The bulletin below was published on April 24, 2024. Click Here for Taft’s Latest Coverage of the FTC’s Ban on Noncompete Agreements

Yesterday, the Federal Trade Commission (FTC) issued a new rule banning virtually all noncompete agreements covering workers in the United States. Absent a successful court challenge, the rule will go into effect 120 days after publication in the Federal Register (which is expected to happen shortly).

Under the new rule, and subject to a few narrow exceptions, companies are banned from entering into new noncompete agreements and enforcing noncompete agreements currently in effect with all workers.

The definition of “worker” is broad and includes not only employees but also independent contractors, externs, interns, volunteers, apprentices, or sole proprietors. The definition of “worker” does not include a franchisee in the context of a franchisee-franchisor relationship.

A noncompete agreement is defined as an agreement that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from (i) seeking or accepting work with another person after the end of employment or (ii) operating a business after the conclusion of employment.

The final rule provides that the use of noncompete agreements is an “unfair method of competition” that violates Section 5 of the FTC Act. Violations of the FTC Act can result in fines, penalties, and other injunctive relief.

Noncompete Recission and Notice Requirements

Existing noncompete agreements with workers other than senior executives will no longer be enforceable under the new rule (presuming it goes into effect). Employers will not be required to rescind these agreements, but will be required to notify affected workers that the agreements are no longer enforceable. The FTC has issued a model notice for this purpose.

The new rule allows existing noncompete agreements with senior executives to remain in effect. “Senior executive” is generally defined as an employee “earning more than $151,164 annually who [is] in a policy-making position.” These positions include an entity’s president, chief executive officer or the equivalent, or any other officer who has the authority to make policy decisions that control significant aspects of the business entity. However, companies can no longer enter into noncompete agreements with senior executives after the effective date of the final rule.

Exceptions

Noncompete agreements ancillary to the sale of a business remain permissible. In addition, the new rule does not prohibit an employer from pursuing a cause of action against a worker who violated their noncompete agreement prior to the effective date of the rule.

Because the FTC’s authority only extends to for-profit businesses, the final rule will not affect employment agreements entered into by workers employed by non-profit organizations. While the FTC recognizes this limitation, it has stated it reserves the right to evaluate an entity’s non-profit status.

Relations to Other State Laws

The final rule does not limit or affect the enforcement of state laws that already restrict noncompetes, so long as the law does not conflict with the final rule. The final rule only supersedes existing state laws where the state law conflicts with the final rule.

Takeaway for Employers 

During the 120 days before the final rule goes into effect, employers should identify all employees who have signed non-compete agreements, and of those employees, identify which qualify as “senior executives” under the rule.  Employers should identify those individuals to whom notices will need to be provided, but should not issue such notices until closer to the effective date.

It is anticipated that this final rule will be subject to numerous legal challenges. The U.S. Chamber of Commerce has already filed a lawsuit seeking to strike down this ban in the U.S. District Court for the Eastern District of Texas, Chamber of Commerce of the United States of America v. Federal Trade Commission. The U.S. Chamber of Commerce alleges that the FTC lacks the power and authority to unilaterally ban noncompete agreements and seeks injunctive relief from the court to prevent the implementation of the final rule. Additional lawsuits challenging the rules are expected to follow.

Unless and until a court issues a temporary restraining order or preliminary injunction that would delay the implementation of the final rule, employers should begin the process of planning for the impact of the ban. The final rule does not generally ban other restrictive covenants, such as confidentiality or non-disclosure agreements. Corporations concerned about protecting their intellectual assets should review their confidentiality agreements to ensure adequate protection and restructure their employment agreements to comply with the new rule.

Taft attorneys will continue to monitor these developments and are available to assist you or your company in evaluating the impact of this new rule.