FTC bans most noncompete agreements

On April 23, 2024, the Federal Trade Commission (FTC) issued a final rule banning most noncompete agreements nationwide, which rule is set to become effective on September 4, 2024. The FTC’s basis for issuing the rule is that noncompete agreements “keep wages low, suppress new ideas and rob the American economy of dynamism,” according to FTC Chair Lina M. Khan.

The rule defines a “noncompete clause” as a term or condition of employment that prohibits a worker from, penalizes a worker for or functions to prevent a worker from seeking or accepting work in the United States with a different person where such work would begin after the conclusion of the employment that includes the term or condition or operating a business in the United States after the conclusion of the employment that includes the term or condition.

The rule states that, with respect to a worker other than a senior executive, it is an unfair method of competition for a person:

(i) To enter into or attempt to enter into a noncompete clause;

(ii) To enforce or attempt to enforce a noncompete clause; or

(iii) To represent that the worker is subject to a noncompete clause.

With respect to a senior executive, it is an unfair method of competition for a person:

(i) To enter into or attempt to enter into a noncompete clause;

(ii) To enforce or attempt to enforce a noncompete clause entered into after the effective date; or

(iii) To represent that the senior executive is subject to a noncompete clause, where the noncompete clause was entered into after the effective date.

Under the final rule, existing noncompetes for senior executives can remain in force. “Senior executives” are workers who were in a policy-making position and received total annual compensation of at least $151,164 in the preceding year.

However, prior to the effective date of the rule, employers must notify all other current and former workers that any existing noncompetes will not be, and cannot legally be, enforced against the worker. The FTC has issued model language that will satisfy the employer’s notice obligation and thereafter, the notifying employer will be granted a safe harbor for purposes of compliance.

The final rule contains three enumerated exceptions, which are: (1) noncompetes entered into by a person pursuant to a bona fide sale of a business entity, (2) where a cause of action related to a noncompete clause accrued prior to the effective date of the final rule, and (3) enforcement or attempt to enforce a noncompete clause or to make representations about a noncompete clause where a person has a good-faith basis to believe that the rule is inapplicable.

Some initial takeaways from the final rule include:

1. The rule is set to become effective on September 4, 2024, but it is expected that there will be immediate legal challenges, which may result in delay of publication or outright preclusion of the rule.
2. The FTC notes in the final rule that its enforcement authority only extends to businesses organized to carry on for its own profit or that of its members. Consequently, any entity outside the scope of the FTC Act and the FTC’s rulemaking authority, including nonprofit organizations and banks, would not be subject to the final rule.
3. The definition of a noncompete clause is narrow enough to conceptually exclude nondisclosure agreements, nonsolicitation agreements and training repayment agreement provisions. However, substance matters, as the FTC notes that functional equivalents constitute a noncompete clause under the final rule. Therefore, if a term in any of the foregoing agreements is so broad or onerous that it has the same functional effect as a term or condition prohibiting or penalizing a worker from seeking or accepting other work or starting a business after their employment ends, such a term is a prohibited noncompete clause.

Client alert authored by Tom Calascibetta (312 855 6413), associate.

This Chuhak & Tecson, P.C. communication is intended only to provide information regarding developments in the law and information of general interest. It is not intended to constitute advice regarding legal problems and should not be relied upon as such.