On April 23, the Federal Trade Commission ("FTC") voted 3-2 to ban noncompete agreements, which prevent employees from working for competitors or launching a competing business after they leave a job. The FTC's new rule is slated to go into effect 120 days after it is published in the Federal Register. Whether the rule will ever actually take effect, however, is uncertain.
The FTC first proposed a noncompete ban in January 2023, estimating that the rule would increase earnings by almost $300 billion each year. After publishing its proposal, the FTC received more than 26,000 public comments. The rule's final version, which is somewhat narrower than the original proposed rule, nullifies nearly all noncompete agreements and imposes a notice requirement on employers.
There are three important takeaways from the final rule. After the rule's effective date:
- All existing noncompete agreements with non-senior executives are unenforceable. Existing noncompete agreements with senior executives (i.e., workers earning more than $151,164 annually and who are in policy-making positions), on the other hand, are enforceable.
- Employers are banned from entering into or attempting to enforce all new noncompete agreements, even those with senior executives.
- Employers must provide notice to workers bound to an existing noncompete agreement that the agreement will not be enforced against them in the future.
Importantly, there are two instances in which the final rule does not apply: (1) to non-compete agreements entered into by a person pursuant to a bona fide sale of a business entity; and (2) when a cause of action related to a noncompete agreement accrued prior to the rule's effective date. This second instance occurs when, for example, an employer alleges that a worker accepted employment in breach of a noncompete agreement and the alleged breach occurred prior to the rule's effective date1.
The rule faces multiple challenges, so employers need not act yet. It is unclear whether the FTC has the legal authority to issue the rule without an express directive from Congress. Moreover, the U.S. Chamber of Commerce filed suit challenging the rule this morning. Even if the new rule overcomes these expected challenges, becomes effective, and preempts state laws governing noncompete agreements, employers have alternatives. For example, employers concerned about protecting their intellectual assets and investments can use confidentiality agreements and trade secret laws – two restraints specifically endorsed by the FTC.
Footnote
1. According to the FTC, "[t]he final rule does not render any existing non-competes unenforceable or invalid from the date of their origin. Instead, under the final rule, it is an unfair method of competition to enforce certain non-competes beginning on the effective date." Non-Compete Clause Rule, Federal Trade Commission, (emphasis in original) (last visited Apr. 23, 2024).
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