The FTC voted on April 23 to ban new non-competition agreements and render existing non-competition agreements unenforceable for most workers. The new rule would also require employers to provide notice to most employees who currently are subject to a non-compete that such agreements are not enforceable.
The FTC determined that noncompetition agreements are an unfair method of competition in violation of Section 5 of the Federal Trade Commission Act (“FTC Act”) stating “[N]oncompete clauses keep wages low, suppress new ideas, and rob the American economy of dynamism…The FTC’s final rule to ban non-competes will ensure Americans have the freedom to pursue a new job, start a new business, or bring a new idea to market.”[1] The new rule is slated to become effective 120 days after the date of publication in the federal register. The FTC rule does not limit enforcement of state laws that do not conflict with the FTC rule, but it will preempt state laws that conflict.[2]
For existing non-competes, the FTC adopted a different approach for workers who meet the definition of a “senior executive” versus other workers. “Senior executives” are workers who are (1) in a policy-making position and (2) earn at least $151,164 annually.[3] Existing non-competes for senior executives may remain in force; however, while non-competes with other workers are not enforceable after the effective date.[4] Explaining the differing approach, the FTC stated that it would allow existing non-competes with senior executives to remain in force because senior executives are less likely to be subject to the kind of ongoing harm suffered by other workers subject to existing non-competes.[5] To clarify, all new non-competes for both senior executives and other workers are banned going forward, but existing non-competes for senior executives will continue to be enforceable. Before the effective date, employers must provide workers who are not senior executives with notice that their existing non-competes are no longer enforceable.[6]
The noncompete ban will not apply to non-competes entered into by a person pursuant to a bona fide sale of a business entity.[7] It also will not apply when a cause of action related to a non-compete accrued prior to the effective date.[8] Additionally, because the FTC’s authority only applies to for-profit businesses, the new rule will not apply to nonprofit organizations.
Groups opposing the FTC’s new rule moved swiftly to lodge legal action against the rule. On April 24, the U.S. Chamber of Commerce and other business groups filed a lawsuit seeking to block implementation of the rule.[9]
We anticipate further lawsuits and legal challenges to the new rule will be filed. Employers are encouraged to be mindful of the potential effective date of the new rule; however, whether this rule will be enforceable is yet to be determined as opposition to the validity of the new rule play out in the legal system.
For more information and guidance on the FTC non-compete rule and its impact, please contact Dara Keller at dkeller@messner.com or any of the attorneys with Messner Reeves’s Labor & Employment practice group.
[1] FTC Press Release April 23, 2024; prepared statement of FTC Chair Lina M. Khan.
[2] 8 § 910.4.
[3] See § 910.1 (defining “senior executive”).
[4] § 910.2(a)(1)(ii).
[5] See “Non-Compete Clause Rule” at 16 CFR Part 910.
[6] § 910.2(b)(1).
[7] § 910.3(a).
[8] § 910.3(b).
[9] Chamber of Commerce of the United States of America, et. al. v. FTC, et. al., Case No. 6:24-cv-00148, U.S. Dist. Ct. Eastern Dist. Of Texas (April 24, 2024).
