FTC’s non-compete ban: What employers need to know

On April 23, the Federal Trade Commission (FTC) issued its final rule banning almost all non-compete agreements nationwide with few exceptions. The action had been expected since January 2023, when the FTC first proposed the sweeping ban.

The final rule defines a “non-compete” as “any term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from” seeking or accepting employment or operating a business in the United States after the current employment ends. It also prohibits all “functional equivalents” of non-competes, such as overly broad non-disclosure agreements and non-solicitation agreements.

The final rule takes effect 120 days after its publication in the Federal Register, likely sometime in September 2024. Once in effect, employers are prohibited from entering into or attempting to enter into new non-competes with any worker. Additionally, employers must notify current and former workers that their existing non-competes are no longer enforceable.

One limited exception exists for “senior executives” who earn at least $151,164 and serve in “policy-making positions.” Non-compete agreements between employers and senior executives that are in place before the final rule takes effect will remain enforceable.

According to the FTC, fewer than 1% of workers are estimated to fit this “senior executive” exception. Still, the final rule is not actually final. At least two lawsuits have already been filed challenging the FTC’s authority to issue the ban:

• Ryan LLC v. Federal Trade Commission, 3:24- cv-986 (N.D. Tex., April 23, 2024)
• Chamber of Commerce of the United States of America et al. v. Federal Trade Commission, 6:24-cv-00148 (E.D. Tex., April 24, 2024).

The plaintiffs in both cases argue that the FTC has exceeded its statutory authority under the “major questions doctrine,” which prohibits federal agencies from promulgating new rules of serious economic and political significance in the absence of clear and unmistakable congressional authority.

The Chamber of Commerce is seeking a preliminary injunction and a stay of the final rule until the litigation is resolved.

Given the legal challenges already underway, there is a significant possibility that the final rule may be delayed or even struck down before it takes effect. This uncertainty underscores the need for employers to remain vigilant and adaptable in their approach to non-compete agreements.

As the legal challenges unfold, it’s crucial for employers to seek guidance from experienced employment counsel. They can help review existing non-competes with both current and former employees and explore alternative strategies to protect valuable proprietary information. This proactive approach can provide employers with a sense of security amidst the potential changes.

Brett Taylor is an attorney with the Rose Law Firm in Little Rock. The opinions expressed are those of the author.