by Michael B. Kent, Jr.
On April 23, 2024, the Federal Trade Commission voted 3-2 to approve a final rule banning most noncompete provisions in the employment context. The rule has nationwide applicability and preempts inconsistent state and local laws. Additionally, the rule requires that employers notify employees subject to a prohibited noncompete that such provisions will not be enforced. If allowed to stand, the rule will change the landscape of employment law by overturning decades of state law precedents governing the validity and enforcement of noncompete agreements.
What is prohibited?
The rule deems each of the following acts to be “an unfair method of competition” and, thus, prohibited under federal law:
• To enter into a noncompete clause (or attempt to do so);
• To enforce a noncompete clause (or attempt to do so); and
• To represent that a worker is subject to a noncompete clause.
The rule defines “noncompete clause” broadly to include any term or condition of employment that prohibits, penalizes, or functions to prevent a worker from seeking or accepting work or operating a business in the United States. The rule prohibits only noncompete clauses that apply after the conclusion of employment, however. Restrictions imposed during the worker’s employment remain untouched.
The rule also contains a broad definition of “worker,” which encompasses not only traditional employees but also independent contractors, interns, apprentices, and volunteers.
Is the rule retroactive?
Not only does the rule prohibit an employer from entering into new noncompete clauses, but it also invalidates existing noncompetes. The rule does not apply, however, to causes of action related to a noncompete that accrued before the rule becomes effective.
What notices must an employer provide?
Employers must notify workers subject to existing noncompete clauses that enforcing the noncompete is now an unfair method of competition and that the clause cannot (and will not) be enforced against them. The notice can be hand-delivered, mailed, emailed, or texted to the worker, but it must be sent no later than the date on which the rule becomes effective. The rule contains model language for providing this notice, and employers who use the model language are deemed to have complied with the notice requirement.
Are there exceptions?
Aside from existing causes of action, the rule contains three exceptions:
• Senior executives. Noncompetes entered into with senior executives prior to the rule’s effective date are not invalidated. New noncompetes may not be imposed after that date, however, even for senior executives. The rule defines “senior executive” as a worker who occupies a policy-making position and earns at least $151,164 in annual compensation.
• Bona fide sale of business. The rule does not apply to noncompete clauses entered into as part of a bona fide sale of a business entity, of an ownership interest in a business entity, or of all or substantially all of a business entity’s operating assets. The rule defines “business entity” to include a partnership, corporation, association, limited liability company, or other legal entity, as well as divisions or subsidiaries of the foregoing.
• Good faith. It is not a violation of the rule to enforce, attempt to enforce, or make representations about a noncompete clause where a good-faith basis exists to believe the rule does not apply to the noncompete in question.
When does the rule take effect?
By its terms, the rule becomes effective 120 days after its publication in the Federal Register. The FTC published the rule on May 7, 2024, meaning it becomes effective on September 4, 2024.
Is the rule legal?
To date, at least three legal challenges have been brought against the rule in federal courts. These lawsuits—two in Texas and one in Pennsylvania—allege several reasons for invalidating the rule, including a lack of authority on the part of the FTC, violations of separation of powers principles, and the irrationality of the rule’s economic impact and retroactive application. It remains to be seen whether these arguments will prove successful in delaying implementation of the rule or in striking it down altogether.
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Envisage attorneys assist both individuals and businesses with employment-related matters, and we are available to help you understand the new FTC rule and how it might affect you or your business. If you have questions about this alert or think we might be of assistance to you, you may contact us at (919) 755-1317.