On April 23, 2024, the FTC, by a 3-2 vote, announced a Final Rule that has the effect of invalidating post-employment noncompetes on a nation-wide basis for the vast majority of workers. The term worker includes employees, independent contractors, volunteers, interns, and externs. The Rule reflects the Commission’s determination that it is an unfair method of competition, and therefore a violation of Section 5 of the FTC Act, for businesses to enter into or seek to enforce certain noncompetes with workers. As touted by the FTC, the Fina Rule “will ensure Americans have the freedom to pursue a new job, start a new business, or bring a new idea to market.” Absent a successful legal challenge, the Rule becomes effective 120 days after its publication in the Federal Register (on or around August 21, 2024).
Summary of Final Rule
At a high level, the FTC’s Final Rule:
- Bans entering into, or seeking to enforce, new noncompetes with all workers, including senior executives, after the effective date.
- For existing noncompetes, bans entering into, or seeking to enforce, them against all workers, except senior executives, after the effective date. For senior executives, existing noncompetes can remain in force.
- Defines the term “senior executive” to refer to workers earning more than $151,164 in total annual compensation during the preceding year who are in a “policy-making position.”
- Total annual compensation may include salary, commissions, nondiscretionary bonuses, and other nondiscretionary compensation.
- The Rule defines “policy-making position” as a business entity’s president, CEO or the equivalent, and any other officer of a business entity who has policy-making authority. It defines “policy-making authority” as final authority to make policy decisions that control significant aspects of a business entity or a common enterprise. The Rule explains that an individual who is an officer of an affiliated or subsidiary company who only has policy-making authority with respect to the subsidiary or affiliate or a division/department of the entity, but not the overall common enterprises, would not qualify as a “senior executive.”
- Requires businesses to provide notice to current and former workers subject to the ban, no later than the Rule’s effective date, that they will not be enforcing any noncompetes against them. The FTC has published a model notice for this purpose.
Exceptions to the Ban
- Existing noncompetes with senior executives.
- Existing noncompetes with any worker for the purpose of pursuing a cause of action that accrued before the Rule’s effective date.
- Non-competes entered into by a person “pursuant to a bona fide sale of a business entity, of the person’s ownership interest in a business entity, or of all or substantially all of a business entity’s operating assets.”
- Noncompetes that apply to competitive activities outside the U.S.
- Noncompetes between franchisors and franchisees.
- Noncompetes that ban concurrent employment, i.e., working for two businesses at the same time.
- Noncompetes issued by entities that are not subject to the FTC Act, including certain financial institutions, common carriers, and nonprofit entities.
Alternatives to Noncompetes
The Commission found that employers have several alternatives to noncompetes that still enable firms to protect their investments without having to enforce a noncompete, including trade secret and patent laws, invention assignment and non-disclosure agreements (NDAs), and non-solicitation and no-hire restrictions. However, the Commission cautioned that if any of these restrictions are sufficiently broad to have the “functional equivalent” of a non-compete, they may fall under the Rule and thereby be prohibited. Additionally, commentary to the Rule suggests that forfeiture-for-competition provisions, where a worker sacrifices money or equity benefits if they compete against their former employer, or liquidated damages provisions where a worker must pay a business money if they compete, are covered by the Rule and would thus be prohibited moving forward.
State Law Preemption
The Final Rule takes the position that it preempts all state laws “inconsistent with” the Rule, but not those state laws that offer greater protection than the Rule.
Next Steps
Lawsuits have already been filed challenging the enforceability of the Final Rule. It is possible an injunction could be issued in the coming days or weeks that will stay the Rule from taking effect until there is a hearing on the merits of the challenge. As these lawsuits play out, it would be wise to take the following preliminary steps to prepare for the Rule’s implementation in case it goes into effect as scheduled.
- Identify current and former workers who have active noncompetes that are banned by the Final Rule.
- Create a contact list for these individuals in case it becomes necessary to issue them a notice of non-enforcement required by the Final Rule.
- Identify current and former workers who the business believes qualify as senior executives. Review that list with counsel to ensure they meet the definition.
- For senior executives who do not have a noncompete, consider issuing them one before the effective date of the Final Rule.
- Consider modifying your organization’s template restrictive covenant agreement to conform the Final Rule.