By: Linda Goodman

The Federal Trade Commission (“FTC”) issued a final rule that prohibits non-compete agreements in the United States (“Final Rule”). The FTC concluded that agreements between employers and their workers that restrict such workers’ ability to work after terminating their employment are an unfair method of competition and an exploitative practice that adversely affects competitive conditions in labor, product, and service markets. The Final Rule will become effective September 4, 2024, and will apply retroactively to existing non-competes.

The Final Rule’s definition of a non-compete is very broad and includes any term or condition of employment that prohibits, penalizes, or has the result of preventing a worker, after the termination of the employment, from seeking or accepting another job in the United States; or operating a business in the United States.

The FTC emphasizes that, in addition to any non-compete agreements or clauses, any contractual provisions or workplace policies that “restrain such a large scope of activity that they function to prevent a worker from seeking or accepting other work or starting a new business after their employment ends” are within the scope of the Final Rule.  Apparently employer actions are also subject to review.

The FTC has identified common agreements that are prohibited including forfeiture-for-compensation clauses, which terminates promised compensation or benefits if a worker engages in employment or a company of their own which is in direct competition with their employer; severance agreements in which workers are paid only if they do not compete with their employer; and agreements in which workers are required to pay liquidated damages for engaging in competitive activities.

More importantly is that the FTC has broadened the definition of an employee receiving this benefit to include not only a paid employee, but anyone who works or previously worked, whether paid or unpaid, and irrespective of any title the worker may have or have had, including independent contractors, interns, externs, volunteers, apprentices, or even sole proprietors providing a service.

There are limited exemptions to the prohibition on non-competes, such as non-competes already entered with senior executives and non-competes prohibiting workers from competing during the term of employment.

The exceptions to the rule are limited to the following:

1. Existing non-competes with senior executives. Non-competes with senior executives entered into before the Final Rule becomes effective are not affected. Under the Final Rule, a “senior executive” is a worker that: (a) has annual compensation in excess of $151,164; and (b) is in a “policy-making position,” defined as the company’s president, CEO, or equivalent, or any officer or person with “policy-making authority,” i.e., final authority to make decisions that control significant aspects of a business. According to the FTC, this carve-out has limited effect given that “senior executives” represent less than 0.75% of workers in the United States.
2. Non-competes in connection with the sale of a business. The Final Rule does not prohibit non-competes entered into in connection with a bona fide sale of a business, i.e., a sale that is not made for the “sole purpose of evading the rule” but is made in good faith.
3. Causes of action that accrued prior to the effective date. The Final Rule does not apply to a cause of action relating to a non-compete agreement that arose prior to the Final Rule’s effective date, including, according to the FTC, a scenario “where an employer alleges that a worker accepted employment in breach of a noncompete if the alleged breach occurred prior to the effective date September 4, 2024.
4. Non-competes restricting competition during employment. The Final Rule prohibits non-competes that restrain what a worker can do after employment. Non-compete agreements that restrict the worker’s ability to compete with the employer during employment are not prohibited under the Final Rule.
5. Good-faith basis for not applying the Final Rule. The Final Rule does not apply to the enforcement or attempted enforcement of a non-compete, or to a representation regarding a non-compete “where a person has a good-faith basis to believe (…)” the Final Rule is inapplicable.
6. Employers that are not subject to the FTC’s jurisdiction under the FTC Act. Employers not subject to FTC jurisdiction are not bound by the Final Rule. Among the employers excluded from the Final Rule are “banks,” certain entities claiming tax-exempt status, and insurance companies.

Notice to Employees is Mandatory for Employers.

While employers will not be required to make any changes to existing non-competes, they are required to provide employees (except senior executives) with “clear and conspicuous notice that the employee’s non-compete will not be, and cannot legally be, enforced against the worker” following the effective date of the Final Rule.

The notice must identify the worker who entered into the non-compete agreement and delivered to the employee by hand, physical mail, email, or text message.

Enforcement of the Final Rule can be Triggered by Employees.

Workers will be able to report suspected violations of the Final Rule once it goes into effect.  Whether a given restrictive covenant rises to the level of being a functional non-compete will turn on the facts and circumstances of particular covenants and the surrounding market context.

Contracts with Employees that are not Affected by the Rule.

Employers should explore alternative safeguards to protect their sensitive and confidential business information and customer relationships.

1. Non-disclosure agreements and other restrictive employment agreements which are not prohibited non-competes may be used by employers to protect confidential information, provided they do not bar a worker from disclosing information that is readily available to other employers or that relates to a “worker’s general training, knowledge, skill, or experience, gained on the job or otherwise”.
2. Non-solicitation agreements are also allowed as long as they limit whom a worker may contact after termination of employment and do not prevent the worker from seeking or accepting other employment or from starting a competing business.
3. Training-repayment agreements or TRAPs generally would not be affected by the Final Rule if the amount an employee is required to pay for training costs as a result of his or her employment ending at a particular time is reasonably related to the employer’s costs of training the worker.
4. Golden parachutes or garden leave agreements that maintain the same compensation and benefits for a worker while preventing access to the workplace or to co-workers, or even diminishing job duties, are not prohibited by the Final Rule. Such agreements that set a condition on a worker’s expected compensation, such as a bonus, is not considered a non-compete agreement under the Final Rule so long as it does not contain a post-employment restriction.
5. Finally, Intellectual Property laws, and trade secret laws in particular, already provide significant legal protection for an employer’s confidential business information.

Generally, alternative protections must be tailored adequately to avoid the specific level and type of impact that the FTC has determined non-competes – as defined in the Final Rule – have on competitive conditions.

Court Challenges Have Begun.

The Final Rule has faced legal challenges even before its effective date.  On April 24, 2024, the U.S. Chamber of Commerce filed a lawsuit seeking to have the ban on non-competes struck down. The Chamber of Commerce alleges that the FTC is engaged in an “unprecedented power grab,” overstepping its authority by issuing rules defining new anticompetitive conduct and voiding a vast number of contracts without Congressional approval. The U.S. Chamber of Commerce has also stated that “the FTC is empowered by federal law to enforce existing antitrust laws passed by Congress, but not to enact rules determining what other type of conduct by businesses is anticompetitive.” Additional lawsuits have also been filed against the FTC challenging its rulemaking authority.

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This article was originally posted on Cliclaw.com as part of my ongoing efforts to share valuable legal insights. I regularly contribute guest blogs to leading websites in the field of internet compliance. In these posts, I cover a range of topics to help businesses stay compliant in the ever-evolving digital world. You can read my latest guest contributions on Cliclaw.com.

This article is a publication of The Goodman Law Firm and is intended to provide information on recent legal developments. This article does not create an attorney-client relationship, nor should it be construed as legal advice or an opinion on specific situations. This may constitute “Attorney Advertising” under the Rules of Professional Conduct and under the law of other jurisdictions.

Linda L. Goodman is an attorney specializing in internet compliance and privacy law. With years of experience helping businesses navigate complex legal landscapes, Linda contributes expert insights on compliance issues in the digital space. To learn more about her services and insights, visit her law firm website at The Goodman Law Firm.

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