FTC Adopts Final Rule to Ban Non-Compete Agreements

Posted on Apr 26, 2024 by

On April 23, 2024, by a vote of 3-2, the Federal Trade Commission (“FTC”) adopted a Final Rule (“Rule”) that imposes a comprehensive ban on non-compete agreements for nearly all U.S. workers. The Rule is slated to go into effect 120 days after publication, though it is already facing legal challenges, making its ultimate implementation uncertain.

What is Prohibited. 

The Rule states that it is an unfair method of competition for a person (i) to enter into or attempt to enter into a non-compete clause; (ii) to enforce or attempt to enforce a non-compete clause; or (iii) to represent that a worker is subject to a non-compete clause after the Rule goes into effect. §910.2(a).

The Rule defines a non-compete clause as any restriction that prohibits, penalizes, or prevents a person from operating a business or from seeking or accepting work in the United States after their work or employment ends. §910.1. Non-compete clauses are prohibited whether they are included in contracts or in a workplace policy, whether verbal or written. §910.1.

Who is Affected. 

The Rule covers persons who provide services as:

  • Employees
  • Independent contractors
  • Externs, interns, volunteers, or apprentices,
  • Sole proprietors. (§910.1.)

Exceptions to the Rule.

There is a limited exception for senior executive employees, who have policy-making authority within a business. For these executives, non-compete restrictions may continue to be enforced so long as they were entered into before the Rule’s effective date. §910.2(a)(2).

Senior executive employees are those making at least $151,164 per year (which may consist of a combination of salary, commissions, and other non-discretionary compensation) and who have final authority to make policy decisions that control significant aspects of the business entity. §910.1. The FTC estimates that this limited exception will cover less than 1% of workers. Importantly, even for senior executive employees, the Rule prohibits any new non-compete clause from being imposed after the effective date.

Non-Competes That Are Not Banned.

The Rule does not ban non-compete clauses imposed in connection with a bona fide sale of a business or in connection with the sale of a person’s ownership interest in a business entity, regardless of the percentage ownership interest sold. This means that non-competition restrictions will continue to be an important part of business sale transactions and may also be imposed between owners of a business. Non-competes between franchisor and franchisee are not banned, but the Rule does bar them with respect to employees of either a franchisee or franchisor.  In addition, the Rule does not ban existing causes of action related to breach or enforcement of a non-compete clause provided that the cause of action accrued prior to the effective date of the Rule. §910.3(a)-(c).

Non-Disclosure and Non-Solicitation Restrictions Are Not Affected.

The Rule does not ban non-disclosure agreements or customer non-solicitation clauses, so long as these restrictions are not written so broadly as to effectively and functionally constitute a non-compete restriction.  The Rule also does not affect the right to protect proprietary information meeting the definition of a trade secret under applicable trade secret law.

Effective Date.

The Rule will become effective 120 days after it is published in the Federal Register.

Notice to Workers.

Employers are required to provide clear and conspicuous written notice to each affected worker that any non-compete clause previously applicable to the worker will not be, and cannot be, enforced against the worker.

The notice must be provided by the effective date of the Rule and can be provided in a variety of ways, including by hand-delivery, mail, email, or text message. The FTC has provided a sample notice, which can be found here.

Pre-Emption of Conflicting State Law.

While non-competition restrictions are disfavored under Wisconsin law and must withstand strict scrutiny to be enforced, they are not illegal per se.  However, the Rule would pre-empt conflicting state law, making non-compete clauses illegal in states, such as Wisconsin, where they might otherwise meet state law requirements for enforceability.

Legal Challenge.

Lawsuits have already been filed to challenge the legality of the Rule, including the FTC’s authority in adopting it. One such lawsuit, which was filed in the Federal District Court for the Eastern District of Texas,[1] seeks an order permanently enjoining the FTC from enforcing the Rule.  It also seeks to delay the effective date and implementation pending conclusion of the case.

If an injunction is granted, the effective date of the Rule could be postponed, and implementation could be stayed pending final adjudication.  This litigation would likely make its way to the U.S. Supreme Court, which would then make a final decision as to the legality and enforceability of the Rule.

What to Do Next.

While we are waiting to see how things play out, here are some next steps for employers to take:

  • Take inventory of your agreements and policies that contain non-compete clauses and gather contact information for the current and former workers who signed them so that you will be prepared to provide the required notices before the effective date of the Rule.
  • Have any non-disclosure and customer non-solicitation covenants in your contracts reviewed by legal counsel to make sure these restrictions are drafted as stand-alone restrictions separate and apart from any non-compete restriction and that they are not written so broadly as to effectively convert them into a banned non-compete restriction. These covenants should also be reviewed by counsel to ensure they meet the requirements for enforceability under Wisconsin law and do not run afoul of other federal laws, such as Section 7 of the National Labor Relations Act, which applies to both union and non-union employers.

If you have questions or need assistance with this area of law, please contact Attorney Becky Kent or Attorney Lora Zimmer.

[1] Chamber of Commerce of the United States of America, et al. v. Federal Trade Commission, et al., Case No. 6:24-cv-00148 (04/24/24).
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Rebecca L. Kent

Employment & Labor Law and Commercial Litigation Attorney at McCarty Law LLP
Becky assists businesses as they confront the legal questions and challenges that arise each day in the area of human resources. She provides legal services in the areas of employment and labor law and represents clients in employment and business-related litigation.