Our clients ask us this question every day “Is this Non-Compete Enforceable”? The rules are clear in California (“no”), but in most other areas of the United States the answer are much more murky (“well, it depends on legitimate business interests, which state law applies, etc.”).
Now the Federal Trade Commission (FTC) has a simple answer: It approved a new rule that bans nearly all non-compete agreements that would prevent or penalize a worker from taking another job anywhere or starting a business even if it competes with the employer. Existing non-competes with workers, other than “senior executives”, are void after the rule takes effect.
Under the FTC’s new rule adopted on April 23, 2024 ( Non-Compete Clause Final Rule (ftc.gov))
Senior Executives: Existing noncompetes for senior executives can remain in force under the FTC’s final rule, but employers are banned from entering into or attempting to enforce any new noncompetes, even if they involve senior executives. “Senior Executives” is meant to be defined narrowly to a small subset of executives: the president, CEO or any other officer or other individuals in a policy-making position for an entire enterprise who ALSO earn more than $151,164 from that enterprise.
Everyone Else: Existing noncompetes for the vast majority of workers will no longer be enforceable after the rule’s effective date.
Employer Notice: Employers will be required to provide notice to workers other than senior executives who are bound by an existing noncompete that the employer will not be enforcing any noncompetes against them. The FTC provided model language for the employer-provided notice.
Sale of Business Exception: The Final Rule does not apply to non-competes entered into by a person pursuant to a bona fide sale of that person’s ownership interest in a business entity or of all or substantially all of a business entity’s operating assets. There is no minimum ownership level, but the sale of business must be bona fide, to avoid sham sales designed to coerce an employment-based noncompete from a worker.
The Final Rule applies to employees and independent contractors, but specifically excludes franchisor/franchisee relationships.
The FTC originally proposed a non-compete ban in January 2023, which we wrote about here (Kick Non-Competes to The Curb). Subsequently the FTC received more than 26,000 comments about the proposed rule. Some of the comments were incorporated into the Final Rule, namely: adding an exception for existing senior executive non-competes; amending the notice requirement to ease compliance; and eliminating the sale of business ownership threshold.
In support of the new rule, the FTC argued that noncompetes are a widespread and often exploitative practice that suppresses wages, hampers innovation, and blocks entrepreneurs from starting new businesses. Litigation is expected to commence immediately, with the U.S. Chamber of Commerce announcing that it would file a lawsuit seeking to enjoin the enforcement of the FTC’s Final Rule. The Chamber will argue that the FTC does not have the appropriate authority from Congress to impose such a nationwide rule.
What Should an Employer Do Next? The Rule becomes effective 120 days after publishing final rule in the federal register, but if a federal court suspends enforcement of the Final Rule due to the several contemplated lawsuits, then it could be many months before common employment practices must change. Meanwhile, employers can make plans:
Plan to issue the employer notice after the effective date. Employers must issue the notice to every worker for whom they have an address, mobile phone or email on record.
Begin to update employment templates to delete non-competes.
Evaluate your trade secret and confidentiality protections. Are they separate and distinct from non-solicitation and non-compete clauses?
Consult with counsel to help Identify executives who are in a policy-making position. These are officers with responsibility and decision making authority for the whole enterprise, not just a division or a subsidiary.
Calculate the potential financial losses if “forfeit for competing” compensation contracts are also banned. The FTC rule intends to ban these common arrangements, including paid “garden leave” or severance contracts that impose forfeiture of promised compensation.
While this new nationwide non-compete ban is the subject of several immediate lawsuits intending to delay its effective date, we predict that we will continue to see state- by- state legislative proposals to limit and restrict the effectiveness of non-competes. Businesses will have to navigate various rules, if there is no national standard. Employers should still narrowly tailor their noncompete clauses to protect only legitimate business interests and should be mindful of local laws in states like Massachusetts, Illinois and Colorado, where restrictions already exist, and New York, where we are monitoring new legislative proposals.