FTC Announces Final Rule Banning Most Noncompetes in Employment Agreements

On April 23, the Federal Trade Commission (“FTC”) announced a final rule (the “Final Rule”) banning most noncompete agreements in the United States. According to the FTC, “It is an unfair method of competition—and therefore a violation of section 5 [of the Federal Trade Commission Act] — for persons to, among other things, enter into noncompete clauses (‘noncompetes’) with workers on or after the final rule’s effective date.”

The Final 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 (1) 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 (2) operating a business in the United States after the conclusion of the employment that includes the term or condition.”

The final rule also states that, for purposes of the final rule, “term or condition of employment” includes, without limitation, a contractual term or workplace policy, whether written or oral. It appears that employers will still be able to use confidentiality and nonsolicitation clauses, however, the FTC has indicated these kinds of restrictions could be subject to the Final Rule if they are so broad in scope that they function as noncompetes.

Under the Final Rule, the FTC has adopted a comprehensive ban on new noncompetes with all workers, including “senior executives.”  The Final Rule will not go into effect until 120 days after Federal Register publication (as opposed to after the FTC’s public announcement), which we expect to be sometime in August 2024.

For existing noncompetes, the final rule adopts a different approach for “senior executives” than it does for other workers. For senior executives, existing noncompetes can remain in force. Existing noncompetes with workers other than senior executives are not enforceable after the effective date of the Final Rule. The final rule defines the term “senior executive” to refer to workers earning more than $151,164 who are in a “policy-making position.” Industry groups across the country have already announced legal challenges to the Final Rule.

Based on the announced Final Rule, it appears that employers may still enter into noncompetes with employees prior to the Final Rule’s effective date, but only those noncompetes with “senior executives” would be enforceable after the effective date.

Fewer than 1% of workers are estimated to be senior executives under the Final Rule, although the percentage is higher in industries such as the financial industry. Employers must provide nonsenior executives who have existing noncompetes with notice that they are no longer enforceable. To facilitate compliance and minimize burden, the Final Rule includes model language that satisfies this notice requirement.

Assuming that the Final Rule is not subject to successful legal challenge, employers will need to revise their agreements to comply with the Final Rule.

The Final Rule is inapplicable to noncompetes a person enters into in accordance with a bona fide sale of a business entity. Moreover, the final rule is inapplicable where a cause of action related to a noncompete arose before the final rule’s effective date. The final rule also states that it is not an unfair method of competition to enforce or endeavor to enforce a noncompete or to make representations about a noncompete when a person has a good-faith basis to believe that the Final Rule does not apply. The Final Rule also applies in various situations to agreements mandating that employees reimburse or pay back their employer for training costs if termination of the worker’s employment occurs within a specified time period.

Clark Hill attorneys are prepared to work with employers to navigate the challenges posed by the Final Rule. For more information, please contact Jon Vegosen at jvegosen@clarkhill.com, or the Clark Hill attorney with whom you regularly work.

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