New FTC Rule Targets Non-Compete Clauses: Key Implications and Ongoing Legal Battles

The Federal Trade Commission (FTC) has introduced a transformative rule that fundamentally alters the landscape of non-compete agreements in the United States. Published in the Federal Register on May 7, 2024, the rule is set to take effect on September 4, 2024. This sweeping regulation prohibits employers from entering into non-compete agreements with most workers, aiming to eliminate what the FTC views as an “unfair method of competition.”

Overview of the Final Rule

The Final Rule broadly defines a non-compete clause as any employment term that prevents or penalizes a worker from seeking or accepting work with another employer or starting a business in the U.S. after their current employment ends. This applies not only to employees but also to independent contractors, externs, interns, and volunteers. The FTC’s prohibition targets both new non-compete agreements and existing ones, making them unenforceable after the effective date.

Prohibitions on Existing and New Non-Compete Agreements

While the rule applies comprehensively, it carves out a specific exception for “senior executives.” These are defined as individuals earning at least $151,164 annually and holding policy-making positions. Employers can maintain existing non-compete agreements with these senior executives, but cannot enter into new ones post-September 4, 2024. This exception, however, is quite narrow and applies only to those who meet stringent criteria regarding compensation and decision-making authority.

Noteworthy Exceptions

Bona Fide Sale of a Business: Non-compete clauses associated with the genuine sale of a business entity remain permissible. The FTC defines a bona fide sale as one conducted in good faith between independent parties with the opportunity for negotiation, excluding agreements tied to stock repurchase rights or mandatory redemption programs.

Other Post-Employment Restrictions: While the rule does not explicitly ban non-disclosure agreements or non-solicitation agreements, it prohibits any post-employment restriction that effectively functions as a non-compete. Thus, overly broad or onerous restrictions could be scrutinized under this rule.

Garden Leave Arrangements: These arrangements, where an employee remains employed and compensated during a notice period, may be allowed if they do not impose post-employment restrictions. Careful drafting is essential to ensure they do not act as de facto non-competes.
Pre-Effective Date Breaches: The rule allows for enforcement actions related to breaches of non-compete agreements that occur before the effective date.

Pre-existing Causes of Action: Employers can still enforce non-compete clauses if the cause of action related to the non-compete accrued before the rule’s effective date​

Notification Requirement

Employers are mandated to notify affected workers in writing that their non-compete clauses are no longer enforceable. This notice must be delivered individually by hand, mail, email, or text message before the rule’s effective date. The FTC has provided model notices to facilitate compliance with this requirement.

Ongoing Legal Challenges

The implementation of the Final Rule is not without contention. Since its publication, multiple lawsuits have been filed challenging the FTC’s authority. These legal battles argue that the FTC overstepped its constitutional and statutory authority. They also assert that non-compete agreements traditionally have been governed by state law. These challenges will likely result in prolonged litigation, creating uncertainty about the rule’s final implementation and enforcement​

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