effect until approximately August 2024 (i.e., 120 days after
the publication date).
Tuesday’s vote came more than a year after the FTC first
proposed a non-compete ban on January 5, 2023, and
received over 26,000 public comments on the proposal.
Reaction to the FTC’s vote was swift, with two lawsuits already filed that challenge the
FTC’s authority to issue the Final Rule and its enforceability.
Resolution of these suits and the fate of the Final Rule is
therefore yet to be determined. Key provisions of the Final Rule
are discussed below, along with take-aways.
Key Provisions of the Final Rule
- Comprehensive Ban on New Non-Competes with
Workers. Businesses may not require any worker to sign
non-compete clauses on or after the Final Rule’s effective
date.
- A non-compete is defined as a term or condition of employment
that prohibits, penalizes, or prevents a worker from seeking or
accepting work, or operating a business, after the conclusion of
employment. - “Worker” means any person who works or previously
worked, paid or unpaid, and includes (but is not limited to)
employees, independent contractors, externs, interns, volunteers,
apprentices, or sole proprietors providing a service to a person.
“Worker” includes a natural person who works for a
franchisee or franchisor but does not include a franchisee in the
context of a franchisee-franchisor relationship. - While confidentiality and non-solicitation clauses are not
prohibited, if these provisions prevent a worker from seeking or
accepting other work, they may meet the definition of non-compete,
and therefore, be unenforceable.
- A non-compete is defined as a term or condition of employment
- Existing Non-Competes No Longer Enforceable, Except
with Senior Executives. Non-competes entered into before
the effective date are no longer enforceable, except non-competes
entered into before the effective date with “senior
executives.”
- A “senior executive” is a worker who (1) was in a
policy-making position and (2) received total annual compensation
of at least $151,164 in the preceding year, or $151,164 in total
compensation on an annualized basis. - A “policy-making position” means a business
entity’s President, CEO or the equivalent, or any other officer
or person with authority to make policy decisions that control
significant aspects of a business entity or common enterprise.
- A “senior executive” is a worker who (1) was in a
- Notice of Non-Enforcement by the Effective
Date. Businesses must provide workers with a “clear
and conspicuous notice” that their existing non-compete will
not and cannot be enforced. Notice is due by the effective date,
and the FTC supplied a model notice. Businesses will not be
required to provide such notice to “senior executives,”
as the ban will not extend back to cover their pre-existing
non-competes. - Exceptions for Bona Fide Sales of Business, Existing
Causes of Action, Good Faith, and Certain Industries.
There are a few other limited exceptions to the Final Rule:
- The Final Rule does not apply to non-competes entered into by a
person pursuant to a “bona fide sale of a business.” This
exception is broader than the initially proposed rule that only
allowed non-competes with persons who owned 25% or more of a
business. However, the FTC comments caution that not all sale
contexts will be eligible for this exception. - The Final Rule allows employers to enforce non-competes where
the cause of action accrued prior to the effective date. - The Final Rule states that it is not an unfair method
of competition to seek to enforce a non-compete provided a person
has a good faith basis to believe that the FTC’s ban is
inapplicable. - Certain industries also are exempt from the Federal Trade
Commission Act, specifically, banks, savings and loan institutions,
federal credit unions, common carriers, air carriers and foreign
air carriers, and persons, partnerships and corporations subject to
the Packers and Stockyards Act. The rule also does not generally
apply to non-profits.
- The Final Rule does not apply to non-competes entered into by a
- State Law Preemption. Conflicting state laws
are superseded. Thus, even state laws that prohibit non-competes
for low-income workers – like Illinois law that prohibits
non-competes with workers making less than $75,000 per year –
will be superseded. Other than state laws in conflict, the Final
Rule provides that it is not intended to exempt compliance with or
prevent enforcement of state law, including state antitrust law,
consumer protection laws, or common law. - Severability Clause. The FTC included a
severability clause. Thus, if a court holds certain provisions of
the Final Rule are unenforceable, the FTC can still argue for the
enforceability of other provisions.
Take-Aways
- The Final Rule is Not Currently in Effect. Do
not panic. As noted above, lawsuits were swiftly filed and more may
follow before the effective date. These lawsuits likely will take
several months to reach final resolution, and the rule could be
enjoined during the pendency of the suits. In the meantime,
employees may incorrectly believe that they are no longer subject
to a non-compete; be ready to explain the uncertainty regarding the
timing and ultimate fate of the rule. - Identify and Evaluate Existing Agreements.
Identify existing non-competes and determine if each is with a
senior executive exempt from the potential ban or a worker for whom
the ban will apply if it becomes effective. Analyzing that issue
now will position businesses to timely provide the required
rescission notice if the ban takes effect. - Consider Implementing Non-Competes with Senior
Executives Before the Effective Date. If senior executives
do not have a non-compete and one is desired, the business should
seek the non-compete with those individuals before the Final Rule
goes into effect. Thereafter, the senior executive exemption does
not apply. - Bolster Trade Secret Protections. Consider
whether a ban on non-competes would trigger the need for additional
trade secret and confidential information protections. If so,
bolster the protections now. - Analyze Enforceability of Non-Solicitation
Provisions. Determine if your company’s current
non-solicitation restrictions should be drafted more narrowly to
increase the likelihood such provisions will be enforced, in light
of the Final Rule’s potential critical evaluation of
non-solicits and increased state law scrutiny.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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