Federal Trade Commission Issues Final Rule Banning Most Noncompete Agreements

In Employment Law, Labor, News by Marc L. Fleischauer

On April 23, 2024, the Federal Trade Commission (“FTC”) voted by a 3-2 margin to issue a final rule prohibiting employers from entering into and enforcing most non-competition agreements (“noncompetes”) against current and former workers. The FTC’s vote came more than a year after issuing its notice of a similar proposed rule on January 5, 2023 and collecting public comments through April 19, 2023. The FTC’s final rule proclaims that most noncompetes constitute a form of unfair competition pursuant to the FTC Act (15 U.S.C. § 45).

In 2023, after seeking client input, Coolidge Wall submitted a public comment to the FTC criticizing aspects of the proposed rule, which you can read here. Yesterday, the FTC indicated that it had reviewed nearly 27,000 such comments from proponents and detractors in preparation for its vote on the final rule.

The FTC did not preview its 570-page publication summarizing the new rule before the day of the vote, and the final rule itself likely will not be formally published in the Federal Register until next week, so there is little new analysis available.  However, our review of the final rule presented by the FTC online confirms that, with some exceptions, the original proposed rule remains intact in this final form.  Here is an overview:

  • The FTC has declared that noncompete agreements nationwide are an unfair method of competition. Unless and until legal challenges prevail, and upon the effective date of the final rule, it is a violation of Section 5 of the FTC Act for employers anywhere in the United States to enter into noncompetes with workers and to enforce most noncompetes.
  • The final rule will become effective 120 days after its publication in the Federal Register.  This timing is not entirely predictable, but in general the Federal Register publishes administrative submissions within three business days of receipt, so the 120-day clock should start ticking early next week at the latest; the best estimate is that the effective date will be sometime in August 2024.  So employers and their counsel have some time review and prepare for the new rule before it is effective.
  • The FTC final rule is expected to be immediately challenged in court.  If past experience is a guide, a federal district court is likely to enjoin the rule before its effective date, with rapid appeals to follow until the Supreme Court weighs in.
  • Enforcement of trade secret laws and non-disclosure agreements (NDAs) are still permitted methods of protecting proprietary and other sensitive information.  The fate of non-solicitation agreements – which may prohibit customer solicitation but do not broadly ban other forms of competition – should be permitted within certain limits.
  • Existing noncompetes for “senior executives” will remain in force even beyond the effective date. However, employers are prohibited from entering into or enforcing any new noncompetes, even for senior executives, after the effective date. The final rule defines senior executives as workers earning more than $151,164 annually in “policy-making positions.” Notably, other highly paid employees who are not policy-makers, including sales employees, physicians, and other professional, are not exempted from the requirements of the final rule.
  • Although the rule proposed last year would have required employers to formally rescind past agreements containing noncompete clauses and to inform current and former employees of such recission, this provision was technically dropped from the final rule. However, the final rule still prohibits as unfair competition any attempt by employers to “enforce” existing noncompetes that the FTC deems improper, including through demand letters, threats of enforcement, or actually initiating litigation for damages or injunctive relief.
  • Employers are required to provide notice to employees with existing noncompetes (other than senior executives) that the noncompetes will not be enforced against them in the future. The FTC has provided “model language” that employers can use to communicate to such employees.
  • Finally, the final rule does not prohibit noncompete clauses entered into pursuant to a bona fide sale (a) of a business entity, (b) of the person’s ownership interest in a business entity, or (c) of all or substantially all of a business entity’s operating assets.  (This drops an earlier proposal that such an exemption would only apply to individuals selling a “substantial” (i.e. 25% or higher) ownership interest).

Obviously, more details from the FTC final rule and any legal challenges will be forthcoming before the final rule becomes effective.  Coolidge Wall will continue to cover this closely in the months to come.

The Labor and Employment lawyers at Coolidge Wall will continue to cover this topic closely in the months to come.  Should you have specific questions, please contact us.