On April 23, 2024, the Federal Trade Commission (FTC) announced it had approved its final rule that would effectively ban workplace non-compete agreements, with limited exceptions (the “Final Rule”). The effective date of the Final Rule is 120 days after publication in the Federal Register – not after the FTC’s public announcement.

Final Rule

The Final Rule concluded that non-compete agreements are an “unfair method of competition” and a violation of Section 5 of the FTC Act. Under the Final Rule, the FTC has issued a comprehensive ban on new non-compete agreements with all workers, including senior executives. Thus, under this rule, businesses are prohibited from entering into or enforcing new non-compete agreements upon the effective date.

What About Existing Non-Compete Agreements?

As for existing non-compete agreements, those will also become unenforceable on the effective date, except for existing non-compete agreements with senior executives in policy-making positions. The Final Rule defines “senior executive” as a worker 1) in a “policy making position”; and 2) earning an actual or annualized sum of $151,164 (through salary, bonuses, and/or commissions, but excluding fringe benefits, retirement contributions, and medical/life insurance premium payments).  A “policy making position” is a business’ president, CEO or equivalent, or any other person with “policy-making authority” for the business similar to a corporate officer with policy-making authority. In turn, those who have the authority to make policy decisions controlling “significant aspects of a business entity or common enterprise.”

Other Exceptions to the Final Rule

Exempt from the Final Rule are non-compete clauses entered into with a seller of a business entity, so long as the sale involves the disposition of the person’s ownership interest in the business entity, or disposition of all or substantially all of a business entity’s operating assets. The Final Rule clarifies that a “worker” with whom the rule bans non-compete agreements also does not include a franchisee in the context of a franchisee-franchisor relationship. However, the Final Rule applies to non-compete agreements with a person who works for a franchisee or franchisor.

Further, the ban does not apply to the enforceability of non-compete agreements that are the subject of ongoing litigation at the time of the Final Rule’s publication. Specifically, the ban does not apply “where a cause of action related to a non-compete clause accrued prior to the effective date.”

Other Types of Restrictive Covenants

The FTC states in the preamble that the Final Rule does not categorically prohibit other types of restrictive covenants, such as non-disclosure or non-solicitation agreements, which do not by their terms prohibit a worker, or penalize a worker, for seeking or accepting other work or starting a business after they leave their job.

What’s Next?

The Final Rule will become effective 120 days after publication in the Federal Register. Once the Final Rule is in effect, employers will be required to provide notice to workers other than senior executives who are bound by an existing non-compete agreement that they will not be enforcing any non-compete agreements against them. The Final Rule is certain to face legal challenges. The United States Chamber of Commerce has already announced it intends to initiate litigation as early as April 24, 2024.

Employers will be well served to review their existing non-compete, confidentiality, and non-solicitation agreements to determine whether they are currently enforceable or need to be amended to protect the employer from unfair competition by former employees.

[View source.]