FTC Issues Final Rule Banning Many Employment Non-Compete Clauses

On April 23, 2024, the Federal Trade Commission (“FTC”) issued its long-awaited “final” rule invalidating many employment-based non-compete agreements.  The FTC’s position is that non-competition agreements are a form of “unfair competition” which violate the Federal Trade Commission Act of 1914.  The effective date of the FTC’s final rule’s is 120 days after the rule is published in the Federal Register – the official federal government publication.  Publication should happen within the next few days.

The FTC’s recent action was expected.  The FTC originally announced a “proposed” rule on January 19, 2023.  See generally SS+D Newsletter, “FTC Proposes New Rule to Broadly Ban Non-Compete Agreements” (January 31, 2023).   The final rule, while not quite as broad as the original 2023 FTC proposal, is still a sweeping invalidation of what many employers have long considered a vital business strategy.

The final rule does the following: (1) prohibits, after the final rule’s effective date, entering into or attempting to enter into non-compete clauses; (2) invalidates non-competes entered into before the rule’s effective date, except those entered into with “senior executives”; (3) defines a “senior executive” for purposes of this exception as someone earning more than $151,164 annually and who holds a policy-making position; (4)  prohibits an employer from representing to a worker that they are covered by a non-compete clause when in fact they are not; (5) prohibits a person from enforcing or attempting to enforce a non-compete clause which would otherwise be invalid under this rule.  (In other words, scare tactics using a cease-and-desist demand or other threat may by themselves be considered forms of unfair competition under the rule.)  Finally, employers are required to notify workers (other than senior executives) that their existing non-competes are not enforceable.  Model language is provided in the final rule for an employer to comply with this notice requirement.

Importantly, the final rule covers only “non-compete clauses” which prohibit a worker from accepting work or operating a business “after conclusion of the employment that includes the term or condition.”  Stated another way, non-compete clauses should be permissible so long as they restrict competition only while the worker is still employed by the employer proposing the restriction.  There are also some other exceptions to the final rule. The rule does not apply to clauses executed in connection with the bona fide sale of a business entity.  The final rule does not apply where a cause of action for breach of the non-compete already occurred or “accrued” prior to the rule’s effective date.  It is not an unfair method of competition to enforce or attempt to enforce a clause where one has a “good faith basis” to believe the rule is inapplicable.

Many observers agree that the final rule will likely be challenged in court. Certain trade groups, businesses, and members of Congress have already voiced opposition to the rule and have given notice of their intent to challenge it.  In the meantime, employers who rely on non-competes should evaluate whether there are other less restrictive options for protection of vital business interests.  Employers should also be prepared to issue the required notification to all affected employees.

For more information, please contact Karl Ulrich at 937.222.2052 or by email at kulrich@ssdlaw.com.