By: Jack S. Bjorn
On April 23, 2024, the Federal Trade Commission (FTC) issued its proposed final rule regarding noncompete agreements. The rule goes into effect 120 days following its publication in the Federal Register, but enforcement could be further delayed by likely legal challenges. Below is a summary of the important provisions of the final rule.
New Non-Compete Agreements
With respect to new noncompete agreements, the rule effectively bans all noncompete agreements for all “workers” entered into on or after the final rule’s effective date 120 days after the rule is published in the Federal Register. Under the rule, a “worker” is defined as any natural person who works or previously worked for an employer, whether paid or unpaid, including employees, independent contractors, externs, interns, volunteers, apprentices, or sole proprietors that provide services to a person. “Worker” also includes someone who works for a franchisee or franchisor, but does not include a franchisee in the context of a franchisee-franchisor relationship.
Existing Non-Compete Agreements
With respect to existing noncompete agreements entered into before the final rule’s effective date, the rule bans all noncompetes for workers that are not defined as “senior executives”, and allows agreements with senior executives to remain in force. For purposes of the rule, a “Senior Executive” is defined as a worker who: (1) was in a policy-making position; and (2) received from a person/entity for the employment: (i) total annual compensation of at least $151,164 in the preceding year; (ii) total compensation of at least $151,164 when annualized if the worker was employed during only part of the preceding year; or (iii) total compensation of at least $151,164 when annualized in the preceding year prior to the worker’s departure if the worker departed from employment prior to the preceding year and the worker is subject to a non-compete clause.
Notice Requirement for Existing Non-Compete Clauses
Except as provided for existing noncompete clauses applicable to senior executives, the proposed final rule also requires the person/entity who entered into a noncompete clause with a worker to provide a “clear and conspicuous notice” to the worker by the effective date of the rule. The notice must state that the worker’s noncompete clause will not and cannot be legally enforced. The rule outlines the general requirements for the form of the notice, and provides includes a model notice.
Exceptions to the Proposed Final Rule
Exceptions to the rule’s ban on noncompete agreements include:
(1) bona fide sales of business, including sale of a business entity, a person’s ownership interest in a business entity, or substantially all of a business entity’s operating assets;
(2) existing causes of action prior to the effective date of the rule; and
(3) good faith efforts to enforce a noncompete clause or make representations about a noncompete clause where a person/entity has a good faith reason to believe the rule is inapplicable
Relation to State Law
The final rule does not limit state laws that restrict noncompete agreements where the state laws do not conflict with the final rule, but otherwise preempts state laws that conflict with the final rule.
Conclusion
The FTC’s ban on noncompete clauses is broad and generally impacts all new and existing noncompete clauses as of the effective date of the rule. However, the rule likely will face legal challenges and the effective date may be delayed as of the result of such challenges. In the meantime, employers should prepare for implementation of the rule, and may wish to consider other protective measures such as non-solicitation clauses and anti-raid provisions, which are outside of the rule’s purview. In light of likely legal challenges, employers would also be well advised to wait to take action regarding supplying notices with respect to their current agreements until the implementation schedule of the rule is clear. If you have any questions or concerns regarding the final rule or its application to you or your business, please contact Jack Bjorn at jbjorn@eatonpeabody.com for additional assistance.