On April 23, 2024, the Federal Trade Commission (FTC) issued a final rule banning noncompete clauses in certain employment contracts as an unfair method of competition. This rule is limited to postemployment restraints (i.e. restrictions on what the worker may do after the conclusion of the worker’s employment) and does not apply to in-term restraints (i.e. restrictions on what the worker may do during the worker’s employment).
Effective Date and Enforcement
The final rule will become effective 120 days after its publication in the Federal Register. Employers must comply by refraining from entering into noncompete clauses with workers on or after its effective date. Pre-existing noncompete clauses become unenforceable for workers that do not qualify as “senior executives” under the FTC’s definition. Employers must provide notice to such workers bound to existing noncompete clauses that these clauses are no longer enforceable. The FTC has provided model language to include in such notices.
Exemptions
Non-compete clauses in employment contracts for senior executives that have been entered into before the final rule’s effective date will remain enforceable. The FTC defines “senior executive” as a worker who is in a policy-making position and has a total annual compensation of at least $151,164, annualized if the worker only worked a portion of a year. This exemption is limited, however, to agreements that pre-date the effective date of the rule. The final rule also does not apply to noncompete clauses entered into by a person pursuant to a bona fide sale of a business entity or to entities that the FTC customarily does not have jurisdiction over, such as non-profit organizations, banks, savings and loan institutions, and federal credit unions.
Other Types of Restrictive Agreements
Other types of restrictive employment agreements, such as non-disclosure agreements, non-solicitation agreements, and training repayment agreement provisions (TRAPs), are not categorically prohibited under the final rule. Note, however, that a non-solicitation agreement or TRAP may satisfy the definition of a noncompete clause under the final rule where the agreement or provision functions to prevent a worker from seeking or accepting other work or starting a business after their employment ends.
New York State Laws and Workers Outside the United States
The final rule will preempt New York and other State laws (including State common law, antitrust law, and consumer protection law) that conflict with its terms but will not limit or affect the enforcement of State laws that afford workers greater protections than those provided under the FTC’s final rule. The final rule also does not prohibit employers from using noncompete clauses that restrict work outside the United States.
Potential for Litigation Challenges
It is possible that litigation challenging the FTC’s authority to implement this final rule may delay the effective date. In the event a reviewing court were to hold any part of any provision or application of the final rule invalid or unenforceable, the final rule includes a severability clause clarifying that the remainder of the final rule will remain in effect.
Notice to Employees
Given these restrictions and exemptions, employers should review all existing employment contracts and other documentation to identify applicable noncompete clauses. For those employment contracts that include noncompete clauses for non-exempt workers, the employer should prepare and issue notices using the FTC’s model language as guidance to these workers prior to the final rule’s effective date. Employers should further review any compensation agreements with executive-level workers to determine whether such workers fall under the Federal Trade Commission’s definition of “senior executive.”
Potential Penalties
Employers that violate the final rule may be subject to civil penalties or an injunction if the FTC pursues adjudication of the violation under the FTC Act, or if a States’ attorneys general, other State agency, or individual sues under pertinent state law. Cuddy & Feder’s litigation and transactional departments will continue to monitor further developments in the rule’s enforcement and are available for consultation regarding the scope of the rule and guidance on proper drafting techniques for notices that may need to be issued. If you have any questions or need more information about how this rule affects you or your company, please contact our Litigation Group.
