On April 23, 2024, the Federal Trade Commission issued a final rule banning a majority of non-competes to “promote competition, protecting the fundamental freedom of workers[1] to change jobs, increasing innovation, and fostering new business formation” (the “Rule”). (https://www.ftc.gov/news-events/news/press-releases/2024/04/ftc-announces-rule-banning-noncompetes.)

Under the Rule, existing non-competes[2] for the vast majority of the workforce will no longer be enforceable after the effective date (which is slated to take effect 120 days after the Rule is published in the Federal Register). The Rule only applies to the industries whose business practices are regulated by the FTC. Therefore, the Rule would not apply to workers of banks, insurance companies, airlines, and nonprofit organizations. 

1. NOTICE REQUIREMENT

The Rule also provides for a notice requirement. An employer who has entered into a non-compete with a “worker” must provide clear and conspicuous notice to the worker, by the effective date, that the worker’s non-compete will not be, and cannot legally be, enforced against the worker. § 910.2(b).

The notice must: (i) identify the person who entered into the non-compete with the worker and (ii) be on paper delivered by hand to the worker, or by mail at the worker’s last known personal street address, or by email at an email address belonging to the worker, including the worker’s current work email address or last known personal email address, or by text message at a mobile telephone number belonging to the worker. § 910.2(b). Model language for the notice can be found here: https://www.ftc.gov/system/files/ftc_gov/images/new-rule-image-noncompete-rulev3.png.

2. EXCEPTIONS

The Rule shall not apply:

• To non-competes entered into by a person pursuant to a 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;
• Where a cause of action related to a non-compete clause accrued prior to the effective date; or
• It is not an unfair method of competition to enforce or attempt to enforce a non-compete clause or to make representations about a non-compete clause where a person has a good-faith basis to believe that the Rule is inapplicable. § 910.3.

The Rule comes with certain exceptions that allow for the protection of legitimate business interests. These exceptions typically include clauses allowing non-compete agreements in cases involving trade secrets, confidential information, or specialized training that are crucial for maintaining a competitive advantage.

For instance, employers may still enforce non-compete agreements to prevent former employees from disclosing proprietary information to competitors or using specialized knowledge acquired during employment to gain an unfair advantage. Additionally, industries with unique considerations, such as healthcare and technology, may have specific exemptions tailored to their needs.

Furthermore, non-compete agreements may remain valid in the context of business mergers or acquisitions where preserving the integrity of the transaction and preventing unfair competition are paramount.

Existing non-competes for senior executives can remain in force under the Rule, but employers are banned from entering into or attempting to enforce any new non-competes, even if they involve senior executives.

By incorporating these exceptions, it appears the FTC’s rule seeks to strike a balance between fostering competition and innovation while safeguarding the legitimate interests of businesses. However, the application of these exceptions may vary depending on jurisdiction and the specific circumstances of each case, underscoring the importance of careful legal review and compliance.

3. SENIOR EXECUTIVES

In this final rule, the FTC adopted a definition of “senior executive” to isolate the workers who are least likely to have experienced exploitation and coercion and most likely to have bargained for meaningful compensation for their non-compete.

A “senior executive” is defined as a worker who:

1. was in a policy making position; and
2. earned at least $151,164.00 in total compensation[3]:
   1. in the preceding year, or
   1. when annualized if the worker was only employed part of the year, or
   1. in the preceding year prior to departure and the worker is subject to a non-compete clause.

Workers for whom exploitation and coercion concerns are likely most relevant and who are unlikely to have bargained for or received meaningful consideration for a non-compete—namely, lower-earning workers, and relatively higher paid or highly skilled workers who lack policy-making authority in an organization—do not fall within this final definition.

4. CHALLENGES

The Rule now faces a legal challenge from businesses that contend the agency has overstepped its legal authority. A lawsuit challenging the rule was filed on April 24, 2024 in the U.S. District Court in East Texas by the U.S. Chamber of Commerce and other business groups. A separate lawsuit was filed in Dallas by the global tax services and software provider Ryan LLC.

Stay tuned for further updates and analysis on this groundbreaking development. If you have any questions or concerns, please contact the McHattie Law Firm.

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[1] The Rule uses the term “worker” instead of “employee” because the term worker is broadly defined to include paid and unpaid employees, regardless of title or status (this would include independent contractors, interns, externs, volunteers, apprentices or a sole proprietor who provides a service to a person). The term “worker” does not include a franchisee in the context of a franchisee-franchisor relationship. § 910.1.

[2] A “prohibited” non-compete is defined as a term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from: (a) 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 (b) operating a business in the United States after the conclusion of the employment that includes the term or condition. § 910.1.

[3] Total compensation includes salary, commissions, non-discretionary bonuses and any other non-discretionary compensation earned during that 52-week period. § 910.1.