Background

On Tuesday, April 23, 2024, the Federal Trade Commission (FTC) voted to publish a Final Rule that will effectively ban existing and future non-compete agreements with workers in the United States, with limited exceptions. The Final Rule will not take effect until 120 days after it is published. Assuming the Final Rule is published in the next two weeks as anticipated, it will not take effect until approximately August 2024 (i.e., 120 days after the publication date).

Tuesday’s vote came more than a year after the FTC first proposed a non-compete ban on January 5, 2023, and received over 26,000 public comments on the proposal.

Reaction to the FTC’s vote was swift, with two lawsuits already filed that challenge the FTC’s authority to issue the Final Rule and its enforceability. Resolution of these suits and the fate of the Final Rule is therefore yet to be determined. Key provisions of the Final Rule are discussed below, along with take-aways.

Key Provisions of the Final Rule

• Comprehensive Ban on New Non-Competes with Workers. Businesses may not require any worker to sign non-compete clauses on or after the Final Rule’s effective date.
  • A non-compete is defined as a term or condition of employment that prohibits, penalizes, or prevents a worker from seeking or accepting work, or operating a business, after the conclusion of employment.
  • “Worker” means any person who works or previously worked, paid or unpaid, and includes (but is not limited to) employees, independent contractors, externs, interns, volunteers, apprentices, or sole proprietors providing a service to a person. “Worker” includes a natural person who works for a franchisee or franchisor but does not include a franchisee in the context of a franchisee-franchisor relationship.
  • While confidentiality and non-solicitation clauses are not prohibited, if these provisions prevent a worker from seeking or accepting other work, they may meet the definition of non-compete, and therefore, be unenforceable. 
• Existing Non-Competes No Longer Enforceable, Except with Senior Executives. Non-competes entered into before the effective date are no longer enforceable, except non-competes entered into before the effective date with “senior executives.”
  • A “senior executive” is a worker who (1) was in a policy-making position and (2) received total annual compensation of at least $151,164 in the preceding year, or $151,164 in total compensation on an annualized basis.
  • A “policy-making position” means a business entity’s President, CEO or the equivalent, or any other officer or person with authority to make policy decisions that control significant aspects of a business entity or common enterprise.  
• Notice of Non-Enforcement by the Effective Date. Businesses must provide workers with a “clear and conspicuous notice” that their existing non-compete will not and cannot be enforced. Notice is due by the effective date, and the FTC supplied a model notice. Businesses will not be required to provide such notice to “senior executives,” as the ban will not extend back to cover their pre-existing non-competes.
• Exceptions for Bona Fide Sales of Business, Existing Causes of Action, Good Faith, and Certain Industries. There are a few other limited exceptions to the Final Rule:
  • The Final Rule does not apply to non-competes entered into by a person pursuant to a “bona fide sale of a business.” This exception is broader than the initially proposed rule that only allowed non-competes with persons who owned 25% or more of a business. However, the FTC comments caution that not all sale contexts will be eligible for this exception.
  • The Final Rule allows employers to enforce non-competes where the cause of action accrued prior to the effective date.
  • The Final Rule states that it is not an unfair method of competition to seek to enforce a non-compete provided a person has a good faith basis to believe that the FTC’s ban is inapplicable.
  • Certain industries also are exempt from the Federal Trade Commission Act, specifically, banks, savings and loan institutions, federal credit unions, common carriers, air carriers and foreign air carriers, and persons, partnerships and corporations subject to the Packers and Stockyards Act. The rule also does not generally apply to non-profits.
• State Law Preemption. Conflicting state laws are superseded. Thus, even state laws that prohibit non-competes for low-income workers – like Illinois law that prohibits non-competes with workers making less than $75,000 per year – will be superseded. Other than state laws in conflict, the Final Rule provides that it is not intended to exempt compliance with or prevent enforcement of state law, including state antitrust law, consumer protection laws, or common law.
• Severability Clause. The FTC included a severability clause. Thus, if a court holds certain provisions of the Final Rule are unenforceable, the FTC can still argue for the enforceability of other provisions.

Take-Aways

1. The Final Rule is Not Currently in Effect. Do not panic. As noted above, lawsuits were swiftly filed and more may follow before the effective date. These lawsuits likely will take several months to reach final resolution, and the rule could be enjoined during the pendency of the suits. In the meantime, employees may incorrectly believe that they are no longer subject to a non-compete; be ready to explain the uncertainty regarding the timing and ultimate fate of the rule.
2. Identify and Evaluate Existing Agreements. Identify existing non-competes and determine if each is with a senior executive exempt from the potential ban or a worker for whom the ban will apply if it becomes effective.  Analyzing that issue now will position businesses to timely provide the required rescission notice if the ban takes effect.
3. Consider Implementing Non-Competes with Senior Executives Before the Effective Date. If senior executives do not have a non-compete and one is desired, the business should seek the non-compete with those individuals before the Final Rule goes into effect. Thereafter, the senior executive exemption does not apply.
4. Bolster Trade Secret Protections. Consider whether a ban on non-competes would trigger the need for additional trade secret and confidential information protections. If so, bolster the protections now.   
5. Analyze Enforceability of Non-Solicitation Provisions. Determine if your company’s current non-solicitation restrictions should be drafted more narrowly to increase the likelihood such provisions will be enforced, in light of the Final Rule’s potential critical evaluation of non-solicits and increased state law scrutiny. 

For more information on this topic, or to learn how Godfrey & Kahn can help, contact a member of our non-compete & trade secrets practice.