What Does the Federal Trade Commission’s New Rule Mean for Non-Compete Agreements?

April 24, 2024

On April 24, 2024, the Federal Trade Commission (FTC) issued a final rule by banning non-compete clauses nationwide. The FTC prompted such a sweeping rule as the organization believes that non-compete clauses inhibit new ideas, prevent startup companies from forming, and keep employee wages low. The final rule is expected to go into effect 120 days after it is published in the Federal Register. These rules are typically published within a month or so of the notice of the final rule.

The final rule is a comprehensive ban on all existing and new non-competes with workers and Senior Executives. The definition of workers is relatively broad and includes but is not limited to employees and independent contractors. The FTC defines a Senior Executive as a worker who (1) was in a policy making position; and (2) received from a person for the employment total compensation of $151,164 in the preceding year. The definition of “policy making position” is relatively narrow and it is not safe to assume an employee falls within the definition.

For existing non-competes, workers must be provided notice that their non-competes can no longer be enforced. This notice must be provided before the end of the 120-day effective date. The final rule makes it an unfair method of competition for an employer to enter into or attempt to enter into a non-compete agreement with workers, to enforce or attempt to enforce such an agreement, or to represent that the worker is subject to the agreement.

For Senior Executives, existing non-compete agreements will remain in effect as an exception to the general rule. Accordingly, unless the agreement was entered into before the effective date, it is unlawful to attempt to enforce or represent to a Senior Executive that they are subject to the non-compete agreement. In addition, the final rule does not apply to non-competes entered by a buyer or businesses. The rule notes that the transaction must be a “bona fide sale of a business entity.” Similar to the definition of Senior Executive, this definition is complicated and needs to be analyzed with counsel.

The FTC’s new rule, which has sparked debate within the U.S. Chamber of Commerce, is expected to face legal challenges aimed at blocking its implementation. The U.S. Chamber of Commerce has already announced its intention to initiate litigation, challenging the regulation. However, businesses should act now in reviewing existing non-compete clauses and related contractual provisions. While awaiting court decisions, employers should strategize with our attorneys at Halpern & Scrom to consider multiple options on how to effectively safeguard confidential information and trade secrets.

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