In a move that, if allowed to go into effect, could force companies across the United States to tear up existing contracts, the U.S. Federal Trade Commission (“FTC”) approved a Final Rule April 23, 2024, effectively barring any person from entering into a non-compete agreement or clause with most U.S. workers, subject to certain limited exceptions. The FTC intends the Final Rule to go into effect 120 days after it is published in the Federal Register (the “Effective Date”), but a number of legal challenges have been filed against the Final Rule, and thus, effectiveness may be delayed.

Currently laws and regulations on non-compete agreements vary from state to state, and are largely banned in California. This Final Rule, if enacted, would create a baseline federal policy for all U.S. companies. While our team continues to analyze the language and potential effect of the 570-page Final Rule, below are some of our initial observations.

Impacts of the Final Rule?

The Final Rule provides that it is an unfair method of competition for persons to, among other things, enter into non-compete clauses with workers, and doing so is a violation of Section 5 of the Federal Trade Commission Act. More particularly:

1. The Final Rule prohibits an employer from entering into, attempting to enter into, enforcing or attempting to enforce any new non-competes with any worker or senior executive after the Effective Date.
2. Under the Final Rule, the definition of a “worker” is “a natural person who works or who previously worked, whether paid or unpaid, without regard to the worker’s title or the worker’s status… including, but not limited to, whether the worker is an employee, independent contractor, extern, intern, volunteer, apprentice, or a sole proprietor who provides a service to a person…”
3. Existing non-competes with “senior executives” can remain in force, but, as noted in No. 1 above, the FTC has determined that it is an unfair method of competition for a person to enter into, attempt to enter into, enforce or attempt to enforce a non-compete clause entered into with any worker, including a “senior executive,” after the Effective Date.  Under the Final Rule, a “senior executive” is a worker earning more than $151,164 who is also in a “policy-making position.”
4. For workers who are not senior executives and that are bound by an existing non-compete, employer must provide clear and conspicuous notice to current and past workers by the Effective Date that the non-compete clause is no longer in effect and will not be, and cannot legally be, enforced against the worker.
5. Non-solicitation clauses do not fall within the Final Rule’s definition of a restricted non-compete clause if, in the words of the FTC release paraphrasing the Final Rule, they do not “function to prevent a worker from seeking or accepting other work or starting a business after their employment ends.”  Whether a non-solicit clause runs afoul of the rule will thus depend on the facts and circumstances. 
6. The Final Rule includes the following three exceptions:
   • Bona Fide Sale of Business: non-compete clauses entered into in connection with a bona fide sale of a business;
   • Existing Causes of Action: an existing cause of action related to a non-compete clause that accrued prior to the Effective Date; and
   • Good Faith: enforcing or attempting to enforce a non-compete clause or making representations about a non-compete clause where a person has a good-faith basis to believe that the Final Rule is inapplicable.

What Should Your Company Do Now?

Given the potential sweeping effects that the Final Rule may have, all businesses should begin reviewing their existing agreements with their workers to assess whether such agreements and/or provisions will be deemed unenforceable non-competes under the Final Rule after the Effective Date and whether they are required to provide notice to such workers by that Effective Date.  Some employers may consider entering into a non-compete agreement with “senior executives” prior to the Effective Date, but these should work with counsel to craft them appropriately; the Final Rule does not invalidate California (or any other state’s) laws to the extent they are more restrictive than the Final Rule.

The takeaways in this article are intended to cover only a portion of the Final Rule. Our team will continue to monitor the Final Rule and any legal challenges that may follow, and will provide further information as released that may help our clients understand and navigate the nuances of the Final Rule.

For more information, please contact our team at Procopio to learn more about how the Final Rule may impact you or your business. For additional information, please review the Final Rule Fact Sheet.