In a monumental move, the Federal Trade Commission approved a final rule on April 23, 2024, that effectively invalidates most noncompete agreements. This rule will take effect 120 days after it is published in the Federal Register.

The key provisions of the new rule include the following:

• For-profit employers, regardless of size or industry, are prohibited from entering into or enforcing noncompetes with their employees and independent contractors;
• A limited exception is provided for “senior executives” – those “in a policy-making position” and making over $151,124 – in that agreements predating the effective date of the rule remain enforceable as to this class of employee;
• Employers are required to provide written notice to all current and former employees who are bound by unexpired noncompete provisions – the rule provides model language for such notices;
• NDAs and customer/employee nonsolicitation provisions are not prohibited, except when such provisions function as de facto noncompetes;
• Causes of action accruing prior to the effective date are not affected;
• The rule does not prohibit noncompetes (1) applying to sellers in a bona fide sale of a business; or (2) between franchisors and franchisees;
• In-term noncompetes (those limiting competitive activities during the term of employment as opposed to post-termination) are not prohibited.

There have already been at least two federal lawsuits filed to block the enforcement and effectiveness of this rule on the grounds that it is unconstitutional and an unauthorized use of the FTC’s rulemaking power.

Assuming the rule survives the initial court challenges and is allowed to go into effect, all employers will, at a minimum, have to comply with the rule by identifying their current and former employees and contractors with whom they have unexpired noncompetes and provide the required written notice to such persons. Employers will also have to revise their standard employment and severance agreements and their company handbooks and policy manuals to eliminate noncompete provisions that would be in violation of this rule.

With the elimination of a key tool that companies have historically used to prevent unfair competition, other methods of protection will have increased importance, including well-drafted NDAs and nonsolicitation provisions, use of state and federal trade secret protections, and employee invention assignments.

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