No More Non-Competes?

On Tuesday, April 23^rd, the Federal Trade Commission issued a rule banning all new and many existing employer and employee non-competition restrictions nationwide, subject to very limited exceptions (the “Rule”). The Rule expressly preempts any conflicting state laws, and thus applies in every state in the United States, but it does not apply to non-competes restricting work solely outside of the United States. The Rule will be effective 120 days after publication in the Federal Register, subject to ongoing legal challenges. Thus, the earliest effective date of the Rule is August 26, 2024, if published on Friday, April 26 and not enjoined prior to effectiveness.

The Rule prohibits employers and employees from entering into, enforcing, or asserting obligations under any non-compete clause or agreement, subject to limited exceptions. The Rule permits: (a) non-competes entered into before the effective date (but not after) by “senior executives” in “policy-making positions” who earn more than $151,164.00 annually, which will remain unchanged and enforceable (i.e., officers or persons with “final authority to make policy decisions that control significant aspects” of a business) and (b) non-compete clauses entered into in connection with, or pursuant to, a “bona fide sale” of a business entity or a person’s ownership interests in a business.

The Rule describes a “non-compete clause” as falling into one of three prongs: (i) “prohibiting”, (ii) “penalizing”, or (iii) “functioning to prevent” a worker from either seeking or accepting work or operating a business that includes one of the foregoing terms/conditions. The Commission defined “prohibits” as “terms and conditions that expressly prohibit a worker from seeking or accepting other work or starting a business after their employment ends,” and further explained that these terms usually restrict workers within a similar industry and a specified geographical location. The second prong pertains to terms and conditions that “penalize” workers by requiring that they either pay a penalty or forfeit a duly owed benefit for violation of a non-compete clause. For example, this could include agreements where an employee is required to either pay liquidated damages, or forfeit a severance arrangement with, their previous employer if they do not refrain from competing. The third prong, “functioning to prevent”, has a vaguer application. It includes terms that restrict a large scope of activity and function to prevent a worker from working, accepting, or starting a new business post-employment without expressly triggering such restrictions by these specific undertakings, such as “broad or onerous” confidentiality agreements, training repayment agreement provisions and nonsolicitation agreements.

For example, an NDA that simply requires a former employee not to disclose confidential information to competitors would not be restricted by the Rule, as the prohibitions do not apply to information that (i) arises from the employee’s knowledge, skill, training, experience, etc., or (ii) is ascertainable to employers or the general public. Likewise, non-solicitation agreements/clauses are not prohibited under the Rule to the extent they do not prevent a worker from seeking new work or starting a new business. The Rule provides that such determinations on enforceability are subject to “fact-specific inquiries.”

If and when the Rule becomes effective, employers will be required to notify their employees that any prohibited non-competes are no longer effective. The Commission provides model language in the Rule.