The Federal Trade Commission (FTC) issued a new rule on April 23, 2024, banning non-compete agreements in the United States for most American workers. Finding that non-compete agreements unfairly interfere with competition (and therefore violate Section 5 of the Federal Trade Commission Act) the FTC has ruled that no new non-compete agreements may be entered after the effective date of the new rule and that non-compete agreements entered into before the final rule’s effective date are non-enforceable with the exception of those with “senior executives.”

Effective date.

120 days after publication of the final rule in the Federal Register. The FTC Compliance Guide states the final rule likely will be effective in early September.

Who Is Covered?

Most everyone. Worker is defined as broadly as possible and specifically includes independent contractors, interns, externs, volunteers, apprentices, or sole proprietors who provide services to a person or business.

"Senior Executive" Exemption.

The FTC distinguishes existing non-competes with “senior executives”—but only as to existing non-competes. To be a “senior executive” you need to earn at least $154,164 in annual compensation and be employed in a policy-making position, such as president or chief executive or any other officer with policy making authority. If/when the new rule is effective, new non-compete agreements are prohibited even for senior executives.

Sale of Assets Exemption.

The FTC also distinguishes non-compete agreements that are part of a sale of a business or substantially all of the assets of a business.

Does the FTC final rule trump state law?

Yes. The final rule states that it supersedes state laws to the extent those laws otherwise permit or authorize a non-compete agreement banned by the FTC final rule.

Employee Notice.

Employers must provide notice to their workers (other than senior executives) that the existing non-compete agreements are unenforceable.

What qualifies as a prohibited non-compete agreement?

This requires a “fact specific” inquiry. The FTC specifically notes that non-disclosure agreements are enforceable to protect an employer’s legitimate business interest.

What about existing disputes over non-competes?

The final rule does not apply where a cause of action related to a non-compete accrued prior to the effective date.

IS THIS REALLY HAPPENING?

Probably not the way it is currently framed. Lawsuits challenging the final rule and the FTC’s authority to adopt the final rule were filed within hours of the FTC’s announcement.

As with any new legislation or rule, the above interpretation may evolve or change. We will keep you posted!

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