Key Takeaways:
– The FTC’s Final Rule bans all future non-competes beginning in approximately four months.
– The Final Rule also voids existing non-compete provisions for all workers other than senior executives beginning in approximately four months.
– Many legal challenges to the Final Rule are likely, which, at the very minimum, will significantly delay implementation of the rule.
On April 23, 2024, the Federal Trade Commission (“FTC”) issued its Final Rule prohibiting non-compete clauses in all agreements between employers and their workers. This controversial ban comes one year and six months after the FTC’s proposed rule on the same subject, and after a notice and comment period during which the FTC received over 26,000 public comments on the hotly contested new rule.
The Final Rule leaves the proposed rule mostly unchanged and takes a different approach to new non-compete agreements versus existing non-compete agreements.
New Non-Compete Agreements
The Final Rule’s stance on new non-competes is straightforward: it imposes a comprehensive ban on new non-competes with all workers. Thus, any non-compete entered into after the Final Rule’s effective date (120 days after publication of the Final Rule in the Federal Register – which is likely to occur in a couple of weeks) will be considered a method of unfair competition in violation of the FTC Act.
Existing Non-Compete Agreements
Some existing non-compete agreements will survive the FTC’s new rule. The Final Rule provides that existing non-competes can remain in force with “senior executives,” but only until these agreements expire. Employers cannot enter into new non-compete agreements with senior executives, including extending existing agreements, after the rule goes into effect. The rule defines “senior executive” as an individual who (1) is in a policy-making position; and (2) had a total annual compensation of at least $151,164 in the preceding year.
For all other employees, however, the rule voids existing non-compete agreements. Further, the rule requires employers to send a notice by the effective date to each worker with an existing non-compete clause voided by the rule explaining that the “worker’s non-compete will not be, and cannot legally be, enforced against the worker.” This notice must be an individualized notice to each worker with a non-compete agreement, specify their name, and be delivered to the individual by hand, mail, email, or even text message.
Additionally, the Final Rule allows for causes of actions related to existing non-competes that arise before the effective date of the rule to proceed, meaning violations of current non-competes can still be enforced after the effective date, so long as the violation occurs before the effective date.
The rule includes model language for the notice requirement, which can be found here.
Bona Fide Sale of Business Exception
The bona fide sale of a business is the only complete exception to the Final Rule. Thus, any non-compete clause entered into by a person pursuant to the sale of their business or the person’s ownership interest in the business will still be enforceable and new agreements will be able to be entered into in this context after the effective date.
Despite the significant impact this Final Rule may have on employers nationwide, its implementation is likely to be delayed significantly due to impending legal challenges on the FTC’s authority to issue the rule. The ban is expected to be challenged immediately. Indeed, the U.S. Chamber of Commerce has already challenged the Final Rule in Texas federal court. In fact, many legal observers question whether the Final Rule will ever go into effect. Thus, employers likely will be able to operate as usual with respect to their non-compete agreement strategies as these anticipated legal battles work their ways through the courts. Ultimately, however, employers may need to begin preparing to comply with the FTC’s rule should it be upheld.
