Federal Trade Commission Issued its Final Rule Prohibiting all Non-Compete Agreements

-- Updated May 17, 2024

On April 23, 2024, the Federal Trade Commission (FTC) issued its Final Rule prohibiting all non-compete agreements for all employees, at all levels, with only extremely limited exceptions. The final rule was published on May 7, 2024, which makes the Final Rule effective on September 4, 2024. 

Why did the FTC create a rule banning non-compete agreements? 

After the Biden Administration issued an executive order directing the FTC to review non-competes and their impact in 2021, the FTC concluded that non-competes unlawfully stifle competition and depress wages for U.S. workers, and that banning these agreements would encourage competition, innovation, and increased wages. In particular, the FTC noted the impact that non-competes have in the healthcare industry and with start-up companies. 

What does the FTC Final Rule do? 

The Final Rule bans all non-compete agreements. The Final Rule defines non-compete agreements 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. Section 910.1.

The Final Rule applies to all non-compete agreements signed both prior to and after the effective date, with two exceptions: 

1.  Non-compete clauses with “senior executives” entered prior to the rule’s effective date remain enforceable. “Senior executives” are workers who are in a “policy-making position” and earned at least $151,164 annually. A “policy-making position” means the CEO or any other officer of a business entity or person who has “policy-making authority.” This is a very limited exception. The FTC states that fewer than 1% of workers are estimated to be senior executives under the Final Rule.
2. The Final Rule does not apply to a non-compete clause in connection with the “bona fide sale of a business entity, of the person’s ownership interest in a business entity, or of all or substantially all of a business entity’s operating assets.” 

While the Final Rule does not explicitly reference non-solicitation agreements, it does seem possible that an overly broad non-solicitation that functionally prevents a former employee from performing services would be designated as a “non-compete.” 

The FTC provided that employers can still rely on trade secret laws and non-disclosure agreements (NDAs) to protect proprietary and other sensitive information. 

What should you do if your company currently has non-compete agreements with employees? 

The most important take-away is: Monitor. On May 7, 2024, the FTC published the Final Rule in the Federal Register, making the effective date September 4, 2024.  

Given the controversy of this Rule and the already-filed legal challenges, it is highly likely that the FTC’s Final Rule will be stalled. Currently, there are at least two federal lawsuits filed challenging FTC’s authority to issue the Rule and the constitutionality of the Rule. One such lawsuit was filed by the U.S. Chamber of Commerce in the U.S. District Court for the Eastern District of Texas. 

If the FTC Final Rule does go into effect and your non-compete agreement is later barred, the most important thing will be to have clear and enforceable confidentiality / NDAs and non-solicitation agreements -- both will need to be specific and narrowly tailored in order to comply with the FTC Final Rule.  

Does my company have to enter into new agreements with employees if the FTC Rule becomes effective? 

No. If the FTC Rule goes into effect and your company has a non-compete agreement with employees, the FTC requires that you provide written notice to your employees of the ban. The FTC has provided a model notice, and it can be sent by letter, email or text. Section 910.2(b).

However, you may want to also closely examine your confidentiality and non-solicitation provisions to make sure that the provisions remain enforceable. 

Are non-profits covered by the ban?

No. By statute, the FTC only has authority over for-profit enterprises, so the Rule does not apply to those organizations. This is in addition to the industries noted above, which are specifically excluded from the FTC’s purview by statute: banks, savings and loan institutions, federal credit unions, common carriers, air carriers and foreign air carriers, and persons and businesses subject to the Packers and Stockyards Act.

But, non-profits be cautious! Comments to the Final Rule explicitly warn that merely claiming tax-exempt status under the Internal Revenue Code is not sufficient to exempt an organization from the FTC Act. If you are a non-profit entity and have non-compete agreements, you should contact counsel to determine the application of the FTC Final Rule to your organization. 

Please contact an employment law attorney with any questions and we will continue to update you. 

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Simmons Perrine Moyer Bergman PLC is a full-service law firm with locations in Cedar Rapids and Coralville, Iowa. For more information, visit spmblaw.com. 

Disclaimer: This information is intended for general information purposes only and is not intended, nor should it be construed or relied on, as legal advice. Please consult your attorney if specific legal information is desired.