On April 23, 2024, the Federal Trade Commission (FTC) issued its Final Rule banning almost all non-compete agreements nationwide with few exceptions for employers under the FTC’s jurisdiction. The action has been expected since January 2023, when the FTC first proposed the sweeping ban. The Final Rule defines a “non-compete” as “any term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from” seeking or accepting employment or operating a business in the United States after the current employment ends. The Final Rule likewise prohibits all “functional equivalents” of non-competes, such as overly broad non-disclosure agreements and non-solicitation agreements.
The Final Rule takes effect 120 days after its publication in the Federal Register, likely to be sometime in September 2024. Once in effect, employers are prohibited from entering into or attempting to enter into new non-competes with any worker. Additionally, employers will be required to notify current and former workers that their existing non-competes are no longer enforceable. One limited exception exists for “senior executives” who earn at least $151,164 and serve in “policy-making positions.” Non-compete agreements between employers and senior executives that are in place before the Final Rule takes effect will remain enforceable. According to the FTC, fewer than 1% of workers are estimated to fit this “senior executive” exception. Moreover, there is a sale-of-a-business exception for non-compete agreements entered pursuant to a bona fide sale.
Still, the Final Rule is not actually final. At this time, at least two lawsuits have been filed challenging the FTC’s authority to issue the ban: Ryan LLC v. Federal Trade Commission, 3:24-cv-986 (N.D. Tex., Apr. 23, 2024) and Chamber of Commerce of the United States of America et al. v. Federal Trade Commission, 6:24-cv-00148 (E.D. Tex., Apr. 24, 2024). The plaintiffs in both cases argue that the FTC has exceeded its statutory authority under the “major questions doctrine,” which prohibits federal agencies from promulgating new rules of serious economic and political significance in the absence of clear and unmistakable congressional authority. The Chamber of Commerce is seeking a preliminary injunction and a stay of the Final Rule until the litigation is resolved. There is a strong possibility that the Final Rule will be delayed and may ultimately be modified or struck down before it ever takes effect.
For now, employers are still in the wait-and-see phase. While these legal challenges are being sorted out in the courts, employers should work with experienced employment counsel to review their existing non-competes with both current and former employees and to consider what alternatives may be used moving forward to prevent the misappropriation of valuable proprietary information (such as increasing security measures, limiting access to sensitive information to those who need to know, and using well-drafted confidentiality and non-solicitation agreements) should the Final Rule become effective.
If you have questions or concerns regarding the use of non-compete agreements in your business or have any other compliance concerns, please do not hesitate to contact us.