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FTC Votes to Approve Issuance of Final Rule on Non-Compete Clauses

The Federal Trade Commission (“FTC”) has adopted a rule that non-competition agreements between companies and their employees constitute unfair methods of competition, although the FTC’s action has already been challenged in court, so the effective date and scope of the rule remain to be determined.

The FTC acted on April 23, 2024, by a 3-2 vote, to approve the issuance of a final rule essentially adopting that stance regarding non-competes, although with some exceptions. The final rule amounts to a comprehensive ban on employers entering into new non-compete clauses with any worker on or after the rule’s effective date, which takes place 120 days after publication of the final rule in the Federal Register. “The FTC’s final rule to ban non-competes will ensure Americans have the freedom to pursue a new job, start a new business, or bring a new idea to market,” stated FTC Chair Lina M. Khan.

Non-competes in existence before the final rule’s effective date will no longer be enforceable after the effective date, with a carve-out for senior executives. The rule defines a “senior executive” as a worker who received total annual compensation of at least $151,164 from a person for employment in a policy-making position in the most relevant preceding year. This carve-out applies only to non-competes in existence before the effective date. Pursuant to the rule, any attempt to enter into a non-compete with a worker after the effective date, whether a senior executive or not, would constitute an unfair method of competition.

Instead of requiring employers to formally rescind any existing non-competes with non-senior executives, the rule mandates that employers will have to provide clear and conspicuous notice to such workers by the effective date that the non-compete will not and cannot legally be enforced against them in the future. The rule proposes model language for employers to use when providing such notice.

The rule does create three exceptions to the ban for the following:

- For a person with an ownership interest in a business entity, a non-compete entered into pursuant to a bona fide sale of the entity, of the person’s ownership interest in the entity, or of all or substantially all of the entity’s operating assets;
- Where there is a cause of action related to a non-compete clause which accrued prior to the effective date; or
- Where a person has a good-faith basis to believe that this rule is inapplicable.

A complete copy of the FTC’s final rule and reasoning can be found at https://www.ftc.gov/system/files/ftc_gov/pdf/noncompete-rule.pdf

1. Retrieved from https://www.ftc.gov/news-events/news/press-releases/2024/04/ftc-announces-rule-banning-noncompetes
2. §910.1 of the proposed final rule