On April 23, 2024, the Federal Trade Commission (“FTC”) approved, by a 3-2 vote, a final rule that would void and ban nearly all employee non-compete agreements in the United States. The rule, to be codified at 16 C.F.R. Part 910, will take effect 120 days after it is published in the Federal Register. However, the rule already is the subject of immediate legal challenge and injunction efforts, including on the grounds that the FTC lacks the legal authority to promulgate the rule. The U.S. Chamber of Commerce is one of the plaintiffs who has sued.
In general, the FTC’s rule declares it to be an unfair method of competition for a person to enter into a banned non-compete clause; to attempt to enforce a banned non-compete clause; or to represent to a worker that he or she is subject to a banned non-compete clause.
A banned non-compete clause is a term or condition of employment that prohibits a worker from, penalizes a worker for, of functions to prevent a worker from: (i) seeking or accepting work in the United States with a different person where the work with a different person begins after the conclusion of the worker’s employment; or (ii) operating a business in the United States after the conclusion of the worker’s employment.
The only exceptions going forward would be non-compete clauses entered with a person pursuant to a bona fide sale (i) of a business entity, (ii) of the person’s ownership interest in a business entity, or (iii) of all or substantial all of a business entity’s operating assets.
Prior non-compete agreements that do not fall into these three “sale” exceptions are invalidated under the FTC’s rule with one exception. If a senior executive entered into a non-compete before the FTC’s rule takes effect, the FTC’s rule does not invalidate it. A senior executive is someone who (1) was in a policy-making position and (2) received total annualized compensation of at least $151,164. However, there is no exception for the senior executive and a new non-compete.
A final requirement of the FTC’s rule is that employers sent out notices to employees who have a now invalid non-compete that those non-competes are no longer enforceable. The contents of the notice, and a model notice form, is set out in the final rule.
If this rule is upheld, it will be a sea-change in employment practices and non-compete agreements.
