Federal Trade Commisions Bans Non-Compete Agreements

On April 23, 2024, the Federal Trade Commission (“FTC”) issued what it has called the “Non-Compete Clause Rule” (the “Rule”). The Rule bans new non-compete agreements with all workers.

The Rule provides that it is an unfair method of competition for employers to enter into non-compete clauses with any worker, including senior executives, on or after the Rule’s effective date.

With respect to existing non-competes, i.e., non-competes entered into before the Rule’s effective date, the FTC adopted a different approach for senior executives than for other workers. Existing non-competes with senior executives can remain in force. The FTC determined that senior executives are less likely to be subject to the kind of acute, ongoing harms currently being suffered by other workers subject to existing non-competes and because of concerns about the practical impacts of extinguishing existing non-competes for senior executives. The Rule defines a “senior executive” as a worker earning more than $151,164 annually who is in a “policy-making position.”

For workers who are not senior executives, existing non-competes are no longer enforceable after the Rule’s effective date.

The Rule contains separate provisions defining unfair methods of competition for senior executives and other workers. With respect to a worker other than a senior executive, the Rule provides that it is an unfair method of competition for a person to enter into or attempt to enter into a non-compete clause; to enforce or attempt to enforce a non-compete clause; or to represent that the worker is subject to a non-compete clause.

With respect to a senior executive, the Rule provides that it is an unfair method of competition for a person to enter into or attempt to enter into a non-compete clause; to enforce or attempt to enforce a non-compete clause entered into after the effective date; or to represent that the senior executive is subject to a non-compete clause, where the non-compete clause was entered into after the effective date.

The Rule applies to post-employment non-competes only. It does not apply to in-term non-competes that prohibit an employee from competing against the employer while still employed.

The Rule has an effective date of 120 days after its publication in the Federal Register.

However, the Rule will be subject to immediate legal challenge and injunction efforts, including on the grounds that the FTC lacks the legal authority to promulgate such a rule. The first lawsuits were filed within hours of the FTC announcing its vote on April 23, 2024. These legal challenges may delay or ultimately preclude enforcement of the Rule.

Yes. An employer that entered into a non-compete clause with a current or former worker who is not a senior executive must, prior to the effective date of the Rule, provide “clear and conspicuous notice” (by hand, mail, email, or text message) to the current or former worker “that the worker’s non-compete clause will not be, and cannot legally be, enforced against the worker.” To facilitate compliance and minimize burden, the Rule includes model language that satisfies this notice requirement.

The Rule defines a non-compete clause as “a term or condition of employment that prohibits a worker from, penalizes a worker for, or 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 that includes the term or condition; or (2) operating a business in the United States after the conclusion of the employment that includes the term or condition.” The Rule provides that “term or condition of employment” includes, but is not limited to, a contractual term or workplace policy, whether written or oral.

The FTC notes that this definition of non-compete applies not only to non-competes, but also to terms that function as non-competes, i.e., any contractual provision that “has the effect of prohibiting the worker form seeking or accepting employment.” The FTC has provided the following examples of terms that may function as non-competes: (a) a non-disclosure provision that is “written so broadly that it effectively precludes the worker from working in the same position for a new employer; and/or (b) a provision that requires a worker to repay training costs where the repayment is not “reasonably related to the costs” of the training.

The Rule applies to anyone who works for a for-profit employer, whether paid or unpaid, without regard to the worker’s title or status, and to independent contractors. Specifically, the Rule defines a “worker” covered by the Rule as “a natural person who works or who previously worked, whether paid or unpaid, without regard to the worker’s title or the worker’s status under any other State or Federal laws, including, but not limited to, whether the worker is an employee, independent contractor, extern, intern, volunteer, apprentice, or a sole proprietor who provides a service to a person.”

Because the FTC’s authority only extends to for-profit businesses, the Rule will not affect employment agreements entered into by workers employed by non-profit organizations. However, the FTC warned that if an entity registers as a non-profit tax-exempt entity but is in fact organized for the profit of its members, then those entitles would, in the FTC’s opinion, fall under the Rule.

The Rule does not apply to non-competition agreements entered into by a person during the “bona fide sale of a business,” of the person’s ownership interest in a business entity or of all or substantially all of a business’s operating assets.

The Rule does not appear to ban non-solicitation clauses unless they meet the definition of a non-compete clause. Non-solicitation clause are generally not considered non-compete clauses under the Rule because, while they restrict who a worker may contact after they leave their job, they do not by their terms or necessarily in their effect prevent a worker from seeking or accepting other work or starting a business.

However, non-solicitation clauses can satisfy the definition of a non-compete clause, and be banned under the Rule, where they function to prevent a worker from seeking or accepting other work or starting a business after their employment ends. Whether a non-solicitation agreement meets this threshold is a fact-specific inquiry.

We will continue to monitor developments and will provide updates as additional information becomes available. In the meantime, if you have any questions or would like to discuss a strategy for complying with the Rule, please contact us to schedule a call.