On April 23, 2024, the Federal Trade Commission (FTC) voted 3-2 to issue a final rule that, once effective, will ban noncompetition (“non-compete”) agreements nationwide. The rule, which becomes effective 120 days after publication in the Federal Register, is almost certain to draw judicial challenges as companies that rely on non-competes are likely to move to block its enforcement.

Context and Arguments

According to the FTC, an estimated 18% of U.S. workers (30 million people) are currently covered by non-competes. The FTC identified evidence that, it says, show the harm caused to workers subject to non-competes, and it claims that by eliminating the practice, it will be encouraging innovation, and stimulating higher estimated earnings for the average worker, with lower estimated health care costs.

The two FTC Commissioners who voted against the rule are expected to provide written statements. In the meantime, many people have already spoken against the rule, arguing that non-competes are essential for protecting smaller businesses, trade secrets, and important institutional knowledge held by key individuals who agree to bound by non-competes.

The Ban

The rule provides that it would be an unfair method of competition—and therefore a violation of section 5 of the FTC Act—for employers to, among other things, enter into non-compete clauses with workers on or after the final rule’s effective date. Once the rule goes into effect, employers will not be allowed to enforce most of the existing non-compete agreements they already have. In fact, for each unenforceable non-compete clause currently in place, employers will need to notify the worker that the non-compete will not, and legally cannot, be enforced. This must be done by the rule’s effective date, and the rule provides model language.

There is a time-limited exception for existing agreements with “senior executives.” While the rule’s definition of senior executives should be reviewed with care, it applies to high-ranking employees who have policy-making authority and receive annual (nondiscretionary) compensation of at least $151,164. Existing agreements with “senior executives” are not automatically barred, but new non-competes will be prohibited. There is also a time-limited exception for causes of action against employees who breached non-competes before the effective date.

One of the rule’s few permanent exceptions is that it does not apply to non-competes entered into pursuant to a sale of a business entity. Companies intending to rely on this exception in the future should first consult with legal counsel.

The rule specifically applies to post-employment non-competes, so it does not affect moonlighting policies (which may be subject to applicable state law).

Additional Consequences

The FTC’s declaration that non-competes are unfair methods of competition will create possible liability under additional laws, as well. For example, and depending on the full circumstances, in Massachusetts, an employer that attempts to enforce an invalid non-compete may have liability for violating the Massachusetts law concerning unfair and deceptive trade practices (M.G.L. c. 93A), which allows for multiple damages and attorneys’ fees.

This new rule is an enormous change in the employment landscape. Employers should take this opportunity to conduct a full review of their noncompete policies and be prepared for compliance to avoid potentially significant liability. Sullivan’s employment team is ready to advise on this law and its effects.