The FTC’s New Non-Compete Rule
While non-compete agreements have historically been viewed as a means to protect a businesses’ proprietary information, the Federal Trade Commission has recently, with the support of numerous states, finalized a rule determining that non-compete agreements are an unfair method of competition and violate Section 5 of the Federal Trade Commission Act (“FTC Act”).
The final rule[1], passed on April 24, 2024, and set to go into effect on September 4, 2024 (“effective date”), prohibits employers from entering into new non-compete agreements after the effective date. The rule also prohibits employers from enforcing existing non-compete agreements with any employee who is not a senior executive[2]. Additionally, the rule requires that employers notify all workers that their non-compete agreements are no longer in effect and will not be enforced[3]. Any violation of this rule may be reported to the Bureau of Competition at the Federal Trade Commission. The FTC may thereafter initiate investigations and bring enforcement actions against employers for violations of the rule. The use of a non-compete agreement may expose the business to FTC action and/or civil tort claims from aggrieved employees.
Currently, there are lawsuits pending in multiple jurisdictions challenging the FTC’s authority to enact this ban on non-compete agreements. Businesses and employers should follow the course of the litigation surrounding the enactment of the rule and prepare to send the required notices, should the rule remain intact, by the effective date, September 4, 2024.
A link to the full text of the final rule may be found here: Federal Register :: Non-Compete Clause Rule.
[1] 16 CFR § 910.2 and § 910.6
[2] A “senior executive” is defined as a worker who earns more than $151,164.00 annually who is in a “policy-making position.” Less than 1% of workers are estimated to be “senior executives” under the new rule.
[3] The FTC has provided model language that employers may use to notify their employees.