Is the New FTC Rule a Death Knell for Non-Compete Agreements?

If you are an employer or an employee in the United States it is likely that at some point in your work life you have been a party to a non-compete agreement. Non-compete agreements are a type of restrictive covenant that prohibits a person from owning, working for or being otherwise involved in a defined type of business for a set period of time after leaving a business or employer. Over recent years, both federal and state law have looked at these types of restrictions with increasing disfavor with many states having their own specific laws surrounding scope and enforceability. Now employers who seek to impose non-compete terms on workers are facing a greater obstacle. On April 23, 2024, the Federal Trade Commission (“FTC”) decided in a 3-2 vote, to approve a rule that would almost entirely outlaw the use or enforcement of non-compete agreements in the United States (excluding non-profit employers), with very narrow exceptions. The rule will go into effect 120 days after the “Final Rule” is published in the Federal Register, which could happen within a few days. In the interim, expect many legal challenges to the Final Rule, as businesses and chambers of commerce are gearing up to seek to have the rule declared invalid and to stay its effective date. 

If you are a business owner, employer or an employee or other type of worker, such as an independent contractor, here are some things you need to know once the Final Rule goes into effect:

With respect to existing non-competes (those already agreed to and in effect), virtually all of them will no longer be enforceable except for those affecting certain high level senior executives who comprise a limited percentage of the workforce. As to the vast majority of non-competes already in place, employers will be required to notify people subject to those constraints that the rule is in effect, that the current or former employees are no longer bound by the non-competes, and that it is unlawful to enforce a non-compete agreement. Employers will also have to inform the workers who agreed to the non-competes that the employer will no longer seek to enforce the terms and the employer may not state that the employer is subject to those restrictions. 

With respect to future non-competes, they will only be permissible in circumscribed situations such as where the party subject to the restraints has made a genuine sale of all or substantially all of a business and may not compete with that business for a defined period.

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