In a rare public meeting, the Federal Trade Commission (FTC) voted 3-2 on April 23, 2024, to approve a final regulatory rule (Final Rule) which bans virtually all preexisting and future noncompete agreements with very few exceptions.

The Final Rule is substantially the same as the initially proposed rule. The Final Rule applies to essentially all businesses, regardless of size, and all employees, with a partial exception for existing agreements with “senior executives.”

Key elements include:

• The Ban: Regarding workers who are not “senior executives,” it is unlawful for a person to (1) enter or attempt to enter into a noncompete clause; (2) enforce or attempt to enforce a noncompete clause; or (3) represent to any worker that the worker is subject to a noncompete clause. The Final Rule applies to noncompete agreements not just with employees, but with workers classified as independent contractors as well.
• Senior Executives: The Final Rule “grandfathers” existing noncompete agreements applicable to “senior executives,” but employers may not require senior executives to enter into a noncompete clause after the effective date of the rule. “Senior executives” are those employees who (1) are employed in a policy-making position; and (2) received at least $151,164 in annual compensation the prior year. Employees who make policy only with regard to a specific department or division of a business will not be considered “senior executives” under the Final Rule.
• Franchises: The Final Rule does not apply to franchisee/franchisor contracts. However, it does apply to employees working for a franchisee or franchisor.
• Existing Noncompetes: The Final Rule does not call for the formal recission of existing noncompete agreements; however, prior to the effective date, notice must be provided to employees whose post-employment noncompete agreements are no longer enforceable.
• Effective Date: The Final Rule will be effective 120 days after publication in the Federal Register.

Types of Contracts Covered by the Final Rule:

The Final Rule defines “noncompete clause” extremely broadly. According to the Final Rule, a “noncompete clause” includes any written or oral contractual term or condition of employment that (a) prohibits a worker from, (b) penalizes a worker for, or (c) 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; or (2) operating a business in the United States after the conclusion of the employment that includes the term or condition.

Notably, the Final Rule does not specifically apply to customer and employee nonsolicitation agreements or confidentiality/nondisclosure agreements. However, in its comments, the FTC stated that “whether a specific clause falls within the scope of the final rule will necessarily depend on the precise language of the agreement at issue.” Therefore, customer and employee nonsolicitation agreements and confidentiality/nondisclosure agreements apparently are permissible to the extent that they are not so broad as to “function to prevent” a worker from working for another employer.

Exceptions to the Final Rule:

Although broad, the Final Rule laid out the following exceptions:

• The Final Rule does not apply to a person or entity outside of the FTC’s jurisdiction. This includes nonprofit corporations.
• The Final Rule does not apply to a cause of action related to a noncompete clause that accrued prior to the effective date.
• The Final Rule does not apply to a noncompete 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.

Notice Requirements to Workers Subject to Preexisting Noncompete Clauses:

Prior to the effective date, an employer who entered into an agreement including a noncompete clause with a worker (not a senior executive) must provide “clear and conspicuous notice” to the worker “that the worker’s noncompete clause will not be, and cannot legally be, enforced against the worker.” Model language for the required notice is included in the Final Rule.

Legal Challenges to the Final Rule:

The U.S. Chamber of Commerce and other business groups have already challenged the Final Rule in the United States District Court for the Eastern District of Texas. In the complaint, the U.S. Chamber of Commerce argued that noncompete clauses “benefit employers and workers alike — the employer protects its workforce investments and sensitive information, and the worker benefits from increased training, access to more information, and an opportunity to bargain for higher pay.” It is to be expected that other parties will follow suit and file similar challenges to the Final Rule, which could delay or even permanently block the Final Rule from taking effect.

Employers’ Next Steps

Although the Final Rule may yet be enjoined by the courts, employers are advised to take the following steps immediately:

• Reach out to counsel to discuss which current and former workers fall within the Final Rule and require Notice.
• Reach out to counsel to discuss review of your trade secret policies and protections as trade secret laws may accomplish similar protections for which employers were relying on noncompete agreements.

[View source.]