Total Ban: FTC Issues Final Rule Banning Employment Noncompete Agreements

At a Glance

• The U.S. Federal Trade Commission’s (FTC) final rule will ban essentially all employment noncompete agreements after the effective date, approximately 120 days after it is published in the Federal Register.
• The rule adopts a modified approach for senior executives — existing noncompete agreements can remain in force.
• Although litigation over the rule is anticipated, employers should consider alternatives to noncompete agreements, including NDAs and trade secret protection.

On April 23, 2024, the U.S. Federal Trade Commission (FTC) voted (in a 3-2 vote along party lines) to finalize and promulgate a final rule that bans noncompete agreements for the vast majority of workers.

Here are the key takeaways:

• Scope. The rule bans all employment noncompete agreements after the effective date. This applies to all workers (including senior executives).
• Notice Required. The rule requires employers to issue notices stating that existing noncompete agreements will not be enforced (another departure from the proposed rule, which required recission).
• Senior Executives. The final rule allows existing noncompete agreements to remain in place only for certain “senior executives” after the effective date (another departure from the proposed rule). Senior executives are employees “earning more than $151,164 annually who are in a policy-making position.”
• Timing. The rule is scheduled to go into effect 120 days after it is published in the Federal Register.
• Exclusions. This rule does not apply to noncompete agreements (1) in franchisee-franchisor relationships (although the rule applies to employees who work at franchises); (2) with certain nonprofit organizations who are not subject to the FTC’s jurisdiction; or (3) in connection with the sale of a business entity (regardless of ownership stake percentage).
• Penalties. Companies that violate the rule may be subject to civil penalties.

FTC Dissent. The two most recently confirmed commissioners — Melissa Holyoak and Andrew Ferguson — voted against the final rule. Specifically, both commissioners stated that the FTC lacked the authority to issue the final rule without an explicit directive from Congress. Commissioner Ferguson stated that a written dissent is forthcoming. Commissioner Ferguson’s comments also indicated that such action would be especially inappropriate given that the final rule would nullify millions of existing contracts and preempt state law in 46 states. The Commission ultimately voted along party lines to approve the issuance of the final rule.

Legal Challenges to Rule Expected. The final rule is now ripe for challenge. The U.S. Chamber of Commerce, for example, has stated that it will file a lawsuit to block the rule as soon as April 24, 2024. As outlined by the dissenting commissioners, that challenge is expected to focus chiefly on the bounds of the FTC’s authority and whether the FTC exceeded that authority by promulgating such an expansive substantive rule.

Next Steps. Unless enjoined by a court, employers will need to both make plans to comply with the final rule and also consider legal alternatives to noncompete agreements in order to protect customer and employee relationships and confidential or trade secret information.

We will continue to monitor these important developments and, like our prior alerts on this topic, address questions raised by the new rule and the business and legal implications for employers.