On April 23, 2024, the Federal Trade Commission (“FTC”) approved and issued a final rule effectively banning non-compete agreements nationwide (the “Final Rule”). As a result of a 3-to-2 vote, the FTC found that non-compete clauses are an unfair method of competition, and therefore violate Section 5 of the FTC Act. The Final Rule is effective 120 days after it is published in the Federal Register.

The highly anticipated Final Rule, which was first proposed in draft form in January 2023, is expected to have a significant impact on employers and elevates the importance of non-disclosure agreements and related agreements. Hinckley Allen’s Labor & Employment, Intellectual Property, and IP Litigation attorneys have experience managing non-compete prohibitions in those jurisdictions that already have non-compete bans, e.g. California, and can help employers protect a company’s proprietary and trade secret information in light of the Final Rule’s national prohibition on non-competes.

Summary of Final Rule

The Final Rule defines a “non-compete clause” as “a term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from:

• (A) seeking or accepting work in the United States with a different person where such work would begin after the conclusion of the employment that includes the term or condition; or
• (B) operating a business in the United States after the conclusion of the employment that includes the term or condition.”

“Worker” includes not just employees but also independent contractors, interns, externs, volunteers, apprentices and sole proprietors.

The Final Rule broadly prohibits employers from utilizing non-compete agreements in most contexts, and deems them a method of unfair competition under the law. This prohibition includes entering into, enforcing, or even representing that a worker is subject to non-compete provisions. That means existing non-competes for all workers who do not qualify as “Senior Executives” – explained more fully below – are effectively banned. Employers are required to provide clear and conspicuous notice to workers bound by an existing non-compete, except to those who qualify as “Senior Executives,” regarding the unenforceability of existing non-compete clauses by the date the Final Rule becomes effective. The FTC has included model language in the final rule that employers can use to communicate this required notice to workers.

The Final Rule also prohibits agreements that may “function to prevent” a worker from seeking or accepting other work or starting a new business after their employment ends. The FTC has stated that such agreements may include non-disclosure agreements, training repayment agreement provisions, and non-solicitation agreements. To be clear, these types of agreements are not categorically prohibited under the Final Rule, but if an employer requires an employee to enter into an agreement as a term or condition of employment that is so broad or onerous that it has the functional effect of prohibiting a worker from seeking or accepting other work, or starting a business after their employment ends, such a term is a non-compete clause under the Final Rule.

Existing non-competes with “Senior Executives” remain enforceable, but entering into new agreements with individuals entering these roles is prohibited. This is the primary distinction between the rule proposed on January 5, 2023, and the Final Rule.

Under the Final Rule, “Senior Executives” are workers (a) in a “policy-making position” that (b) earn an actual or annualized sum of $151,164. The Final Rule provides that total annual compensation is based on a worker’s earnings over the preceding year. This includes salary, commissions, nondiscretionary bonuses, and other nondiscretionary compensation earned during that 52-week period preceding the workers departure. Total annual compensation does not include payment of medical or life insurance premiums, contributions to retirement plans, or costs for other similar fringe benefits.

Individuals who hold “policy-making positions” include a business entity’s president, chief executive officer or the equivalent, or any other officer or similarly situated person of a business entity who has policy-making authority for the business entity. The FTC adopts the SEC’s definition of “officer” to include a president, vice president, secretary, treasurer or principal financial officer, comptroller or principal accounting officer, and any natural person routinely performing corresponding functions with respect to any business entity. An individual with “policy-making authority” is someone who has the final authority to make policy decisions and control significant aspects of a business entity. This does not extend to those with limited authority to advise or exert influence for subsidiary or affiliates of a common enterprise.

Certain exceptions to the ban on non-compete clauses exist, including non-compete clauses arising from bona fide sales of businesses. Additionally, the rules do not retroactively apply to causes of action predating the Final Rules enactment and does not ban employers from prohibiting employees from engaging in competing activities while actively employed at the company.

The regulations make clear that the Final Rule supersedes all state laws, regulations, orders, and interpretations of non-competes that are not consistent with the final rule. However, the Final Rule will not limit or affect the enforcement of state laws that provide for more stringent limitations on non-competes.

What to Expect Next

Enforcement of the Final Rule will likely be delayed, and it has already been challenged in court, including through one lawsuit that was filed immediately after the Final Rule’s announcement. That suit, pending in a Texas federal court, contests the FTC’s authority to enact the Final Rule. Other challenges are likely forthcoming. The two commissioners who voted against the Final Rule believe the Final Rule to be “unlawful” and “won’t survive legal challenge.” Further, the U.S. Chamber of Commerce, has already pledged to sue the FTC to block the rule from taking effect. Though the fate of the regulation is uncertain, employers should prepare for the potential that the Final Rule will takes effect.

Takeaways and Next Steps

In light of the Final Rule, Employers are encouraged to:

1. Identify and Review Existing Non-Compete Clauses and Other Contractual Provisions: Employers should review their existing non-compete clauses and other contractual restrictions such as non-solicitation and confidentiality provisions that may be argued to function as non-competes under the regulations.
2. Identify Senior Executives: Employers need to identify individuals within their organizations who qualify as Senior Executives based on their policy-making roles and compensation levels.
3. Prepare to Provide Notice: Employers need to identify all employees that require notice that their non-compete clauses have been declared unenforceable by the Final Rule.
4. Consider Alternatives to Non-Compete Clauses: Employers should consider alternative options for protecting their confidential information and trade secrets. Employers can consider options such as confidentiality agreements, non-disclosure provisions, and non-solicitation provisions. However, the FTC has stated that whether a contractual provision amounts to a non-compete clause is a fact specific inquiry. Accordingly, provisions need to be narrowly tailored to their specific protectable interests and employers should pay attention to future debate and litigation on the matter.
5. Stay Informed About State Laws: While the FTC rules supersede conflicting state laws, states can still impose requirements and restrictions that afford greater protections than those under the Final Rule. Employers should stay informed about state-specific regulations regarding non-compete agreements to remain in full compliance.

For further guidance on navigating the implications of the Final Rule, please contact Hinckley Allen’s Labor & Employment, Intellectual Property, or IP Litigation team attorneys.