New FTC Rule Banning Noncompetes

The FTC, relying on Section 5 and Section 6(g) of the FTC Act, issued a final rule on April 23, 2024 banning the use of non-competes nationwide.

The ban will go into effect 120 days after the publication in the federal register (note that publication has not happened yet and the predicted effective date will be sometime in late August or early September).

The rule would make it illegal to enter into any new non-competes with workers after the effective date. Furthermore, existing non-competes will no longer be enforceable after the effective date; except, however, that existing non-competes with senior executives to remain (note the exception only applies to new non-competes for senior executives; not new non-competes). Any worker with an existing non-compete that is no longer enforceable must be given notice that such non-competes are no longer enforceable.

Non-compete clause” is defined as a term or condition of employment that either “prohibits” a worker from, “penalizes” a worker for, or “functions to prevent” a worker from (1) seeking or accepting work in the United States with a different person where such work would begin after the conclusion of the employment that includes the term or condition; or (2) operating a business in the United States after the conclusion of the employment that includes the term or condition. This would include any punitive measures such as liquidated damages in lieu of a typical non-compete clause.

Worker” is defined as a natural person who works or who previously worked, whether paid or unpaid, without regard to the worker’s title or the worker’s status under any other State or Federal laws, including, but not limited to, whether the worker is an employee, independent contractor, extern, intern, volunteer, apprentice, or a sole proprietor who provides a service to a person.

The final rule defines senior executives as workers earning more than $151,164 annually and who are in policy-making positions.

There are a few exceptions and caveats to this rule. The final rule does not apply to non-competes entered into by a person pursuant to a bona fide sale of a business entity. The Final rule does not apply where a cause of action related to a non-compete accrued prior to the effective date. It is meant to only apply in an employer-employee relationship and not in a business-to-business context.

Finally, it does not apply to franchisor-franchisee relationships.

The rule on non-competes also does not prohibit other types of restrictive employment covenants such as nondisclosure agreements and non-solicitation agreements, so long as they are not so broad that they create a de facto noncompete. Specifically, a nondisclosure agreement is not a noncompete if the agreement’s prohibitions on disclosure do not apply to information that (1) arises from the worker’s general training, knowledge, skill, or experience, gained on the job or otherwise, or (2) is readily ascertainable to other employees or the general public.

Violations of the rule will be deemed a violation of Section 5 of the FTC Act, which prohibits “unfair or deceptive acts or practices in or affecting commerce.” The FTC, however, cannot obtain civil penalties or other monetary relief against parties for using an unfair method of competition. The agency can instead pursue adjudication under Section 5(b) of the FTC Act or seek an injunction in federal court against a party that has engaged in an unfair method of competition. The agency can obtain civil penalties in court if a party is ordered to cease and desist from a violation and fails to do so.

Lawsuits challenging the FTC’s authority to enact this rule has already been filed and continued challenges are expected.

Kevin Dong

Kevin is an attorney at Odin Law and Media focused on corporate and entertainment transactions. He can be reached at kevin at odin law dot com.

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