FTC Bans Non-Compete Agreements Nationwide
By: Murti Bhakta
On April 23, 2024, the Federal Trade Commission issued a final rule banning non-compete agreements nationwide (the “Rule”). The FTC believes that non-compete agreements are an unfair method of competition; therefore, the Rule is meant to make most non-compete agreements unlawful. The Rule is expected to go into effect in September 2024, 120 days after it is published in the Federal Register (the “effective date”), pending the results of any legal challenges to the Rule.
Under the Rule, non-competes are defined as a term or condition of employment that either prohibits a worker from, penalizes a worker for, or functions to prevent a worker from (A) 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 (B) operating a business in the United States after the conclusion of the employment that includes the term or condition.
The Rule emphasizes that employers have alternatives to non-competes for protecting valuable investments that burden competition to a less significant degree. To protect trade secrets and other confidential information, these alternatives include enforcement of intellectual property rights under trade secret and patent law, non-disclosure agreements, and invention assignment agreements. Existing non-compete contracts for senior executives can remain in force; however, employers cannot enter into or enforce new agreements with senior executives. Senior executives earn more than $151,164 annually and are in policy-making positions.
Of note, the Rule does not apply to non-competes entered by a person under a bona fide sale of a business entity. The Rule also does not apply where a cause of action related to a non-compete accrued before the effective date. Once the Rule is published in the Federal Register, employers must give notice to their employees impacted by it, stating that the employer will no longer enforce the non-compete agreement (that it will not be legally binding). The notice must be provided to the employee by the effective date.
Lastly, State laws that restrict non-competes and do not conflict with the Rule are not preempted. States cannot authorize non-competes that are prohibited under this Final Rule, but States may, for example, continue to pursue enforcement actions under their laws prohibiting non-competes even if the State law prohibits a narrower subset of non-competes than this Rule prohibits.
The Rule has already been challenged in court. On the same day the Rule was announced, a lawsuit was filed in the United States District Court for the Northern District of Texas against the FTC. Other legal challenges may stay the implementation of this Rule. Close monitoring of this situation is recommended because if the Rule goes into effect, many employers and employees will be impacted by this ban.
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