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FTC Ruling Banning Noncompete Agreements

  • June 11, 2024
  • Blog

On April 23, 2024, the Federal Trade Commission (“FTC”) issued a final ruling banning the vast majority of noncompete agreements nationwide as “unfair methods of competition” in commerce. The rule will not go into formal effect until 120 days after the Federal Registrar formally adopts the new ruling (estimated to go into effect in August or early September). Until then – no action is required, although, there are recommended steps for employers while pending formal implementation.

The FTC rule applies broadly to all workers including employees, independent contractors, interns, externs, volunteers, and apprentices. Once the final rule is in place, employers will be banned from issuing or attempting to enforce new noncompetes. For existing agreements, employers must provide written notice to workers who are currently bound to such agreements notifying them that the noncompete clause will not be enforced. Notice can be done via hand delivery, email, text, or mail. The FTC provides model language for employers to streamline compliance.

The FTC ruling notes one narrow exception for senior executives who are currently bound to noncompete agreements. The FTC defines a “senior executive” as someone making at least $151,164 annually and has significant decision-making authority over the entire enterprise.  (i.e., CEO, COO, President). A noteworthy nuance here – the individual in the senior executive role must have significant control of policies for the entire company – meaning those leading subsidiaries or affiliate companies will not fall into this exemption. Those who influence or advise on company-wide policy, will also not fall into this exemption, as there can be many employees in a company who fill this role. The “senior executive” exception is estimated to apply to only 1% of the working population. Employers are advised to seek legal counsel for clarifications on who is considered a “senior executive.”

As we know, noncompete agreements contain terms or conditions of employment that restrict employees from seeking to work with another entity within the U.S.  Employers should be wary of other types of restrictive covenants, as well. For instance, an overly broad NDA or non-solicitation agreement may be struck down if it presents restraints on post-employment options, as it would function similarly to that of a noncompete.

What Should Employers Do Now?

Companies are not required to make any immediate action at this point. Pending formal enactment, however, employers are advised to prepare the following items: 

  • Take inventory of existing agreements and review NDAs.
  • Identify senior executives.
  • Audit trade secrets protection measures.
  • Ensure non-solicitation agreements are appropriately narrow.
  • Monitor legal developments and challenges to the ruling.

Employers are advised to prepare the above items but wait before taking any action. To no surprise – the FTC is already facing several legal challenges the most notable brought by the U.S. Chamber of Commerce who filed in the Eastern District of Texas seeking to vacate the FTC ruling in its entirety. The FTC will need to surpass various legal hurdles before the rule goes into effect. Until then, employers should monitor the evolving legislation and contact employment counsel to fully understand and adapt to required changes as they arise ensuring compliance within a competitive market.

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