On April 23, 2024, the Federal Trade Commission (FTC) issued a final rule banning (with limited exceptions) employers' use of noncompete agreements. The final rule will take effect 120 days after it is published in the Federal Register (the effective date) and applies to all types of employing entities (e.g., corporations, partnership, limited liability companies) of all sizes. As of the date of this alert, the rule remains unpublished.
For non-senior executive employees (and other service providers):
Employers will be prohibited from entering into (or attempting to enter into) noncompete agreements with workers on or after the effective date, and any noncompete agreements entered into prior to the effective date may not be enforced. The final rule defines "worker" as "a natural person who works or who previously worked, whether paid or unpaid, without regard to the worker's title or the worker's status under any other State or Federal laws, including, but not limited to, whether the worker is an employee, independent contractor, extern, intern, volunteer, apprentice, or a sole proprietor who provides a service to a person." This means, presumably, that a noncompete agreement between entities would not be covered by the final rule. Employers will be required to notify current and former employees (and other service providers) that any noncompete provisions in effect prior to the effective date will no longer be enforced. The FTC's rule seemingly captures not only noncompete provisions in employment-type agreements, but also in shareholder and operating agreements to which employees (and other service providers) may be a party.
For senior executives (those making at least $151,164 and who are in a policy-making position, i.e., a president or CEO, or an officer or equivalent who has final authority to make policy decisions that control significant aspects of the business):
Employers will be prohibited from entering into noncompete agreements on or after the effective date; however, noncompete provisions in effect prior to the effective date may continue to be enforced.
Excepted from the rule are noncompetes entered into pursuant to a bona fide sale of a business entity (i.e., one that is made between two independent parties at arm's length, and in which the seller has a reasonable opportunity to negotiate the terms of the sale). Moreover, while the term "worker" includes a natural person who works for a franchisee or franchisor, it does not include a franchisee in the context of a franchisee-franchisor relationship. How the final rule intersects with the National Labor Relations Board's (NLRB) new joint employer standard is an open question.
The rule also will not prohibit existing, ongoing litigation seeking to enforce a noncompete if the "cause of action related to a noncompete clause accrued prior to the effective date."
While the rule does not explicitly ban non-solicitation or confidentiality/trade secret provisions, courts may look to states like California, where noncompetes were already unenforceable and non-solicits largely disfavored, for guidance on the enforceability of non-solicits under the FTC's new rule. However, these provisions, if narrowly and carefully tailored so as to not rise to the level of a noncompete, will remain important tools for employers to protect company assets.
Takeaways
The rule is likely to face immediate legal challenges which may delay implementation or enforceability. However, employers should be prepared to (i) identify individuals who are "senior executives" and who should enter into noncompete agreements prior to the effective date, (ii) review existing employment, restrictive covenant, and any form agreements to determine specific provisions that will no longer be enforceable after the effective date, and (iii) provide notice to non-senior executive employees and former employees by the effective date that any noncompete provisions will no longer be enforced.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
