FTC Votes to Ban Non-Compete Agreements - Will it Survive Legal Challenges?

The wait is over: The FTC has officially announced that it is moving ahead with a ban on virtually all non-compete agreements. Here's what employers should know about this momentous decision.

Applies to:

All For-Profit Employers and Independent Contractors

Effective:

120 Days after Publication in the Federal Register

Key Information: What is the Non-Compete Ban?

• The FTC voted 3-2 on April 23, 2024 to approve the final rule broadly banning almost all non-compete clauses.
• Employers must notify workers with non-compete clauses that the provisions are unenforceable.
• After the effective date, employers are prohibited from entering into new non-compete clauses for senior executives.

Additional Information about the FTC's Decision

Ever since January 2023, when the Federal Trade Commission (FTC) unveiled its proposed rule to ban virtually all non-compete agreements, employers have been holding their breath to see whether the ban would actually go into effect. Now, the wait is over: on April 23, 2024, the FTC voted 3-2 to move forward with this ban. In its decision, the FTC explained that non-compete clauses are unfair methods of competition in violation of Section 5 of the FTC Act. Among the negative impacts to competitive market conditions, the FTC named inhibition of new business formation and innovation, inhibition of efficient matching between workers and employers, and increased market concentration and higher prices for consumers as reasons for moving forward with the ban.

Key components of the final rule are as follows:

Non-Compete Definition

§ 910.1 of the final 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” seeking or accepting work after the conclusion of employment or operating a business after the conclusion of employment. The broad term “functions to prevent” could apply to non-disclosure agreements, training repayment provisions, non-solicitation agreements, or company policies that are overbroad and could be interpreted to prevent a worker from seeking or accepting work after the conclusion of employment or operating a business after the conclusion of employment.

Affected Workers

All current and former workers are covered by the final rule. This includes employees, independent contractors, externs, interns, volunteers, apprentices, or sole proprietors who provide a service to a client or customer. “Senior executives” or workers who are in a policy-making position and earning at least $151,164 annually with non-compete clauses in effect prior to the effective date of the final rule can still have their non-compete clauses enforced against them. However, after the effective date, employers are prohibited from entering into new non-compete clauses for senior executives.

Notice Requirement

Employers must notify workers with non-compete clauses that the provisions are unenforceable. The notice must be on paper and delivered by hand, by mail, by email, or by text message but must identify the person who entered into the non-compete with the worker. Model language for the notice is included in the final rule.

Exceptions

There are only two limited exceptions to the ban in the final rule. First, the ban does not apply in the circumstances of a bona fide sale of a business entity, of a person’s ownership interest in a business entity, or of all or substantially all of a business entity’s operating assets. Second, the ban does not apply where a cause of action related to a non-compete accrued prior to the effective date. Less clear is § 910.3(c) which states it is not an unfair method of competition for a party to enforce or attempt to enforce a non-compete where there is a good-faith basis that the final rule is inapplicable.

Effects on State Law

The final rule supersedes all state laws, regulations, orders, and interpretations that may be inconsistent with the final rule. State laws can still offer greater protections to workers than the final FTC rule.

Action Items for Employers

What should employers do now? The guidance has not changed much from when the rule was first proposed. Employers should note the FTC’s ban follows recent trends in states moving towards either outright banning non-competes, like California, or creating additional restrictions on the applicability and enforcement of non-competes. Employers should evaluate their ability to comply if the final rule survives legal challenges and goes into effect without significant changes. If the goal of non-competes is to protect a company’s confidential information and trade secrets, other clauses can still be effectively used so long as they do not run afoul of the final rule.

The FTC acknowledged there are several alternatives to non-competes that are still enforceable by employers.

Carefully tailored policies and confidentiality and non-solicitation clauses are enforceable if they are not overly broad. Even the FTC acknowledged there are several alternatives to non-competes that are still enforceable and protect proprietary and other sensitive information, like non-disclosure agreements. Employers should consult with their legal counsel now to determine the extent of the impact on their business and proactively tailor their restrictive covenants to be compliant in the event the final rule goes into effect.

A ruling of this type was always going to garner legal challenges, and indeed the first of these was filed only hours after the announcement. It is unclear what the future holds and how long it may take such lawsuits to work their way through the system. In the meantime, employers should take the following steps:

1. Review the final rule here.
2. Determine affected workers or independent contractors who will need to be provided with notice of non-enforcement.
3. Review restrictive covenants and confidentiality agreements with legal counsel for applicable updates.


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