On April 23, 2024, the Federal Trade Commission (FTC) issued a new rule (Non-Compete Rule) which drastically limits the ability of an employer to agree to and enforce a non-compete agreement with most employees. This rule is effective September 4, 2024. The language of this rule is to be understood broadly, and likely includes both traditional ”non-compete” agreements, as well as non-solicitation agreements.
Alternatives to Noncompetes
The Commission found that employers have several alternatives to noncompetes that still enable firms to protect their investments without having to enforce a noncompete. Trade secret laws and non-disclosure agreements (NDAs) both provide employers with well-established means to protect proprietary and other sensitive information. Researchers estimate that over 95% of workers with a noncompete already have an NDA. The Commission also finds that instead of using noncompetes to lock in workers, employers that wish to retain employees can compete on the merits for the worker’s labor services by improving wages and working conditions.
With respect to existing non-competes, i.e., non-competes entered into before the final rule’s effective date, the Commission adopts a different approach for senior executives3 than for other workers. Existing non-competes with senior executives can remain in force; the final rule does not cover such agreements. The final rule allows existing non-competes with senior executives to remain in force because this subset of workers is less likely to be subject to the kind of acute, ongoing harms currently being suffered by other workers subject to existing non-competes and because commenters raised credible concerns about the practical impacts of extinguishing existing non-competes for senior executives. For workers who are not senior executives, existing non-competes are no longer enforceable after the final rule’s effective date.5 Employers must provide such workers with existing non-competes notice that they are no longer enforceable.6 To facilitate compliance and minimize burden, the final rule includes model language that satisfies this notice requirement.7
The final rule contains separate provisions defining unfair methods of competition for the two subcategories of workers. Specifically, the final rule provides that, with respect to a worker other than a senior executive, it is an unfair method of competition for a person to enter into or attempt to enter into a non-compete clause; to enforce or attempt to enforce a non-compete clause; or to represent that the worker is subject to a non-compete clause. The final rule provides that, with respect to a senior executive, it is an unfair method of competition for a person to enter into or attempt to enter into a non-compete clause; to enforce or attempt to enforce a non-compete clause entered into after the effective date; or to represent that the senior executive is subject to a non-compete clause, where the non-compete clause was entered into after the effective date.
The final rule defines “non-compete clause” as “a term or condition of employment that 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. The final rule does not apply to non-competes entered into by a person pursuant to a bona fide sale of a business entity.15 In addition, the final rule does not apply where a cause of action related to a non-compete accrued prior to the effective date.16 The final rule further provides that it is not an unfair method of competition to enforce or attempt to enforce a non-compete or to make representations about a non-compete where a person has a good-faith basis to believe that the final rule is inapplicable. The final rule does not apply to non-competes entered into by a person pursuant to a bona fide sale of a business entity.15 In addition, the final rule does not apply where a cause of action related to a non-compete accrued prior to the effective date.16 The final rule further provides that it is not an unfair method of competition to enforce or attempt to enforce a non-compete or to make representations about a non-compete where a person has a good-faith basis to believe that the final rule is inapplicable. The final rule does not limit or affect enforcement of State laws that restrict noncompetes where the State laws do not conflict with the final rule, but it preempts State laws that conflict with the final rule.
FEDERAL TRADE COMMISSION 16 CFR Part 910 RIN 3084-AB74 Non-Compete Clause Rule