On April 23, 2024, by a close 3-2 vote, the Federal Trade Commission (“FTC”) issued a final rule with a retroactive effect banning non-compete clauses nationwide (“New Rule”). Unless legal challenges delay or block enforcement, the New Rule become effective 120 days after publication in the Federal Register. According to the FTC, the New Rule could affect one-in-five American workers.

Non-Competes Generally

Non-competition agreements and clauses (“Non-Competes”) are a term or condition of employment that prevents workers from engaging in certain competitive activities within a geographic area for a prescribed period of time. Companies have often used non-competes to protect trade secrets and prevent competition from workers using the skills or information learned during their employment.

What You Need to Know About the New Rule

The New Rule is expansive and straightforward:

The New Rule bans all new Non-Competes. Employers who enter into Non-Competes after the New Rule becomes effective will be engaging in unfair competition in the eyes of the FTC, violating the New Rule.
Existing Non-Competes are almost all banned. The New Rule has a retroactive effect, invalidating all Non-Competes except for those with “senior executives”. The New Rule defines “senior executives” as individuals in a policy-making position and with total annual compensation of at least $151,164 in the preceding year.
Employers must notify all non-senior executives bound by Non-Competes that these agreements will cease to be effective or enforced upon the effective date of the New Rule.
The New Rule carves out an exception for the bona fide sale of a business. Non-Competes entered into pursuant to the sale of a business or an individual’s ownership in the business will remain enforceable. This exception stands for Non-Competes entered into prior to and after the effective date of the New Rule.
The New Rule excludes certain employers. Such employers include banks, insurance companies, nonprofits, transportation and communications common carriers, air carriers, and some other entities.
The New Rule will become effective 120 days after publication in the Federal Register. However, court challenges may delay or preclude the effective date from commencing.

Alternatives to Non-Competes

Employers seeking to protect their interests without a non-compete still have other avenues. The following agreements may be options to accomplish similar goals of Non-Competes:

Non-Disclosure Agreements (“NDAs”): NDAs are agreements that prevent the disclosure of certain proprietary, confidential, or otherwise sensitive information. Companies may utilize NDAs to clearly define “confidential information” and preclude disclosure of information pertaining to clients, employees, pricing, finances, business practices, and intellectual property.
Non-Solicitation Agreements: Non-solicitation agreements prevent employees from soliciting clients, customers, or other employees from a business. Employers can utilize non-solicitation agreements to prevent employees from taking business away from their company.

Future of the New Rule

The future of the New Rule is uncertain and could be derailed by legal challenges. Within an hour of the FTC issuing the New Rule, lawsuits challenging FTC’s rulemaking authority were filed and several other lawsuits have been filed since then. Given the legal challenges, many anticipate that the effective date for the New Rule will be delayed or never occur. Until the New Rule becomes effective, businesses should review current practices and consider getting alternatives to non-competes in place.

We will continue to monitor the legal developments concerning the New Rule. If you have any questions about the new rule or on potential alternatives, please do not hesitate to contact us.