The New Non-Compete Rule: What You Need to Know about the FTC’s Comprehensive Ban

Tuesday May 7, 2024

Sarah K. Brown

The New Non-Compete Rule: What You Need to Know about the FTC’s Comprehensive Ban

On April 23, 2024, The Federal Trade Commission (“FTC”) issued its final Non-Compete Clause Rule (“Non-Compete Rule”), under which the FTC adopted a near comprehensive ban on non-compete agreements. The purpose of this article is to provide a general overview of the Non-Compete Rule, and how it will impact the areas of employment and business relations.

 

The Non-Compete Rule

The Non-Compete Rule maintains that it is an unfair method of competition for employers to enter into non-compete clauses with all workers on or after the final rule’s effective date. The Non-Compete Rule will be effective 120 days after the date of publication in the Federal Register.

The Non-Compete Rule defines a non-compete clause as follows:

“a term or condition of employment that either “prohibits” a worker from, “penalizes” a worker for, or “functions to prevent” a worker from (A) 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 (B) operating a business in the United States after the conclusion of the employment that includes the term or condition.”

It is important to note that the bolded text in the above definition, “functions to prevent,” further expands the definition to include terms and conditions that work to restrain such a large scope of activity that they, in effect, function as a non-compete. This could include non-disclosure agreements, training repayment agreement provisions, and non-solicitation agreements, depending on their application and scope. The FTC also clarified that the definition includes contractual terms or workplace policies, whether those terms or policies are written or oral.

 

Exceptions to the Ban

The Non-Compete Rule provides one primary exception for existing non-compete agreements, and several carve-outs for non-competes entered into after the rule’s effective date.

As to existing non-competes, the Non-Compete Rule provides that existing non-competes with senior executives can remain in force. “Senior executives” are workers earning more than $151,164 and who are in “policy-making positions.” This would include a president, CEO, or any other officer with similar authority.

As to non-compete agreements entered into after the effective date, the Non-Compete Rule will not prevent parties in the following situations from entering into non-compete agreements after the effective date:

  • A buyer and seller in the context of a bona fide sale of a business entity.
  • A franchisee in the context of a franchisee-franchisor relationship.
  • A person who has a good-faith basis for believing that the Non-Compete Rule is inapplicable to their situation.

 

The Rule’s Effect on Existing Agreements

Non-compete agreements entered into prior to the effective date will be treated differently, based on the type of worker subject to the agreement.

Existing non-compete agreements with senior executive will continue to remain enforceable. The Non-Compete Rule explicitly states that entering into a non-compete agreement with a senior executive is an unfair method of competition only when the non-compete clause was entered into after the effective date.

For all other workers, existing non-competes will be unenforceable after the effective date. Further, by the effective date, employers are required to provide affected workers with clear and conspicuous notice that the worker’s non-compete is no longer in effect and cannot be legally enforced against them.

 

Ongoing Litigation

Shortly after the FTC announced the new Non-Compete Rule, US based firms and trade groups such as the US Chamber of Commerce filed suit against the FTC in federal court to challenge the rule. Based on these lawsuits, it is possible that the federal courts could require that the FTC postpone the implementation of the new rule in the short term, or overturn it in the long term. However, in the interim, employers should begin identifying how their employees may be affected by the new Rule, and whether there are existing agreements and policies in place that will require revision in order to comply with the FTC’s ban.

If you have any questions about how you or your business may be affected by the FTC’s new Non-Compete Rule, please reach out to one of the attorneys on our staff for further information.