FTC Votes to Ban Noncompete Agreements in Employment Contracts

The Federal Trade Commission (FTC) voted yesterday to issue a final rule that would prevent most employers from enforcing noncompete agreements against workers, with only limited exceptions for existing noncompetes with senior executives and noncompetes made in connection with the bona fide sale of a business.

As we previously reported, on January 5, 2023, the FTC issued a Notice of Proposed Rulemaking aimed at categorically banning noncompete agreements nationwide. The April 23, 2024, vote was 3-2 (along party lines) in favor of issuing a final rule, which mirrors the text of the proposed rule with just a few differences. In finalizing its first attempt at rulemaking to address unfair method of competition, the FTC continues an aggressive approach to policing competition.

The final rule will become effective 120 days after publication in the Federal Register and will make it unlawful for all employers—defined broadly to include any natural person, partnership, corporation, association, or other legal entity within the Commission’s jurisdiction—to:

• enter into, or attempt to enter into, a noncompete with a worker;
• maintain a pre-existing noncompete with a worker except for existing non-competes with senior executives; or
• represent to a worker that the worker is subject to a noncompete.

Consistent with this sweeping prohibition, the final rule eschews employment definitions contained in state or federal law and broadly applies to independent contractors, volunteers, interns, and anyone else working for an employer.

Impact on Existing Agreements

In a departure from the proposed rule, the ban does not apply to existing agreements with senior executives. The final rule treats noncompetes with senior executives differently from noncompetes with all other workers.

The final rule defines a “senior executive” as a worker in a policy-making position and who received compensation of at least $151,164 in the preceding year (either in total or on an annualized basis). A “policy-making position” means “a business entity’s president, chief executive officer, or equivalent, and any other officer of a business entity who has policy-making authority, or any other natural person who has policy-making authority for the business entity similar to an officer with policy-making authority.”

Further, “[a]n officer of a subsidiary or affiliate of a business entity that is part of a common enterprise who has policy-making authority for the common enterprise may be deemed” to have policy-making authority under the final rule. The final rule states that existing noncompetes with workers who meet the definition of a senior executive may remain in place (though new agreements with senior executives entered into after the rule’s effective date are banned).

Existing noncompetes with all other workers become unenforceable upon the effective date of the final rule. Employers must provide notice to workers, including anyone who previously worked for the business enterprise, that their noncompete agreements are no longer enforceable. The final rule provides model language for this notice.

As FTC staff noted during the open Commission meeting, employers can protect trade secrets through the use of confidentiality or non-disclosure agreements (often referred to as NDAs) and trade secret laws. However, in the preamble to the final rule, the FTC noted that certain forms of post-employment covenants—including NDAs, training repayment agreements, or non-solicitation agreements—may be “so broad or onerous” that they have the same functional effect as a noncompete and could be barred. 

Exceptions

The final rule contains three limited exceptions, in addition to the exception for pre-existing agreements with qualifying senior executives discussed above:

• First, the ban does not apply to a noncompete entered into by a person in connection with the 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. In a change from the proposed rule, the final rule does not require the seller to have any minimum ownership interest in the business for the exception to apply.
• The second exception is for existing causes of action. The proscriptions of the final rule do not apply where a cause of action related to a noncompete accrued prior to the effective date of the rule.
• The third exception states that it is not an unfair method of competition to enforce or attempt to enforce a noncompete clause or to make representations about a non-compete clause where a person has a good-faith basis to believe that the ban is inapplicable.

Although not listed as an exception to the rule, it is notable that the FTC’s jurisdiction does not apply to certain nonprofit entities.

Expected Legal Challenges

We expect employers and industry groups to mount legal challenges to the FTC’s broad exercise of rulemaking authority in this area, as well as its efforts to use Section 5 of the FTC Act as an enforcement tool. Indeed, on April 24, the U.S. Chamber of Commerce filed suit in federal court in Texas alleging the FTC lacks authority to issue the final rule.

Ballard Spahr’s Labor and Employment and Antitrust and Competition Groups are prepared to answer questions regarding antitrust issues in the context of the labor market. We conduct employment agreement audits and advise on noncompetes and other types of restrictive covenants and what steps employers should be prepared to take in light of the final rule. Please contact us if we can assist you in understanding your company’s legal requirements and the measures your business should take to remain in compliance with applicable law.

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